Digitalization of Tax Administrations and the necessary simplification of tax systems.

Today we are witnessing a historic moment in the digitalization of tax administrations (TAs) which evidently accelerated, unplanned and unforeseen, due to the measures of isolation and closure of many of the facilities resulting from the coronavirus pandemic.

This unprecedented economic, health and social crisis that we are going through is producing a huge loss of revenue, which is why many countries are planning tax reforms and processes to modernize their TAs.

In the processes of tax reform, all aspects related to digitalization must be considered, which as I understand should always have the citizen as the guiding principle, seeking simplification, reduction of bureaucracy and greater transparency in the face of corruption.

Reducing compliance costs for taxpayers and the costs of tax administration by TAs is vital throughout the process.

Compliance costs include two components; on the one hand the time spent to meet tax obligations and on the other the payment of fees to the tax advisors.

It should not be forgotten that all this process of digitalization and modernization of TAs must be carried out always considering its basic strategic objective, which is to raise the levels of voluntary compliance by taxpayers through two main lines of action: making procedures easier to those who wish to comply, and carrying out a radical fight against fraud. These two lines are totally complementary and must both be at the service of the acceptance of the tax system today.

However, a key component of this tax system’s acceptance is its simplification, and I am convinced that the tax reforms that are being pursued, whenever they are linked to digitalization, should contribute greatly to this.

Within this simplification we could say that there are two key aspects: on the one hand the legislation and on the other the procedures that Tas develop through their different functions.

It seems that digitalization procedures are often progressing faster than legislation, especially in this current pandemic situation.

It is key to carefully analyze the tax legislation in force in each country, the following being some of the principles that a tax system should respect

  • Justice and equity in the balance of taxes (horizontal and vertical equity).
  • Stability, which is predictable and provides legal certainty.
  • Neutrality, i.e. promoting the economy, not affecting the decisions of economic agents.
  • Sufficient to meet public functions and services.
  • Simplicity: understandable and easy to apply.
  • Certainty, that is, having clear and precise rules.
  • Cost-effectiveness due to the relationship between the collection and system administration costs.

Two very important principles are simplicity and cost-effectiveness, in which digitalisation would play an important role.

I have the feeling that many tax systems have not fully included the key regulatory elements to further advance the process of digitalization of the state.

Any tax reform that is being planned should include all aspects related to new technologies that are essential to digitalize public administrations, while also legislating on how they impact with respect to the rights and guarantees of taxpayers.

The task of digitalizing the TAs is not easy, and even less so when it has to be accelerated as in the circumstances of the coronavirus pandemic.

The current pandemic has highlighted the need to increase resilience and accelerate the pace of digitalization.

This whole process should not be viewed in isolation by the TAs, but on the contrary as an integral part of a concept of digital government and open government involving the various agencies of a country.

Digitalization is now a necessity  to ensure that tax authorities can continue to develop voluntary compliance when providing services to the taxpayer through different means.

Its goal is to create a user-centric system that can meet the needs of all kinds of taxpayers, tax officials and tax agents, and ultimately increase compliance within their economy.

The main advantages of the TAs are greater transparency, lower costs and higher revenues, increased efficiency and effectiveness, improved controls, fight against corruption, electronic cooperation with other TAs, interoperability (ability to exchange and use information) and one-stop windows.

As Carles Ramió [1]says, intelligent administrations must be designed with two fundamental strategies and ingredients: technological renewal linked to artificial intelligence and organizational renewal with knowledge management and collective intelligence.

This technology is only an instrument because for its optimization it is essential that the public administration renews and transforms concepts and paradigms.

All this innovation in management involves rethinking, adapting, and transforming policies, services, and institutional architectures to the new needs of citizens, seeking maximum effectiveness and efficiency of the public sector.

The recent United Nations 2020[2] survey on e-government showed that while the pandemic has revitalized the role of e-government, both in the conventional delivery of digital services and in new innovative efforts to manage the crisis, it has also presented challenges and multiple forms of digital gaps, especially among the poorest, and the most vulnerable groups.

When thinking about tax reform, we must bear in mind all these concepts.

A tax reform by definition consists in modifying the structure of one or more taxes or the tax system, in order to improve its functioning for the achievement of its objectives.

Every time a tax reform is proposed, there must be certain elements or steps to follow, which are advisable for its success and implementation.

First, the proposed tax reform must have a description of the proposed ideal tax system, i.e. what is intended to be done and where the reform is intended to go.  It is important to make a very good diagnosis of the current system including today especially the various issues related to technologies.

When analyzing the tax system, the country’s public expenditure should be analyzed together with what is known as tax expenditures, which is the amount of income that the State ceases to receive, by granting a tax treatment that differs from that generally established in the tax legislation, in order to benefit certain activities, areas or taxpayers (examples: exemptions, deductions from the tax base, reduced rates).

