How can harnessing tax data create value for all?

The COVID-19 pandemic forced tax administrations to transition quickly to remote working. But it also added the new role of economic relief and stimulus payment distributor to their existing one of chief revenue collector.

This meant not only a change of mindset but also collaborating with other Government agencies in new and different ways. The solution, of course, was to turn to digital technologies. But while the pandemic revealed the potential of these technologies for tax administrations, it also brought challenges that transforming five years earlier could have prevented.

1. Designing tax services that put the customer first 

Traditionally, the burden of filing accurate tax returns has fallen on taxpayers. But too often, individuals struggle to understand, properly document and process their tax liabilities. And many businesses see new legislation and tax reporting requirements as creating unnecessary complexity and compliance costs.

But what if filing tax returns could be as convenient as banking online, rather than an unpleasant interaction with Government?

Many tax administrations have already made substantial progress along this path by designing services around the customer. According to the OECD’s 2020 International Survey on Revenue Administration, more than 9 in 10 businesses and 8 in 10 individuals now file their taxes online. And a significant number of tax administrations have already achieved a 100% e-filing rate.

But as taxpayers increasingly expect digital solutions that meet private sector standards, tax administrations must also build digital transformation into their modernization strategies.

That means optimizing web content so taxpayers can access it seamlessly across multiple digital devices and in their native language. It also means quickly deploying digital virtual assistants or intelligent chatbots to resolve queries by anticipating what taxpayers need and providing targeted information. When call volume rocketed during the COVID-19 pandemic, the Australian Taxation Office (ATO) resolved more than 94% of 1.4 million conversations by improving its chatbot.

In the future, though, chatbots will need refining to avoid exacerbating the digital divide and excluding digitally challenged taxpayers. The Canada Revenue Agency is getting around the issue by using its virtual chatbot to answer simple queries while diverting questions that potentially require more empathy to live agents.

Making services seamless and complex changes simple

Tax administrations are also starting to integrate their digital platforms into broader digital Government initiatives to offer taxpayers the seamless experience they expect. For example, the Inland Revenue Authority of Singapore has championed the Government’s “tell me once” approach, which sees taxpayers fill out a single form with data that gets shared across agencies.

At the same time, tax administrations will need to address taxpayer concerns over the increased compliance costs of a shift to digitalization. In the EY 2022 Tax and Finance Operations Survey, 60% of private sector executives said they expect their workload to increase as a result of complying with emerging digital tax filing requirements. And 83% of all companies expect this to cost their tax and finance function at least US$5m over the next five years.

Tax authorities can alleviate some of these concerns by helping businesses and their own employees to stay up to date on the regulatory and legislative landscape. Decision rules management technology can help by aligning automated tax calculations to meet changes in laws, regulations and internal policies. For instance, the Dutch Tax and Customs Administrations Agile Law (pdf) Execution Factory uses natural language processing to clarify complex legal and regulatory changes.

2. Applying advanced analytics and behavioral incentives to simplify and improve compliance

Many tax authorities are already using advanced data modeling, artificial intelligence (AI) and machine learning to provide a more holistic view of taxpayers. They’re also tailoring services to specific taxpayer groups to make it easier to comply (and harder to evade).

Advanced analytics can help tax authorities personalize services further by better segmenting tax cohorts. This allows tax collectors to give more empathetic support to lower-income households and struggling businesses – making sure they get refunds first, giving them more notice of assessments and deferring payment schedules.

Tax administrations can also couple advanced analytics with behavioral insights to “nudge” taxpayers to file their returns accurately. Australia’s ATO uses AI for “compliance-by-design,” to flag deduction claims that are out of the normal range. The system then prompts taxpayers to recheck their figures.

In 2020, a third of taxpayers removed their claims immediately and a third submitted their claims as reported. The final third of taxpayers were flagged for audit when they tried to play the system by inputting “progressively lower numbers” to come under the threshold.

Of course, increasing the use of advanced analytics and behavioral insights experiments also increases the potential for bias and loss of privacy. Tools and frameworks can help mitigate these risks. The Canada Revenue Agency has mandated algorithmic impact assessment (AIA) tools for new AI tax projects that can calculate the risk of bias and provide a list of ethical considerations.

3. Using real-time data exchanges to speed up processes, improve compliance and mobilize revenue

Currently, many leading tax authorities use an application programming interface (API) to exchange tax data between two parties in a secure environment. Under the UK’s Making Tax Digital framework, more than one million businesses have used API interfaces to supply business data directly to the Her Majesty’s Revenue and Customs (HMRC).

The next evolution will be to upgrade cybersecurity so that adopting cloud technologies becomes cost-effective, scalable and secure. Mexico’s Tax Administration Service has used cloud services since 2012, saving 20% in estimated investment costs. It now processes an average of over 180,000 e-invoices in real time per minute.

To realize these benefits, though, Governments will need to share the personal information of taxpayers with third parties. And as the EY Connected Citizens Survey shows, more than 4 in 10 citizens are against the sharing of data. That’s both within Government and with private sector companies, and even if it would lead to improvements in public services or tax cuts.

Tax administrations can address taxpayers’ concerns by building privacy features into data exchanges and letting citizens and businesses control access to their own information. For example, Estonia’s Tax and Customs Board is part of the country’s X-Road federated data exchange. Citizens own their data and get notifications to approve requests for their personal information from a Government agency or private business.

Prefilling returns and assessments with the right data

Many tax administrations already prefill individual returns or assessments with personal taxpayer data. But errors in personal data (address, occupation, etc.) are rife because authorities don’t make enough use of data from other parts of Government or third parties. The World Bank reports that in one high-income jurisdiction, 15% of taxpayer files have errors. And the jurisdiction’s tax administration acknowledged that it could accurately prefill 98% of its tax returns with information from financial institutions alone.

