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The role of technology in expanding the Tax Base

TOPIC: Digital transformation – Providing Secure and effective ecosystem
WRITER: Kendi Nderitu
COMPANY: Country Manager, Microsoft Kenya

The fourth industrial revolution and the rapid progression of technology, has transformed the business environment. It is an undisputable fact that is affecting all businesses and urging technological agility for business efficiency.

Discussions are today fixated on digital transformation; however, success is elusive for many firms. This article explores few standpoints on digital transformation, and outlines its value proposition for tax administration and revenue collection firms.

Tax serves as a central revenue stream for governments throughout the world and despite establishment of processes that improve compliance and facilitate enforcement, a combination of tax avoidance mechanisms and errors are still costing governments billions. UNCTAD Trade and Development Report 2019 documented that tax losses range between USD 50 billion to USD 200 billion yearly, with 95% of this value borne by developing countries. These fiscal revenue losses are a major impediment in the achievement of economic growth and development, and call for adaptation of business architectures e.g. integration of digital technologies into existing models.

Reduction of revenue losses and attainment of a positive impact on tax administration and revenue collection, can be realized through implementation of digital technologies in operations. These technologies include Big Data, Artificial Intelligence (AI), Machine learning, the Internet of Things (IoT), Mobility and Cloud Computing. Whether employed separately or together, these solutions have the power to increase taxpayer satisfaction and empower employees within tax agencies. For example, UK HM Revenue Customs (HMRC) empowered employees by providing access to modern apps, social media and more flexible working. The strategy has supported use of mobile devices for agile customer support as well as extended webchat hours.

Digital technologies similarly simplify processing and analysis of high volume data, making tax administration and revenue collection efficient. However, a secure and effective ecosystem must first be created if any associated digital risk particularly that of fraud, is to be mitigated.

Digital Fraud

To understand the benefits of a secure tax system, we must first understand the risks associated with digital tax fraud.

The creation of shell companies whose sole purpose is to scam has increased. These firms exist on paper, have no real employees or operations and can be set up and liquidated in minutes. This has ultimately become a key vector in carrying out tax fraud.

Consider this scenario: You receive an email from an accounting firm or individual representing, regarding your tax returns. Assume you provide this ‘firm’ with your bank details, your vulnerability to fraud increases since the shell company can drain your account of all savings and vanish after the transaction.       

Outsourcing of services and growth of digital data, online scams and sophisticated spyware has also allowed criminals to industrialize fraud and become more difficult to trace. Notwithstanding these issues, digital transformation holds a promise to contribute to growth and efficiency.

The Promise of Digital Transformation to Tax Systems

The world is becoming a global village with increased interconnectivity, a phenomenon that has furthered information sharing.

Observing at the business environment there is an unremitting call for information sharing. It is a call backed by various organizations e.g. The Organization for Economic Co-Operation and Development (OECD), and envisions improved ability for tax authorities to deter, detect and disrupt tax evasion and avoidance. However, is it attainable if governments fail to employ digital technologies to their operations? Drawing the conversation near, will the African Continental Free Trade Area (AfCFTA) agreement thrive without employment of digital technologies?

The promise of digital transformation is wide-ranging, and includes high standards of transparency, operations optimizations, opportunity to clamp down on tax evasion and avoidance, insight on taxpayers by use of data analytics and most importantly empowering employees with tools like cloud collaboration which increases productivity. All these among others are main constituents to business success.

Components of a Successful Digital Transformation

 Companies are apace investing in transformational technologies that tap into the benefits of digital transformation. However, organizations that have deployed new and sophisticated technologies in their business architecture such as AI, IoT and advanced neural machine-learning, are achieving success in their digital transformation journey.

The success rate on digital transformation does not exceed 26 percent, and it’s ultimately more challenging for traditional industries where success rates fall between 4 and 11 percent according to McKinsey & Company. Notwithstanding, direct digital transformation (DX) investment has grown at a 17.5 percent compound annual growth rate to top USD 7.4 trillion between 2020 and 2023, according to International Data Corporation (IDC). The elusive nature of successful digital transformation is in some cases the reason behind a low success rate despite a growing digital economy.

The following components are key drivers to successful digital transformation that should be adopted into business architectures;

Compliance Strategy: Every business model must develop a compliance strategy which guides on development of compliance procedures and restructuring of units. For the tax industry the strategy is focused on key taxpayer segments such as large businesses, Subject Matter Experts (SMEs) and individuals. The strategy should match values and behaviors responsible for tax assessment, auditing, revenue collection and management, at the backdrop of a clear vision on tax fraud prevention and detection.

