Digitization of Tax Administrations and facilitation of tax compliance

Today, there is a general consensus that the basic strategic objective of modern Tax Administrations (TAs) is to increase the levels of voluntary compliance by taxpayers, through two main lines of action, on the one hand by providing facilities to those who wish to comply, and on the other hand by carrying out a radical fight against fraud.

These two lines of action are complementary and must be both at the service of the acceptance of the tax system today. They establish a relationship of trust with taxpayers and thus minimize the indirect tax burden, since the performance of the Tax Administrations affects the competitiveness of companies located in each country.

Facilitation is the first line of tax control and an essential complement of it. Facilitation means having good information and assistance services, but also that all areas of the Tax Administration assume that their actions have an impact on this area.

Facilitating tax compliance, I understand, is a concept that goes far beyond traditional information and assistance and includes all types of measures adopted by the TAs, with the purpose of reducing tax compliance costs, i.e., the costs incurred by taxpayers to comply with their tax obligations and includes two components, on the one hand, the time spent to comply with tax obligations and on the other hand the payment of fees to their tax advisors.

Many of the compliance facilitation measures also reduce the costs of administration of the tax system, that is, the costs incurred by the Tax Administrations for its administration.

The digitalization process in the structures and functions of the Tax Administrations, which have accelerated exponentially due to the ongoing pandemic, is of vital relevance in all this and is having a strong impact on various measures to facilitate tax compliance, thus giving rise to new ways of relating with taxpayers, such as the virtual office.

Therefore, the objective of this article is to review some best practices for the facilitation of tax compliance, which are being driven by digitalization, to finally present some reflections on the subject.

  1. BEST PRACTICES IN FACILITATING TAX COMPLIANCE.

In the first place, the virtual office stands out as a general access point that the Tax Administrations make available to taxpayers so that they can easily carry out their tax procedures online. In many countries, progress has been such that the same information and assistance services can already be carried out through it as in person.

Related to this, the web portals of the TAs are a vital element, which is why it is very useful to have tools such as a single portal and a citizen folder where citizens can access their records, view their ongoing procedures, and even start new procedures, all in one place.

In this matter, many TAs already involve user taxpayers to participate in the definition of what services should be offered and how they can be offered, producing feedback for continuous improvement.

Call centers are another form of facilitation of tax compliance that is applied today in all Tax Administrations.

Another novel facilitation mechanism is the option of Virtual Assistants that work on the basis of Artificial Intelligence to fulfill information and assistance functions. These are already used in many countries in America such as Brazil, Chile, Mexico, Guatemala, Peru, Colombia, Canada, and also in Europe such as Spain, United Kingdom, Sweden, Finland to name specific examples.[1]

In this regard and within the framework of a general policy of communication with citizens, the TAs also use the media (press, radio, television, or the Internet) to reach them, including, of course, the main social networks (Twitter, LinkedIn, Facebook, Instagram among others).

Mobile applications used to facilitate tax compliance are another trend, constantly growing.  According to Tax Administration 2021[2] , they are becoming increasingly transactional, allowing taxpayers to access relevant records and tax checking accounts, communicate with the TA, provide information, and complete tax declarations and payments[3].

Another way of facilitating tax compliance is to communicate the data that the TA has on each taxpayer, prior to the expiration of the obligation to file the return, always with the warning that the data may not be correct and that, if there are more Data with tax significance, they must be declared by the taxpayer, even if they have not been communicated by the TA.

Likewise, many TAs send communications applying “nudge” techniques to encourage and promote correct tax behavior and based on the “behavioral insights” approach, that is, an approach towards a better understanding of taxpayer behavior.[4]

A subsequent step to this is the pre-prepared tax return, where the Tax Administrations make available to taxpayers a draft of the tax declaration so that, if they agree, they can present them or otherwise rectify them. This already applies in many countries, especially in income tax and in some also in VAT, such as Chile.[5]

Payment facilities and deferrals constitute another facilitation instrument which in many TAs is already digitalized in all its stages, from the application of the plan to its granting, payment, and subsequent control.

A very important facilitation tool is the simplification of forms, procedures, and processes within the TAs, as well as the simplification of the tax system in general, an aspect in which I understand that digitalization should contribute a lot.