Secondly, in order to carry out a tax reform, it is essential to make a comparison of the current system and the one that is intended to be achieved with the reform.

Next, we need to analyze the steps to arrive at the proposed ideal system.

Also, it is key in the whole reform process to know the causes of tax evasion[3], since only in this way it will be possible to build a strategy to combat it, which can be included in the reform proposals.

Carrying out a tax reform implies analyzing multiple variables, which vary in each country and at each moment in time. That is why everything related to digitalization is relevant today.

As I said earlier I consider it key to work for the simplicity of the tax structure since it is clear that complex tax systems favor evasion and avoidance, because they create uncertainty regarding the scope of tax rules, raise the costs of control, increase the costs of compliance and multiply the schemes or mechanisms of evasion and avoidance.

Modern technologies, without doubt, are a great ally for the simplicity of the tax structure as I am convinced that we should simplify the tax systems by reducing the compliance costs for taxpayers and the system’s costs of administration by the TAs[4]

When new technologies are adequately incorporated by TAs, in most cases they imply a real re-engineering of the way procedures were conceived, simplifying them and making them more efficient, without forgetting that the main asset is the human resources that must be trained, motivated, honest and well paid.

In regard to the simplification and digitalization of TAs’ procedures for the implementation of the tax reform proposal, one way is to follow the CIAT Tax Code Model[5], which in its Section 5, articles 96 and following has aspects linked to the Electronic Tax Administration, promoting as a general principle the use of technical and electronic media, computer and telematic resources necessary for the development of its activity and the exercise of its powers. In addition, it establishes the equivalence of the electronic document as a medium of information, distinguishes between automated and non-automated electronic actions and the creation of an electronic mailbox among other highlights.

However, as this model dates back to 2015, we should also consider other technological advances that have occurred in the TAs, such as electronic desk audits, the inclusion of video calls as a way of relating within the procedures, as recently did the Spanish Tax Administration, which can use videoconference as a channel to relate to taxpayers, provide advice, facilitate compliance with their tax obligations or carry out all kinds of actions.[6]

With regard to the information and assistance function, legislation should be made in relation to virtual conversational assistants or chatbots, digital presentations to be made by taxpayers and mobile apps that are increasingly used in this function[7], as well as the various aspects related to pre-filled tax returns issued by the TAs more and more frequently.[8]

Today it is very important to legislate all aspects related to Electronic Document Management, the use of new technologies that the AATT use in risk analysis and in some cases for the resolution of disputes; where it will be essential to safeguard the rights and guarantees of taxpayers.[9]

No less important is also to consider the various regulations relating to telework that are carried out today in many TAs, including the rights and obligations of workers and the different relations with taxpayers.

In short, the digital transformation of the TAs must be approached in a holistic way, redefining the processes, orienting the services to the citizen and, of course, establishing a strategy that combines the citizen-centred approach with a more efficient, interconnected, collaborative and adapted to the social reality.

Governments, and in particular public administrations, must go beyond the digitalization of existing processes and services to serve citizens. They must harness the power of digital technologies and data to fundamentally redesign and transform the Administration’s business models, as well as the relationship with taxpayers.

In short, any tax reform that a country intends to undertake should, today more than ever, consider all these aspects linked to the simplification of tax legislation and procedures within the TAs, also incorporating aspects related to the digitalization and many other aspects that should arise from studies carried out by experts in the field, from both the public and private sectors.

[3]   To expand the topic, see: Which are the causes of tax evasion? Alfredo Collosa-CIAT Blog 25/06/2019.
[4] See: Does technology simplify taxes? Alfredo Collosa-CIAT Blog 2/6/2017.
[6] Royal Decree-Law 22/2020, of 16 June. Its articles 99 and 151 regulate the procedure.
[7] For more information, see Information and assistance in the Tax Administrations. The future is in the apps CIAT blog 16/10/2017. Alfredo Collosa.
[8] DT-02 – 2019: Pre-filled tax returns / 2019
[9] To expand this topic, see Digitalization of Tax Administrations and Taxpayers’ Rights. CIAT Blog 5/2/2020 Alfredo Collosa.




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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.

1 comment

  1. Tannia Castro Reply

    Como efecto de la Pandemia, las AT deben facilitar a sus contribuyentes mecanismos que faciliten la comunicación para solventar sus consultas, así como para presentar sus declaraciones o peticiones con el objeto de que el cumplimiento voluntario aumente, mas ahora que las ventas se desarrollan a través de redes sociales incrementando el comercio informal y por tanto facilitando la evasión fiscal, es por ello que facilitar los procesos y cumplimientos así como aumentar el cumplimiento voluntario son retos o desafíos urgentes en las AT.

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