Tax administrations should progress even more in the determination of taxes

The reason that led me to share these thoughts come from the worldwide trend that Tax Administrations (TAs) are making huge efforts to self-determine the tax obligations that must be paid by the taxpayers.

It is known that most TAs are characterized by systems where taxpayers themselves must comply with the obligation to self-determine and declare their taxes.

On the other hand, a previous article in this blog, “Does technology simplify taxes”[1] described, on the one hand, that technology is simplifying taxes and also questioned whether tax systems will move from self-assessment by the taxpayer to administrative determination by the TA.

In this regard, I opined that so far this has not happened, because usually what the pre-filled tax returns do is to make the information available to the taxpayers, so they can submit or possibly rectify the information but they keep having the primary responsibility for determining the tax.

Nevertheless, it seems that, increasingly, great strides are taken to have the TAs determining the taxes to enter, without prejudice that the obligation of the final submission of their content and accuracy has will remain with the taxpayer.

Proof of this progress is seen for example in the income tax with pre-filled forms where the TAs make available to taxpayers the draft returns, to be confirmed by them or otherwise to be rectified.  Generally, they begin with certain groups of taxpayers, such as employees in labor relationships who must submit their annual tax return.

Countries like Spain, Chile, Uruguay, New Zealand, USA, Nordic countries among others have extensive experience in the subject.

In the Value Added Tax, there are important advances beginning with implementing the electronic invoicing in many countries[2].  Then a later stage, already taken by many countries, digital VAT books are elaborated via the TAs’ platforms and we imagine that in a not too distant future, this will end with having digital accounting completed from the TA’s office.

Regarding the digital VAT books, among others, the case of Spain is highlighted, where the Tax Agency (AEAT) implemented in July 2017 a new management system for the Value Added Tax (VAT) based on the immediate provision of information (SII)[3] .

This system is based on keeping the VAT registers updated through the AEAT electronic headquarters by the supply of quasi immediate invoices records. This allows the taxpayer to obtain tax information already available on the website of the AEAT from a registry book of “reported”; and another registry of “contrasted”, with information from third parties belonging to the group of this system.

Thus, the taxpayer can contrast this information before the deadline for submission of his monthly VAT return, facilitating the completion of the reverse and error detection, avoiding future requirements of the AEAT.

I understand that we are getting closer to determining the monthly VAT statement this way, and soon all the accounting will be carried out digitally at the TA’s office.

Regarding property taxes, important advances by the TAs make also available to taxpayers the data available and the taxpayers confirm it or possibly rectify and submit the form.

These advances in the sense that TAs make available to taxpayers the statements with the amount of tax to be paid both for the income tax, property taxes and VAT, are being replicated in many other countries beyond than those mentioned here.

I think the trend is irreversible and that increasingly TAs will determine more accurately the tax obligations to enter.

Many of these advances discussed were devised by the Nordic countries, which have identified as essential the following pre conditions[4]:

  • Full systems of third parties submitting information to the collection agency.
  • Taxpayers’ identification systems with high level of integrity.
  • Compatible legislative framework
  • High degree of automation of information providers.
  • Processing of large-scale information.
  • Automated and minimum interactions with the taxpayers.

It is essential that TAs implement a powerful information system that is unique, complete, integrated, high-quality, and interoperate in order to facilitate exchanges of information at national level and with foreign countries, and favoring single-window procedures types.

They must also contend that all tax reforms develop and simplify tax laws, because we reiterate that technology should simplify tax systems and not make them more complex.

I cannot deny that the world and businesses are increasingly complex and this task is anything but simple.

It is clear that the more tax systems are complex and riddled with exceptions, exemptions, differential rates, withholding regimes, perception, payments, promotional schemes, etc., the more difficult the work of the TAs will be.

Now with this comment, I intend to highlight what are, in my humble opinion, the benefits for the TAs to invest resources in this area and if this will make them more efficient in their task of managing existing taxes in each country, to ensure the correct application of the tax system through the strategic objective of increasing voluntary compliance.