To prevent the problem, tax administrations need to speed up the development of secure channels for automatically capturing tax information in near or real time. This information could come from a wide range of sources, including digital devices, social service benefits and the vast amounts of unstructured data on social media.

Instantly processing e-invoices

Leading tax authorities are also validating e-invoices in real time, rather than submitting them daily or monthly: for example, tourists in Israel are exempt from VAT. When they make a purchase in a shop, smart cash registers communicate with the tax administration in real time, validating the deduction and automatically charging the VAT-free amount.

Reforms such as these have mobilized revenue as well as improving compliance: one study in Peru found that companies’ sales, purchases and VAT increased by 5% in the first year after adopting VAT e-invoicing.  Some Latin American tax administrations, including Colombia’s, have also set up e-invoicing repositories. These give micro, small and medium-sized businesses easier access to credit by allowing them to sell their e-invoices, or use them as collateral, on financial markets (i.e., “factoring”).

With different tax administrations at different stages of digital development, though, harmonizing tax across borders can be tricky. Fortunately, common reporting standards and multilateral assurance programs are helping to narrow that divide.

4. Enhancing leading-edge technology with the right digital skills and ways of working

The explosion of data, digital technologies and analytical models is only helpful if tax administrations have the skills and working practices to implement them. And the pandemic revealed the particular challenges they face in doing so. 

In the US, for example, 65,000 Internal Revenue Service (IRS) employees worked from home – more than 70% of the total. But while these numbers mirrored the private sector, remote tax collectors had far more concerns over privacy and cybersecurity to deal with. So, when the IRS closed in-person services in March and April 2020 (at the height of the tax-filing season), its live telephone services had to close too. And when the phone lines reopened in May 2020, the wait times were longer than usual.

Investing in digital skills and instilling a willingness to learn

The rapid shift to remote working is only one aspect of a broader public sector talent strategy that embraces new knowledge and skills. Tax administrations also need to invest in digitally upskilling their workforce.

They won’t realize the gains overnight. Significant proportions of employees have long tenures: in Austria, Portugal, Slovenia and Spain, more than 70% have been with the authority for over 20 years, and their use of technology is minimal. Tax administrations need to convince employees of the benefits of integrating new technologies, as well as building digital skills and learning on an ongoing basis.

At the same time, tax commissioners need to embrace more comprehensive strategies for recruiting specialists with the requisite technical skills. This means tapping into private sector talent pools and recruiting top digital talent into Government service.

Finally, by automating manual tasks, tax administrations can free up time for tasks that require more empathy and complex decision-making: for example, using chatbots to answer process questions allows staff to help taxpayers experiencing hardship to navigate entitlements and obligations. By using advanced digital technologies alongside skilled tax professionals, tax authorities can give taxpayers tailored support, including quicker access to refunds and payment options that meet their circumstances.

5. Harnessing tax data to improve environmental, economic and social policy

It’s clear that digital technologies can revolutionize the taxpayer experience and make it simpler to comply. But as the biggest holders and processors of public data on citizens and businesses, tax administrations can also help their Governments improve economic and social policy.

For example, real-time economic insights from tax administration data can help monitor the health of people and economies better. During the pandemic, the ATO gave data from the Australian Business Register, which it manages as a whole-of-Government service, to state Governments. They then used it to help cross-match the job types, workplaces and businesses at the highest risk of unemployment or financial hardship.

Looking ahead, tax administrations can also share their data with each other and wider Government to help achieve ESG objectives – for example:

•  Identifying issues such as forced labor in supply chains
•  Using blockchain to track and validate the sustainability of goods
•  Deploying AI and machine learning tools to identify trends and spot risks from the source to the point of entry

Integrating the digital strategy and changing the operating model

A tax administration can’t transform on its own. To be effective, its digital strategy must link to the broader vision for a digital Government, both domestically and internationally. The department also needs to understand the latest advances in technology, and analyze the economic and social changes that may lead revenue forecasts to change. And, of course, it needs to build in significant time for consulting with taxpayers and the private sector.

Determining the systems and processes that will get the best results

Like most Government agencies, tax administrations must develop flexible IT infrastructure to manage the increasing number of digital services they need. But as legacy systems make up over 90% of their IT infrastructure, tax administrations need to determine what they can rebuild cost-effectively from the ground up, and what they can improve through investments.

For example, commercial off-the-shelf (COTS) digital solutions offer a full suite of services but need to be flexible enough to accommodate an agency’s exact requirements. And agencies considering custom IT architecture need to make sure they have the funding, skills and time to benefit from its individualized features.  

Deciding when and how to collaborate, and with whom

The long-term vision for tax administrations is for their systems to interact seamlessly with the systems managing the other transactions that individuals and businesses carry out every day.

This means deciding which systems and processes they can perform more efficiently by working with a third party. It also means deciding what types of data and systems they can (and should) open to businesses and individuals. And it means choosing the right business systems, cloud and third-party technologies to manage that data and keep it safe. Adopting common standards around sharing and managing data, and new technologies to prevent data leakage, will be central to collaborating successfully.

Rethinking how to measure success   

In the past, the important measures of a tax administration’s success included the number of audits it conducted or the size of its revenue gap. But when a tax administration transforms to be customer-centric and digital-first, other operational and performance measures start to become more relevant. That means asking questions such as “are we targeting refunds to the people that need them most?” and “how satisfied are taxpayers with our services?”

Tax administrations need to set realistic milestones and timelines for programs and develop tangible measures for both short- and long-term results. Because the better the measures in a transformation program, the more sophisticated that program will become – and the greater the likelihood of realizing tangible returns.