Blockchain, fintech, cloud computing, AI, the internet of things (IoT), 3D printing, industry 4.0, among other innovative technologies, have the capacity to transform the operation of our tax systems and the way that tax administrations interact with taxpayers.
These technologies will disrupt traditional tax norms but also open up opportunities for developing countries to leapfrog the digital divide. These countries do not have the legacy issues that big countries like the US have and unlike the “old” technology that has been traditionally used by tax administrations, they do not require massive investments in hardware (e.g. large servers) since most are cloud based with services being brought in on a ‘need-now’ basis.
Which areas offer the biggest potential?
The way that governments in developing countries go about implementing and administering specific taxes could be assisted, if not transformed, in different ways.
- Taxing land and buildings could be transformed by land registers which are operated on the distributed ledger technology (DLT) which underlies blockchain.
- The administration of VAT could be transformed by the combination of distributed ledger technology, AI and robotics, reducing compliance and administrative costs while at the same time reducing the VAT gap.
- Payroll taxes are also a good target for the combination of distributed ledger technology and “smart contracts”, or computer programs designed to allow the performance of credible transactions without third parties.
- Using AI, robotics and distributed ledger technology could transform the way that tax administrations collect, store and use data required for determining transfer pricing by multinational companies.
At the level of tax policy, the new data management opportunities presented by the next wave of technology offer developing countries an opportunity to have a more fact-based tax reform process and to reconsider the way they use taxes on capital and wealth to reduce the growing inequalities in the distribution of income and wealth, especially given the recent progress made in improving tax transparency.
But perhaps of most importance, these technologies offer developing countries a unique opportunity to counter corruption by reducing the opportunities for collusion between tax officials and taxpayers and by casting a little “sunlight” on who owns what in their economies.
Realising the opportunities
The willingness or ability to understand the technology does not pose a significant challenge or constraint to the potential gains: Generations “X” and “Y” in most developing countries are already technologically savvy. Rather, it is the capacity to manage these changes in the tax administrations, the lack of well-trained officials, and the attitude of political elites that may feel targeted by technologies which improve transparency. Leadership is a key issue: Getting the most out of these technologies requires the leaders of a country to have a vision of what the digital future will look like and to transform this vision into a digital road map for the whole country.
The experience of countries like Rwanda and Kenya show what can be done when strong support is provided from the top and when tax commissioners have the vision and energy to transform the culture and practices within tax administrations.
Donor agencies also have a role to play in this transformation, moving away from a backward-looking agenda to one which looks forward to a digital future. While the choice of technologies, the direction and speed of change must be determined by each country, donor agencies can help by:
- Promoting pilot studies.
- Developing criteria that commissioners can use to choose between competing technologies.
- Facilitating a dialogue between the tax administrations and service providers in the private sector.
- Supporting academic research into some of the longer-term issues that will arise as countries move along the digital road (e.g. the changing balance of power between the administration and the citizen).
We at the WU Global Tax Policy Center in Vienna, in partnership with leading research centres around the world, have recently launched a program to address some of these issues. The aim is to help developing countries maximise the benefits and minimise the risks associated with new technologies. We look forward to working with the development community over the coming years.