I am convinced that all these new developments in terms of attendance of a Tax Administration (AT) improve voluntary compliance and should reduce both extensive and intensive control tasks.

I understand that fraud will decrease with these systems because the TA itself should contrast the data prior to offering the pre-filled form to the taxpayer’s consideration.

This will prevent taxpayers to compute in their returns irrelevant concepts such as nonexistent purchases or expenses, absent or unpaid tax withholdings, or proof of apocryphal VAT tax credits, among others.

Also of course it allows the entire information relevant to the income tax, the estate tax or VAT to be declared, meaning that taxpayers do not incur in omissions when declaring their taxable income.

These tools also allow to further enhance the risk profiles that TAs use, not only for control functions but also in services.

As we all know, the resources available to the TAs are very limited to efficiently manage all taxpayers, therefore the risk profiles must be supported by modern technology, and detect as soon as possible potential fraud manoeuvers that are more and more complex.

Within the control function, risk profiles are used to select cases to be audited, anticipate fraud manoeuvers, limit the authorization of the issuance of vouchers, excluding taxpayers from tax records, applying higher aliquots for withholding, etc.

Regarding the services function, risk profiles are already used to reward compliant taxpayers providing better payment facilities, installments, and terms or applying lower interest rates in those plans, among other uses.

There are also significant advantages for TAs, such as having higher quality data, homogeneous for all taxpayers to use the same name for accounting items, to use these data for the entire control process from planning, research, selection and supervision, both extensive and intensive controls, to exchange information more easily with other countries, using unified information.

I fully endorse what was said in a recent report by the International Monetary Fund (IMF)[5] which states that the digitalization of fiscal policy is essential to improve the information available to governments, allowing to reduce private and public costs of tax compliance and boosting efficiency.

On the side of taxes, it is said that payments can be made available digitally and compliance could be improved through greater access to taxpayer data.  It is also said that fraud can be reduced, both in customs and VAT collection. Digitalization can improve tax compliance, operational efficiency and quality of information on trade transactions, particularly in customs unions lacking border controls.

The IMF states that the digitalization of administrations requires substantial investments for capacity building and creating the digital infrastructure itself, as well as resources to finance the costs of regular maintenance. International cooperation is also vital to ensure the applicability and safety of data exchange.

Finally, the report warns that the digital environment is an “unknown territory”; so it can pose a direct threat to tax collection and expenditure efficiency by creating new opportunities for fraud.

Obviously I think that all these tools are discussed in line with the idea of ​​open government in the sense of a more transparent citizen-administration relationship.

I am convinced that transparency is the way to avoid discretionary behaviors that lead to corruption in the actions of officials, not only from the point of view of taxes as discussed in the present but also from the point of view of public spending, as illustrated in the recent IMF report

On the other hand, from the point of view of the taxpayer, all of these systems will help to comply with their tax obligations, reduce their tax compliance costs and also provide greater certainty in the relationship with the TA.

Simplicity obviously reduces compliance costs for taxpayers and administrative costs for the TA; the lack of simplicity and neutrality of a system invites tax avoidance.

Beyond all, I may have overlooked some other advantages of the fact that the TAs perform the determination of taxes, as well as many other tools, by TAs that follow this path.

I just pretended with this attempt to explain the importance that this topic has and will have, considering the technology that is brought to us by this fourth industrial revolution.

I believe that new technologies, if properly incorporated by the TAs, involve in most cases a real reengineering of the procedures, simplifying them and making them more effective, and let’s not forget that the TA’s main asset are the human resources, which must be trained, motivated, reliable and correctly remunerated.

[1]   02/06/2017 Ciat blog.

[2]   See CIAT Blog 21.03.2018 electronic invoicing in Latin America, Alberto Barreix and Raul Zambrano.

[3]   To expand the topic see

[4]         Tax Administration Manual. CIAT-IBFD. 2011, p. 341


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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