Digitalization of the Tax Administrations and changes in their Organizational Structures

The purpose of the present article is to comment on how digitalization is already affecting aspects related to the structure of tax administrations (TAs) and also allow me to make some suggestions in this regard.

The digitalization resulting from the Fourth Industrial Revolution that we are undergoing produces vertiginous changes in all public and private organizations.

The new concept of the Digital Government is characterized by the digitalization of public services, the extensive use of public and personal data, the introduction of algorithmics to automate processes and encourage the development of Artificial intelligence applications to improve the functions and activities of the public sector.

As it was recently said[1], digitalizing governments is a challenge. Those who have adapted to the internet age also share certain features. Most importantly, they have created small, multidisciplinary digital teams, put them at the heart of the Public Service and have given them the freedom to work in new ways. These have teams focused on delivering solutions to meet the users’ needs.

Today, in the tax world, we debate the taxation of the digital economy, which accounts for 15 per cent of Gross Domestic Product (GDP). It is discussed as it should, and this digital economy is estimated to reach 25 per cent over a period of 5 to 10 years.

TAs are affected daily by the changes in their processes and ways of working.

There is no doubt that the organizational forms of the TAs have been the object of evolution over time and these changes are currently occurring with greater speed.

In theory, TAs can be structured in several ways, each of which has advantages and disadvantages.

For example, the geographical approach is characterized by a network of contacts (local or regional) of offices and/or agents with similar or identical functions covering a given area.

They can also be structured based on tax laws or taxes to be administered, i.e. independent organizational units or departments are in charge of the administration and collection of each tax. These departments are multifunctional and to some extent self-sufficient. That is to say that we would have an agency for each tax to manage, with the consequent costs that this will entail.

For this reason, one of the most frequent and successful forms of structuring has been the organizational structure by function, i.e. a TA that is structured based on the type of work done, rather than the type of tax, business, product or customer.

This structure has been recommended for many years by most international experts from different agencies.

Another, more modern and recent, way in which a TA can be structured is by type of taxpayer, according to different groups of taxpayers who have different characteristics, so that each should be handled differently.

It has also recently been verified that some TAs are being structured by processes, i.e. by each process or business attended by the organization.

Another issue linked to the structure is the integration -or not- of the TAs to collect internal taxes, customs taxes and, where applicable, social security.

In this case, the experiences are very divergent, with many countries having integrated internal taxes with customs and a lesser number have integrated also Social Security, highlighting in America the experiences of Argentina, Brazil and Peru in this respect.

According to ISORA’s recent publication[2]. on average the most frequent organizational structure is by function (41.5 per cent), followed by the one based on the different segments of taxpayers (22.6 per cent) and on the different taxes (18.9 per cent).

This is a hierarchy that repeats itself for the CIAT countries, although the aggregate that reaches the highest percentage is of TAs organized by function (51.4%).

In middle-income countries and low-income countries, patterns of organization by function and type of tax are less frequent, while the organization by segments of taxpayers increase, reaching 60.9% in the administrations of low-income countries.

With regard to its responsibilities, ISORA analysed the involvement of TAs in customs administration and Social Security (although the survey focuses on the administration of internal taxes), with an average of 37 per cent in the first case and 18 per cent in the second.

By income levels, there are more TAs integrating domestic and customs taxes as the level of income decreases (35 per cent in high-income countries, compared with almost 48 per cent in low-income countries), while the opposite is true in terms of the integration of the administration of Social Security contributions (over 20 per cent in high-and middle-high-income countries, compared with 4.3 per cent in low-income countries).

The CIAT member countries, for their part, are very similar on average to the global average in this respect (35% integrate Customs and 16.2% integrate Social Security).

Today more than ever, the context in which the TA work forces them to be dynamic organizations.

The structures are the instrumental elements for the achievement of their function.

That is why it is always stated that there is no optimal organizational solution of universal nature that can be applied from one country to another.

In practice, mixed solutions are given as to how to structure or integrate TAs.

