How can digitalization bring transparency and efficiency in taxation?

The ongoing pandemic is demonstrating day by day how important the digitalization of governments is, and it would seem that we are at a historic moment in the subject.

We are facing a unique opportunity to accelerate the step towards digital governments, to rebuild trust by being more transparent and efficient by promoting the smarter use of modern technologies and data analysis.

The article ” Digitalization as an Anti-Corruption Strategy” [1]states that digitalization can alter opportunities for corruption by reducing arbitrariness, increasing transparency, and enabling accountability by dematerializing services and limiting human interactions.

It is argued that an important way in which digital acceleration is permeating the space of public integrity is through the use of disruptive technologies and data analysis, as anti-corruption tools for actors of integrity systems, inside and outside government.

Tax Administrations (TAs) are said to be using recent technologies to increase tax compliance and prevent tax fraud.

Electronic tax compliance improves collection and reduces fraud and tax compliance costs. In Kenya, economist Njuguna Ndung’u demonstrated how the digitalization of the tax system has reduced direct interaction between taxpayers and tax officials, thus deterring bribery.

In Great Britain, HMRC’s Connect system analyzes taxpayers data and social networks to identify potential tax evaders. Its predictive algorithm identifies the people most likely to commit tax fraud and helps design preventive actions. Between 2008 and 2014, it obtained £ 3 billion in additional tax revenue, starting from the £ 80 million start-up costs of the Connect system, representing a return on investment of £ 37.5 to 1 in its first 5 years.

In the article ” Good digitalization does not happen alone: it requires good human decisions”[2] it is said in relation to digital transformation that transformation is really the key word. It is not just about buying software or digitizing processes. Rather, digital transformation involves a profound change in the way we do business, access services, interact with citizens, and govern.

In 2018, in another publication, it was stated that the digitalization of procedures reduces corruption and the costs of bureaucracy in Latin America and the Caribbean[3].

This study provides a roadmap for simplification and digitalization reforms focused on the citizens’ experience and making strategic use of digital instruments. Digital processes take 74% less time than face-to-face procedures, cost much less, and reduce the incidence of corruption.

A recent document entitled “Enhancing Government Effectiveness and Transparency: The Fight Against Corruption” [4] the World Bank states, among other things, that effective anti-corruption strategies combine multiple measures, often including both sector-specific interventions and transparency and accountability measures that apply to the entire public sector.

Part II of the report examines various policy responses that government and civil society can use to prevent and detect corruption, including open government, govtech.

With regard to taxes, it addresses the issue of the registries of beneficial owners. Although still relatively new, the use of publicly available records of beneficial owners of corporate entities is beginning to have an impact in two ways: helping to enforce illicit enrichment laws and helping to detect and prevent conflicts of interest in public procurement.

The path to implementing transparency reforms for real beneficiaries is not easy. The report presents three diverse examples from countries of how they have approached the adoption of a policy of transparency of actual beneficiaries: Nigeria, Slovakia and the United Kingdom.

In another section, the topic of Information Exchange and Collaboration for tax crimes is discussed.

The FATF includes tax crimes in the set of offenses associated to money laundering purposes, explicitly recognizing the links between tax crimes and money laundering.

In this regard, the document stresses the importance of cooperation between the various agencies. In the Brazilian Petrobras investigation, the tax auditors supported the transnational corruption investigation, analyzing the suspects ‘ tax and customs data and sharing them with the police and the prosecutor as permitted by law. With that information, officials were able to uncover evidence of money laundering, tax evasion, and hidden assets and, so far, the investigation has resulted in criminal fines, tax penalties, and recovered assets worth $ 15 billion.

Two examples of case studies are presented on how TAs can play a greater role in the fight against corruption and specifically against illicit financial flows:

  • Sharing data to detect potential corruption: While TAs can undertake most prosecutions for corruption-related tax offences, they often require support in the form of obtaining information or expertise from other agencies. There are multiple obstacles to this exchange of information, but an increasing number of countries are creating the legal precedence to overcome them. A starting point is to establish bilateral agreements or memorandums of understanding to share information, respecting the relevant privacy laws within the country. The establishment of a national working group to improve collaboration and interconnection between databases are also key steps for national authorities to take.
  • Use of tax data in corruption prosecutions: the level of cooperation between TAs and other national law enforcement agencies is critical to counter fiscal and financial crimes. TAs have access to the transactions and records of millions of individuals and entities but may be unaware of typical indicators of potential bribery, corruption and other non-tax financial crimes. In addition, in many countries there are legal barriers to the ability of TAs to share information with police or prosecutors in non-tax investigations.

In an interesting IMF research[5] more than 180 countries were analyzed and found that the most corrupt collect less taxes, as people pay bribes to avoid them, for example through tax loopholes designed in exchange for bribes. Also, when taxpayers believe the state is corrupt, tax evasion becomes more likely.

Less corrupt governments collect 4% more of GDP in tax revenues than countries at the same level of development that have higher levels of corruption.

The fight against corruption requires political will to build strong fiscal institutions that promote integrity and accountability across the public sector.

As major lessons, the study cites the importance of investing in elevated levels of transparency and independent external oversight, building a professional civil service as transparent and meritocratic recruitment and remuneration procedures reduce opportunities for corruption, being attentive to new challenges as technology and criminal opportunities evolve, and greater cooperation in the fight against corruption.

As final reflections of the reports analyzed, I would like to point out that if anything were missing to highlight the importance of digitalization in countries, it is the current coronavirus pandemic that we are going through.

I am convinced that betting on digitalization should be a state policy, where the public and private sectors should work together under strong political support and greater cooperation, both internally and internationally.

Digitalization has the potential to trigger a change in basic assumptions in the relationship between the State and citizens by accelerating progress towards a more inclusive, transparent and efficient development.

Digitalization opens up new possibilities and opportunities for countries and their citizens to develop. Those countries that better take advantage of the” train ” of digitalization will undoubtedly have better opportunities to develop and provide a better quality of life to their citizens.

The opportunity is enormous, according to the Development Bank of Latin America (CAF), if by 2030 ALC can close the digitalization gap with the OECD, the GDP of the region would grow about three percentage points more a year[6].

This would generate more than $ 700 billion in economic activity growth and about 400,000 new jobs annually in the region. Just connecting eleven million homes in LAC to the Internet would generate around 400,000 jobs, according to a World Bank study[7].

Another IDB publication[8] states that the development of digitalization, through advances in efficiency and the use of digital technologies can boost a growth of 5.7 percentage points in the next 10 years in Latin America and the Caribbean, which means USD 325,000 million.

In short, from all the reports analyzed linked to taxation, the undeniable advantages of digitalization arise because of its contribution to transparency, traceability, efficiency and effectiveness of all processes, which will undoubtedly result in a better quality of life for citizens.



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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