How to measure The Digital Transformation of Tax Administrations?

Undoubtedly, we are at a historic moment in the matter of the digitalization of Tax Administrations (TAs), which obviously accelerated, unplanned and unexpectedly, due to the isolation and closure measures of many of the dependencies, product of the Covid-19 pandemic.

TAs are incorporating technology, becoming digital on a permanent basis to be more efficient in their main task: to increase the levels of voluntary compliance by taxpayers and in turn, making control interventions more effective.

There are very few indicators of how to measure this digitalization process, beyond the traditional studies that are carried out each year on digital government, electronic government, open data and govtech, among others[1].

Therefore, through this blog article, I first comment on the issue of the digitalization of TAs and its main advantages and then present a recent study published[2] that promotes a digital maturity index to measure the progress of their digital transformation and finally, present some ideas of the subject.

 

  1. DIGITALIZATION OF TAX ADMINISTRATIONS

The development of technology is structurally changing information processes across government and the private sector. TAs are no exception and therefore are becoming digital and today more than ever, their job is to manage, interpret and exploit information effectively and efficiently.

This digitalization is producing dizzying changes not only in the structures of TAs[3] but also in their main functions of collection, monitoring, information and assistance, in information systems and in cooperation/collaboration resulting, for example, from internal and international exchanges of information.

In structures, for example, data analytics units are being created for better data processing and analysis.

In terms of the functions, digitalization is affecting all from the information and assistance with the virtual office, implementation of e-procedures, the inclusion of conversational virtual assistants, verification with the electronic audit, electronic records, and digital assistance via video calls, even the collection with the granting of facilities plans through the web portals of the TAs.

E-Government is developing rapidly in TAS and requires various measures for its effective implementation.

The concept of E-Government, as defined by the European Commission implies “The use of ICT in Public Administrations, combining organizational changes and new skills, in order to improve public services and democratic processes and strengthen support for public policies”.

E-Government involves several coordinated elements. On the one hand, the development of electronic services, and on the other, the creation of regulations and technological tools, as well as a new model of public management based on efficiency and effectiveness.

The main advantages of e-government are cited:

  • Greater transparency.

  • Lower costs and potentially higher revenues.

  • Increase efficiency and effectiveness.

  • Improved controls.

  • Fight corruption.

  • Encourage electronic cooperation with other TAs.

  • Facilitates Interoperability (ability to exchange information and use it).

  • Moving to the One-stop window.

The digitalization of TAs allows significant improvements in the efficiency and effectiveness of tax collection, making the payment process simpler for taxpayers and at the same time making control interventions more effective.

In addition, there are gains in many other dimensions of tax administration, such as reducing costs, fighting corruption, transparency and traceability of operations.

Among the advantages for TAs of digitalization, both in their structures and in their functions, I can mention:

  • Working with digital files, with signatures and electronic notifications, instead of paper files that should tend to be reduced.

  • Considering the new forms of information and assistance to taxpayers (attention through the TA´s website or through mobile applications) in which the trend is the reduction of physical contacts with taxpayers.

  • Using the enormous amount of information available to TAs, not only internal but external, product of the growing forms of cooperation / collaboration that is occurring among other points by the exchanges of information, and everything linked to the BEPS Action plan of the OECD.

  • Implementing concepts such as compliance risk management (CRM) [4]wherever possible, by trying to intervene earlier rather than after tax returns have been filed, mass controls will therefore take precedence over intensive controls.

  • Performing electronic audits and controls increasingly close to taxable events.

  • Offering pre-prepared returns is very important in this regard[5] and it is the best example of the preventive approach, in addition to being the culmination of the strategy of most of the TIAs that have been betting for many years on developing very comprehensive and quality information systems to be able to send declaration proposals to taxpayers[6].

  • Promoting collaboration and integration between different public agencies and the TA of a state and between different countries through processes such as the single window.

  • Counting on information systems to make control more efficient, since currently, the work of TAS is to manage information and therefore, I want to highlight the enormous importance of having information systems to carry out massive and intensive controls.

  • Improve the quality of information, as this is not just about capturing a lot of information, the important thing is to work hard on its quality and analyze it and use it effectively.

  • Make it possible to enhance the options of telework or home office.

It should be noted that investments for digital transformation represent the most important component of the capital expenditure currently carried out by TAs, with an average of 56% of capital expenditure for countries that participated in the IMF’s International Survey on Revenue Administration (ISORA) in 2017.

This percentage even reaches 70% in Latin American countries, so digital transformation spending is concentrating virtually all TAs’ investment in the region.