There is no doubt that there was an evolution of the TAs from being organized by taxes to become organized by functions and then by type of taxpayers and processes.

But beyond all these forms of structuring or integrating, we can notice changes that are product of digitalization.

The OECD has stressed precisely this topic, by saying that digitalization is producing an increase of the electronic administration; already there has been a significant change towards e-government with increasing options for the online filing of tax returns and online payments, among other aspects.

How is digitalization affecting the TAs’ structures?

In the function of information and assistance to taxpayers, the trend is the reduction of physical contacts with taxpayers, a product of new forms of attention either through the TA’s website or through mobile applications.

The trend is that fewer and fewer formalities are carried out in the TAs units themselves and more are carried out online, which is leading to a reduction in the number of offices in many organizations in a manner similar to that of the Financial Institutions sector.

Another trend is that the TAs make available to the taxpayers the data available to them, and prepare returns / declarations proforma of VAT and Income Tax.

This leads us to rethink what the optimal structure should be in this regard, analyzing among other points the consequent transfers of agents destined to the physical attention of the taxpayers to other tasks, such as massive or extensive controls.

From the point of view of the function of verification or control, the changes should be linked to the use of the huge amount of information available to Tas, not only internal but external data, product of the increasing forms of cooperation/ collaboration that is produced, among other aspects, from the exchange of information and all the related to the BEPS Action plan of OECD.

I understand that international tax units must be developed, not only at the central level as they already exist in almost all countries but at the operational level in each unit of the TAs.

This monitoring function should also be structured in terms of Compliance Risk Management.

The TAs are adopting an approach that is increasingly proactive for the management of the compliance risk, whenever possible, seeking to intervene in the early stages rather than after they have filed the tax returns, in this sense the massive control will have preponderance over the intensive.

In the function prior to the audit, the investigation is a stage to select cases to audit, here also the structure requires a presence throughout all the units of the TA, endowing it with optimal human and material resources to take advantage of all of the information and new techniques of selection (methods of predictive algorithms, risk analysis, etc.).

Today the digitalization and the concepts of electronic TA and electronic government are greatly enhancing collaboration and integration between agencies and TA within a state and between different countries, through processes such as the one-stop window.

For this aspect, the structure of the TA should include areas that will serve as the link between the various agencies so as to enhance this process and to give a rapid use to the information and best practices exchanged.

Another function that is being restructured and will continue to do so without hesitation is that of ICT.

This function has passed from being a support function of the TA to becoming a priority function today.

I always stress the importance of information systems to have a more efficient control, while also considering its vital relevance for all the service tasks performed by a TA.

I have no doubt that today, TA is managing information, and that is why I would like to stress the enormous importance of having unique information systems to carry out the massive and intensive controls.

For this, changes in the TA’s structures are required, creating new fields, such as data analytics, contemplating also the increasing use of the predictive behaviors as a compliance tool.

Structures should be created to fully use the enormous amount of information received by Tas, since it will continue to increase.

This is not only at the central level of the TAs but mainly at the operational level as these units will increasingly require support from computer scientists and data analysis experts for their best performance.

As I always assert, more than having information, the important thing is to work hard on its quality and make an effective use of it.

Information is key to control higher-risk sectors, which is essential to reduce levels of evasion by modifying behaviors in pursuit of the strategic goal of all TAs.

In conclusion, these are some ideas of changes in structures that are taking place or should take place in the short term.

Surely there are many more that I leave open for debate and contributions, since on this topic as in many others, the best practices help TAs to be more and more efficient and effective.

[1] https://blogs.iadb.org/administracion-publica/es/como-digitalizar-gobiernos-y-mantenerlos-digitales/

[2] OVERVIEW OF THE TAX ADMINISTRATIONS: STRUCTURE; INCOME, RESOURCES, AND PERSONNEL; ISORA OPERATION AND DIGITALIZATION (International Survey on Revenue Administration) Santiago Díaz de Sarralde Miguez. Spanish version