Simplification implies advantages from the taxpayer’s point of view, by reducing the indirect tax burden, and from the TA’s perspective by facilitating the management of the tax and its control. In the UK, there has been an Office for the Simplification of the Tax System (OTS) for 10 years now[6], which is an independent advisory body to the government on the simplification of the UK tax system.

Another way to facilitate tax compliance is the Good Practice Forums with companies and professionals and the collaboration agreements between tax professionals and the Tax Administrations and, of course, the tax education programs that have already been disseminated in most countries for a long time.

They also facilitate tax compliance, cooperative compliance approaches supported by prevention and trust between taxpayers and the Tax Administrations and by prior agreements instead of the traditional solution of ex-post audits and controls. In essence, cooperative compliance is transparency and collaboration between taxpayers and the TAs, in exchange for legal security.

Regarding the comparative experience of this subject, the Netherlands should be mentioned as pioneers, followed immediately by Spain, the United Kingdom, Australia, and South Africa and later by Austria, Denmark, Singapore, South Africa, Finland, and France, among others.

The Accounting and Tax Support Centers form another instrument. They are counseling points where students of accounting and business sciences, trained by the TA, provide free accounting and tax assistance to low-income people and micro-entrepreneurs.

ICAP, for its part, is a voluntary tax risk assessment and assurance program, designed to facilitate compliance by large multinational groups, which are willing to engage with the Tax Administrations actively and transparently in the multiple jurisdictions where the group has commercial activities[7].

Another measure to facilitate compliance is the OECD’s proposal for a new global tax information framework for digital platforms so that they collect information on income obtained from the accommodation, transportation, and personal services through platforms and report the information to the TAs[8].

Another form of facilitation is the Digital VAT kit, recently launched to apply this tax to electronic commerce in Latin America and the Caribbean.[9]

The recent measure proposed by CIAT – Norad of Digital Compliance Economy, regarding the management of VAT within the digital economy also seems very important to u. It requires companies that voluntarily adhere to the mechanism, to charge in their transactions the corresponding indirect taxes in B2C type operations (with consumers) and make the corresponding transfer of funds, as a simplified mechanism of registration, declaration, and provision of information[10].

  1. Final thoughts:

Hereby I have listed only some of the tax compliance facilitation measures that many TAs apply today.

I understand that the ongoing digital transformation allows the TAs to keep applying day by day these new measures to be more efficient in their mission.

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

All digital transformation should be part of an integral process of Digital Government that is being established in different countries.

It seems vital to me that digitalization collaborates in the simplification of tax systems and of the rules and procedures within the Tax Administrations.

It is important to consider, in the tax reform processes, all aspects related to digitalization and the use of new technologies,. They should always have as goals the simplification for the citizen, the reduction of bureaucracy, and greater transparency.

In my understanding, digitalization is creating an increasingly important confluence between measures that are both services and control, like many of those mentioned here.

For the TAs, preventing is much cheaper than correcting and there are also many advantages for taxpayers with the consequent reduction in compliance costs.

Finally, facilitating compliance with tax obligations is essential to achieve the tax administration’s strategy of raising voluntary compliance levels.

I am convinced that the ongoing digital transformation is already contributing to this, and that even more collaboration should take place in this endeavor.

[1] To enlarge see Virtual conversational assistants in Tax Administrations: The future is today. Alfredo Collosa CIAT Blog 09/22/2020.
[2] OECD (2021), Tax Administration 2021: Comparative Information on OECD and other Advanced and Emerging Economies, OECD Publishing, Paris.
[3] To enlarge see Information and assistance in the Tax Administrations. The future is in the apps. Alfredo Collosa CIAT Blog 10/17/2017.
[4] To expand see: How effective are letters or communications to improve tax compliance? Alfredo Collosa CIAT Blog 4/6/2021.
[5] To expand see: Pre-prepared Tax Statements: An Instrument of Facilitation and Control. Fernando Díaz Yubero, Alfredo Collosa. CIAT Blog 5/28/2021.
[6] Annual Report 2020-21: Simplifying the tax system to make it easier for taxpayers,
GOV. UK Office of Tax Simplification
[7] OECD International Compliance Assurance Programme (ICAP)
[8] Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy
[9] New toolkit to strengthen Value Added Taxes on e-commerce in Latin America and the Caribbean
[10] The Digital Economy, the Norwegian Cooperation and CIAT. An Essential Tool. Marcio Verdi. CIAT Blog 03/24/2021.

 

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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