Legislative framework: The rapid growth of the digital economy requires legal systems and legislations that address broadly implications of new technologies. Therefore, tax and procedure laws that modernize administrative and procedural provisions across all major taxes are necessary. 

Operational framework: The framework outlines tax administration’s core processes and compliance procedures. This includes the design of a governance model, organizational structure, and guidelines for operational processes to achieve compliance, management reporting, and roles and responsibilities within the organization.

Tax technology and infrastructure: New technologies have a set of requirements that include suitable physical environment for installation, continuous support in the day-to-day environment, ongoing maintenance and license costs, new security requirements, monitoring and planning for future improvements and so on. To optimize the benefits and manage compliance, risks and rising future revenues, tax administrations should develop a strategy that guides the direction of innovations and provides a clear picture of the end-state design of a tax technology infrastructure.

Change management, training and education: Digital transformation bring about substantive change thus training staff for the growth and extension of individual skills, abilities and competencies on the new operational blueprint and tax technologies is important. Tax administration structures should have clearly defined and differentiated roles and functions, lines of communication, untangled accountability and decision-making procedures that are transparent and functional.

Performance measurement: Performance measurement dashboards and reporting, present a feasible way to maintain buy-in, ongoing support and strategic guidance, and enhance process transparency and accountability. Effectively measuring performance involves periodically assessing set KPIs, relevance, progress, efficiency and the impact of activities with respect to project objectives.

Solutions in Action for Improved Tax Administration and Revenue Collection

Digital transformation can be capital intensive nonetheless the long-term value unlocked supersedes the initial cost of investment.

Possible solutions that can be considered to accelerate success in digital transformation of tax administrators and revenue collection are;

  1. Cloud services which provide capacity to reduce costs of developing and testing systems and scaling. Access to advanced analytics and AI-based solutions form the basis of motivating tax administrators to adopt cloud architectures.
  2. Secured identity, multi-factor authentication including biometrics to enable access to information and personalized engagements.
  3. Cognitive services and AI such as chatbot technology which improve taxpayer assistance services, and Machine Learning to draw better insights out of data. For example, MIT Computer Science and Artificial Intelligence Laboratory (CSAIL) researchers developed Simulating Tax Evasion and Law through Heuristics (STEALTH), a system that uses AI to combat corporate tax evasion.
  4. Advanced analytics that build predictive and cognitive modelling for taxpayer segmentation and risk analysis.
  5. Customer Relationship Management (CRM) platforms that enable secure a case and document management, from registration of entry to archiving and retention, providing a 360⁰ view of the taxpayer. CRM also helps simplify targeted activities, decreasing processing time and offers near real-time eReporting and issue alerts.
  6. IoT (Internet of Things), for a variety of services such as carbon tax, connecting cash registers to tax agencies to curb sales tax fraud, and sensors at gas stations to obstruct fuel theft in the distribution chain.
  7. Blockchains which enhance tax service quality and collections through compliance reporting, anti-money laundering, deal origination trading, trade reporting and risk visualizations, claim filings, claims processing and admin, fraud prediction, licensing and identification, multi-factor authentication and tax filing and collection

Success Stories on Digital Transformation

The ‘Alex’ a virtual assistant introduced by Australia’s Tax Office, which answers general taxation enquiries from citizens and businesses.

Service de Administración Tributaria (SAT) a cloud-based tax collection application employed by Mexico’s Tax Authority. Individuals and businesses use the application to pay their taxes by logging onto the SAT portal with their tax ID number. On the portal a tax payer can review earnings and deductions that are calculated and entered automatically and proceed to file returns – with tax refunds deposited to their bank accounts within five (5) days.

The Kenya Revenue Authority (KRA) which has embraced digitalization as witnessed in their 7th Corporate Plan 2018/19 – 2020/21 themed Revenue Mobilization through Transformation, Data-Driven decision-making and Tax Base expansion. The innovations implemented by the Authority e.g. iTax, M-Service amongst others show the growing interest in modernization of services.

In conclusion tax administration and revenue collections agencies can experience a successful digital transformation. The transformation is however dependent on their ability to re-invent their technology, operating systems and business models. The process of digitalization is not difficult as it is not linear, therefore unlocking potential using digital technologies is possible for these agencies.

We made it easy and efficient for taxpayers to do business with us and to become compliant with tax legislation. There has also been an improvement in meeting payment deadlines and a reduction in collection overheads. “Allen Saruchera, IT Services Manager, Zimbabwe Revenue Authority.