 

2. HOW DO WE MEASURE THE PROGRESS OF THE DIGITALIZATION OF TAX ADMINISTRATIONS?

It is extremely necessary to measure the development of the digital transformation of the TAs, not only to know the degree of progress in the topic, but mainly to identify best practices and the path to achieve the digital transformation of each one of the processes, and in his case, changes in their organizational structures.

The TAs´ Digital Maturity Index was discussed in a recent publication[7] it carries out an analysis based on the premise that TAs are organizations that consume data to produce digital services based on information that allow citizens to comply with their tax obligations easily and equitably.

The IDB, together with other international organizations such as the OECD, IOTA and CIAT have developed a very intense dialogue that allowed to identify and document best practices in the use of ICTs for tax collection.  As a result of this dialogue, best practices are considered to be based on the following principles:

  • The data enters the system only once (data-only-once).

  • Data is managed and processed centrally for various products and services (single source of truth).

  • The dataflows travel and are stored in digital media (paperless).

  • Information is received and processed in real time.

The index builds a scale with four levels of maturity: initial, intermediate, advanced, and best practices, which allow characterizing the progress of a given TA in a series of dimensions that group the most critical aspects related to data and information services for tax collection.

The dimensions of the index are grouped in the enablers of the digital transformation process such as the country’s digital environment (digital policy, degree of connectivity, legal framework digital identity, electronic procedures, and leadership in digital development) and the resources available to the TA (human capital, financing, strategic planning, technological platform and the architecture and integration of its information systems).

There are also two-dimensional aspects, such are the collection of the data (data policy and the existence of a specialized body responsible, safety and quality of data, specific channels to receive the data, portals of procedures, statements and payments, third party information, and the electronic invoice). Finally, we consider the generation of digital products and services (automated processes to generate products as statements pre-filled, programs, audits, risk management, mass screening of fiscal coherence and instruments of planning through transactional information).

The implementation of this index allows public managers to map these dimensions in detail and diagnose their strengths and gaps to be closed in order to continue driving a digital transformation that brings the expected efficiency gains.

The IDB has already promoted the use of the digital maturity index to carry out studies in countries such as Guatemala, Colombia, Chile and the Dominican Republic.

 

3. FINAL IDEAS.

Digitalization has become a key aspect for all countries and the times we are living have made it clear that technological maturity is key to the resilience of governments and their institutions.

I understand that digital transformation is a new opportunity for countries, since those who bet on it will be able to develop more quickly and avoid the inequalities that can be generated if it is not included as a state policy.

This highlights the importance of digitalizing the public sector and the TAs, where citizens should always be placed as the center of all digital transformation, always seeking to be more efficient in the provision of public services.

Although there are many studies that measure the degree of open data, electronic government, digital government, govtech, etc., there are not so many studies or indicators regarding the degree of digital transformation of TAs.

That is why I highlight the initiative promoted by the IDB of the Digital Maturity Index which should serve not only to analyze the digital development of each of the TAS in their functions, processes and structures, but fundamentally to know the best practices and allow to guide those administrations that want to advance in the digitalization processes.

I am convinced that these studies will be strengthened, seeking collaboration and cooperation between different countries and international organizations in conjunction with the private sector, in order to make the digital transformation of TAs more efficient and effective.

In short, as it is always stated “The future is today, remember that the first step does not take you where you want to go, but it moves you from where you are”

[1] To expand see The importance of digitalization for our future. Alfredo Collosa. Mercojuris 6/8/2020.
[2] Digital Maturity Index: How to measure the progress of digital transformation in tax administrations. Gerardo Reyes-Tagle – Osvaldo Santin – Luis Fernando Cadena.  https://blogs.iadb.org/gestion-fiscal/es/indice-de-madurez-digital-como-medir-el-avance-de-la-transformacion-digital-en-las-administraciones-tributarias/
[3] CIAT Blog 21/10/2019 Digitalization of Tax Administrations and changes in their Organizational Structures
[4] To expand on the topic, see Compliance Risk Management (CRM). Fashion or need for tax administrations? Fernando Diaz Yubero-Alfredo Collosa CIAT BLOG 19/03/2020.
[5] To expand on the topic of Prefilled tax returns see https://www.ciat.org/Biblioteca/DocumentosdeTrabajo/2019/DT_02_2019.pdf
[6] Pre-filled declarations: A tool for facilitation and control. Alfredo Collosa-Fernando Díaz Yubero. CIAT BLOG 28/05/2021.
[7] Digital Maturity Index: How to measure the progress of digital transformation in tax administrations. Gerardo Reyes-Tagle – Osvaldo Santin – Luis Fernando Cadena.  https://blogs.iadb.org/gestion-fiscal/es/indice-de-madurez-digital-como-medir-el-avance-de-la-transformacion-digital-en-las-administraciones-tributarias/

 

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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