Challenges for the tax administrations

Probably the title of this post may make the frequent readers of Cosmopolitan smile or, who knows, they may agree with a discrete movement of their heads up and down. However, in my opinion, in the sphere of the tax administrations, undoubtedly the size matters and the effects are boosted in the environment wherein we live.

In the current environment, administrations require a level of specialization which, in relative terms, mainly affects the small administrations. In the area of technology, for example, it is necessary to count on staff members for technical support, the data base, development, design of the web site, management of network equipment, providing security to the perimeter, management of electronic mail, installation of cables, management of the IP center, auditing, testing, quality assurance, project management and change, security and wireless network so that we may install our telephones and tablets and, of course, some persons to act as managers. According to the level of specialization, best managerial and security practices and the simple distribution of tasks and times, it is recommended that many of these functions be assigned to different persons.

The work involved in obtaining, debugging, transforming and processing information is ever greater. We are experiencing a time wherein obtaining large volumes of data directly from the taxpayers and many of the third parties with whom they carry on transactions, to then crosscheck and compare them with the returns filed is becoming a by-gone issue. Currently, we try to use said information to pre-fill returns; develop electronic documents that will totally replace paper documents for tax purposes and which are totally available to the administrations for their analysis and control; to respond to the expectations of the taxpayers as well as of the administration to implement self-managed services via Internet or supported by mobile platforms; respond to taxpayer requests, such as for example the processing of tax refunds in time frames that are more in keeping with the ubiquity of instantaneous courier services than the “ancestral” traditional mail.

As if these demands were not enough there is the tremendous potential of implementing predictive compliance control practices, and even more so, preventive ones, based on the sophisticated and complex analysis of all the aforementioned data sources, and other unusual, less structured ones (such as invoices, reports on payment to third parties and also the references in social networks expressing congratulations for the new yacht). This data analysis calls for including new competencies, new skills: data scientists, statisticians, mathematicians specialized in Bayesian methods or behavioral economists.

To this, one must naturally add the increasing need and – certainly not a transient fad – of exchanging information, on a permanent basis, in many cases automatic with other administrations, in other languages, with other alphabets, others uses and habits. Certainly the effort for generating information files to be sent to the counterparties, under the adequate procedure, with reasonable quality will be a great challenge, but probably less than that required to make an appropriate use, in terms of tax control, of the information to be received.

Indeed the use of tools will facilitate such efforts, but to such end, one must know what to look for and where, which, in turn calls for resources in order to ensure, identify, obtain and master those tools.

There are scarce professionals specialized in certain technological areas and the market’s demand thus creates a harsh competition for the administrations which may face difficulties in retaining their qualified resources for a long time. More than one of them may corroborate the feeling of having become a school for training specialists. Of course, this reality is not exclusive of the technological area. Other areas, such as transfer pricing, for example, could more strongly experience said situation.

How many people does an administration need to adequately respond to those needs? Most certainly the answer depends on whether it endeavors to outsource some of these functions, or hire tools or services. But what if it decides to do everything in-house? Would it be fifty, one hundred, two hundred? Probably the greater demands of the technological area would no longer be more equipment, more disks or more tools but rather, (along with greater bandwidth) more staff.

No matter how the calculation is made. The number for many administrations is too great. A technological team of 100 persons represents two and a half per cent of an administration with 4,000 officials, while it would represent 25% of one with 400. A tax administration may have between two and ten officials for every ten thousand inhabitants, with an average in Latin America of approximately five [1]. In my opinion, the smaller countries could not be self-sufficient as far as technological aspects are concerned.

We are not trying to imply that our technology meeting scheduled to be held in October is not of interest to the larger administrations. Of course it is. It is not only a source of inspiration for the coming development, if one plans to do everything in-house, but rather it is an opportunity, thanks to the exchange, to present solutions and submit them to consideration/review by others, thus seeking to shun from some sort of domestic technological cloister and ideas to continue innovating. It is a matter of allowing everyone, especially the smaller ones, direct contact with possible tools or solutions.

Regards and good luck.

1] Data taken from “State of the Tax Administration in Latin America: 2006 – 2010”. CIAT. 2011. http://webdms.ciat.org/action.php?kt_path_info=ktcore.actions.document.view&fDocumentId=8117

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