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Digitization – why should tax authorities care?

These days, everyone talks about digitization and digital transformation. Sensors and billions of devices send and receive data and help improve our lives, by managing water floodings, managing traffic in a harbor, etc. Many of these examples are Internet of Things (IoT) like scenarios, which are relevant in Public Sector wherever infrastructure is managed.

What about digitization in government administration, e.g. a tax authority?

The first thought that comes into my mind is what I experience as a taxpayer. Digitization in the tax space is nothing new. Online services have been established since the 90’s. According to OECD data, an average of 70% personal income tax returns within OECD countries were processed in 2013 using e-filing and pre-filling. Some countries achieve close to 100%. This requires electronic data exchange between the data source (employers, health insurances, banks, other agencies, etc.). Simplification of the tax system is a major prerequisite for digitization here: Ideally, the underlying tax laws are so simple that for the majority of cases no data other than what is digitally available is required.

Online services are only a starting point

Online services provide comfort to taxpayers and increase the operational efficiency of the tax agencies. Both are valuable and important. Yet the real interest of the tax agency is to increase income through reducing the so-called tax gap. In simple words, the gap is the difference between what should be paid and what is finally being paid. The amounts we talk about are significant. E.g. the UK government collection agency, HMRC, estimated the tax gap for 2015 being £34 billion, which is 6.4 per cent of tax liabilities.

How can digitization help reduce the tax gap?

Identifying undeclared income, overstated deductions or chasing unpaid tax bills is extremely resource intensive. Various strategies are already in place. E.g. for VAT tax compliance, tax lotteries have been established to force the issue of a receipt for a certain transaction. It is all about data – knowing about the participants and transactions. The more you know about your taxpayer, the better you can focus your efforts on those cases where you can expect a higher outcome. External data sources, including social networks like Facebook, will become more and more relevant to achieve a 360 degree view on the taxpayer. Information about the taxpayer is the basis for targeted measures instead of generic approaches. In my opinion, this is the area where tax agencies can really benefit from digitization. This is a huge field for big data, text analysis and predictive strategies – in order to detect incompliance and fraud as well as to increase collection.

SAP’s integrated Tax and Revenue Management platform is helping to reduce the tax gap through mechanisms that increase taxpayer compliance and debt collections. For example, read here about strategies that can help you optimize your debt collections.

Where do you see the biggest impact digitization can have on tax authorities? What are promising strategies, what not? I am very interested to have your thoughts and feedback.

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      Author's profile photo Marlyn Zelkowitz
      Marlyn Zelkowitz

      Thanks, Harald. Digitization can deliver tremendous benefits for governments and taxpayers alike, both citizens, businesses, and other organizations. However, a good cybersecurity approach is one of many critical success factors. We have seen many examples of tax fraud which take advantage of weak cybersecurity or use social engineering to cheat taxpayers.

      Below is one article warning of the dangers.

      Perhaps a future blog post could address the critical factors required for a successful tax digitization and e-filing? Food for though.