The digital transformation of Tax Administrations. Is a new management model emerging?

Recently, the Tax Administration Forum has published a very interesting document entitled in Spanish “Tax Administration 3.0, the path of digital transformation”[1], which invites us to rethink about a new Tax Administration (TA) model that surpasses the current approach based on voluntary compliance.

This is due to the fact that the current model has certain limitations for taxpayers, considering compliance costs[2] and also, for the TAs themselves with high administration costs.

For this reason, the purpose of this document is to comment on the main aspects of the document and then formulate some personal opinions, inviting the readers, as always, to comment them.

The proposed model, called Tax Administration 3.0 (TA 3.0), has as a central characteristic: TA processes are increasingly integrated with the systems used by taxpayers to carry out their operations, which will allow the automation of many aspects of TA and it will bring potentially significant reductions in both compliance and administration costs.

As more interconnections are made between the different systems that taxpayers use to manage their businesses, carry out transactions, and communicate, the more the tax processes can be transferred to said systems, always subject to the appropriate guarantees, that is, respecting the taxpayers’ rights and guarantees.

The management models used today by the TAs have structural limitations, in particular with regard to the ability to substantially reduce fiscal breaches and also to make further substantial reductions in compliance and administration costs.

Therefore, it is said that the new AT 3.0 model has the potential to improve compliance in an increasing number of areas, as it seeks to bring taxation closer to the taxable events and thus significantly reduce compliance costs.

The core elements of the new AT 3.0 model are the following:

  • Integrated within the systems used by taxpayers: Paying taxes will become a smoother experience over time, integrated into daily life and business activities as much as possible. Tax administrations and private sector organizations will increasingly collaborate in the creation of innovative and joint services, adding value to the taxpayer, reducing administrative burdens, and ensuring safe, transparent, and highly reliable results.

  • The TAs will no longer be the only point of data processing and tax determination. Some digital platforms will collect taxes and transfer payments instead of data, while others identify taxpayers and share the results and relevant tax information instead of all transaction data. Public and private actors come together in collaborative governance models. Ultimately, government bodies monitor and ensure the quality, strength, and reliability of operations and results.

  • Tax certainty is granted when operating in real time. AT processes will increasingly be in real time in order to synchronize with business transactions. Artificial intelligence (AI) tools and algorithms will increasingly support decision-making.

  • Taxpayers will have the opportunity to verify and challenge taxes determined, paid, and owed in real time. It will be clear which rules have been applied to which data, reflecting facts and circumstances. This will allow taxpayers to question both automated and human decision making. Citizens and companies can verify the origin and accuracy of the data used and can grant or deny access to sources of personal data that are not required for tax purposes.

  • Taxation is increasingly linked to other government services and functions, as well as those of private actors, using common models of interaction with citizens and companies. A digital identity will support a seamless connection between processes and data sources.
  • A taxpayer-centered perspective will be the central point around which TA processes are structured and governed. The key success factor is the intertwining of human staff and skills with advanced analytics and decision-making support tools such as AI.

Chapter 4 of the document identifies six fundamental pillars of the future TA 3.0:

  • Digital identity to support the secure and unique identification of taxpayers and citizens together, helping to reduce compliance costs.

  • Points of contact with taxpayers: facilitating the participation of taxpayers with TA processes when necessary (for example, through access to real-time support), increasingly seeking opportunities to put those points of contact in the systems that used by taxpayers, even in a more automated way.

  • Data management and standards: they refer to the options on where the data is processed for the different tax functions (within the TA, within the systems used by taxpayers or both), and the requirements for quality, availability and reporting of relevant data.

  • Management and enforcement of tax rules: Tax laws in manageable and verifiable formats, allowing the stakeholders to integrate tax rules within their own systems.

  • New skills that will be necessary for the development and operation of a digitally transformed TA, with less frequent human intervention and with increasing support from AI processes.

  • Governance frameworks: guide the development, implementation, and connectivity of the other basic components both within the TA and in cooperation with other actors, both at the national and international levels.

The intent of the discussion paper is not, of course, to suggest that this is the only possible outcome or that TA is fully automated in the future.

Rather, it is to stimulate a debate on the best way to work collectively, inside and outside the TAs, on the basic components of a new way of administering taxes, more closely aligned with the systems used by taxpayers.

FINAL THOUGHTS

I understand that the digital transformation processes of governments must put citizens at the center of their action and allow simplifying taxes, reducing compliance costs for taxpayers and the costs of administration of the tax system.

It seems to me a totally innovative proposal that the tax administration systems adapt to those used by taxpayers, thus seeking to reduce compliance and administration costs.

The document, as I understand, invites us to rethink the future of the TAs, since today we are witnessing a historic moment in terms of the digitalization of governments and TAs.

The digital transformation led by modern technology such as AI is changing the ways of doing business and our lives in various aspects and that is why I believe that countries and tax administrations must also change their way of managing taxes.

Obviously, not all TAs have the same degree of digitalization, the same human and material resources, or the same social reality to carry out their management, but perhaps one of the most important aspects of the document is to invite us to rethink a new model of TA, implying a paradigm shift with respect to the current one.

At this point, the most important thing is that if the TAs focus on where they want to go and how they can get there, this will help make better decisions regarding the digitalization processes currently underway.

I am convinced that this digital transformation will take some time, especially due to the need to share the costs of the change in the model for the TAs and taxpayers and because basically it will require a strong joint work of governments with citizens, involving different actors both from the public and private sectors, so the road will not be easy.

But I definitely believe that the future management model of the TAs will be more similar to that of AT 3.0 to which we are invited to debate the model than the one currently in force.

What do you think about this?

 

[1]https://www.oecd.org/tax/forum-on-tax-administration/publications-and-products/tax-administration-3-0-the-digital-transformation-of-tax-administration.htm
[2]Compliance costs are basically the costs incurred by taxpayers to comply with their tax obligations and include two components, on the one hand, the time used to comply with tax obligations and, on the other, the payment of fees to their tax advisers.

 

Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

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