The Tax Code and Tax Administration Innovations

By Anatoly Gaverdovskiy

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The Weight of Centuries

For anyone who has been doing business and paying taxes for many years, hearing two cherished words—”tax code”—instantly evokes a host of unpleasant associations. As someone who has been working with tax authorities on various projects for over 20 years, I have even stronger associations. The most striking pertains to the number of pages and the weight in kilograms of the tax codes of the countries where I have worked. And the tax code is not the only relevant document. Interpretations and clarifications—official bylaws, explanatory letters from the finance ministry and tax administration—as well as unofficial comments from the tax experts and specialists supplement it.

As tax administration develops, the tax code becomes such a complex and voluminous document, written in bureaucratic tax-legalese to boot, that taxpayers cannot understand it on their own. To comply with the requirements of tax legislation, they must resort to the help of expensive tax consultants. According to Source Global Research, the international tax advisory market in 2021 was worth $47 billion.

Resistance to Innovations

The tax code may be the most changeable document in the statute books, which also contributes to its confusing nature and complexity. This is because interested parties and lobbyists try to get benefits or special conditions.

In some countries, the tax code has turned into a century-old tree with annual growth rings, where each ring is a new member of parliament who implements certain changes to benefit some interested parties. The worst part of this process is not even the benefits, which are costly to the state budget, but that society may associate tax code changes with direct financial benefits. Not only tax information systems embody tax code requirements—but also taxpayers’ internal accounting policies and systems. If proposed changes do not bring direct benefits, although they may be reasonable and needed, they give rise to resistance, since any change in the code entails an expense for taxpayers.

Simplifying the code by eliminating numerous benefits will have neutral or negative consequences for taxpayers. Thus, sensible initiatives are all demolished by the realities of life and remain on paper.

Also, any innovation encounters resistance because tax code innovations usually stipulate not only the rights and obligations of taxpayers and tax authorities but also the deadlines for enacting the innovation, after which there is no turning back. Digital tax administration transformation requires all participants to update their information systems, which entails lengthy processes of preparation, defense of business cases, budgeting, planning, design, development, testing, and implementation.

Each process participant has its own cycles and readiness time frames, which conflicts with the fact that the tax code’s new rule has a specific date when it will come into force.

Of course, there is a possibility just to ignore the effective date, but a state with such an attitude toward its own laws does not prosper. Constantly postponing the date incurs significant costs, because it is necessary to go through a multi-stage process of agreeing and approving changes to the law.

In addition, if a project takes a long time to implement, reform participants experience diminished motivation, since they lose confidence that their investments in reform will pay off and justified.

Best Practices in Tax Administration Reform

Below, we will discuss a few simple suggestions to prevent a standstill while introducing innovations in tax administration.

• Digital tax administration reform should have a clearly defined goal and a stable circle of stakeholders and loyal supporters. It is impossible to implement large-scale changes if there are no influential players interested in their success.
• The reform must be voluntary. The taxpayers should decide for themselves if to adopt the innovations. If we see taxpayers switching to a new system or regime, then tax authorities have proposed and implemented something valuable. In addition, giving taxpayers the initiative solves the problem with the reform’s deadline and shows the readiness of taxpayers, their information systems, or the information systems of tax authorities’ partners.
• The reform should start with a pilot project with the limited scope, for example, in a few regions of the state. This helps to validate hypotheses, avoid, or identify errors at the early stage, and to implement necessary adjustments based on the outcomes of the pilot stage.
• A separate legislative act should introduce the reform in a plain language, understandable to taxpayers, and not amending the current tax code. Government should integrate the adopted changes into the tax code after the pilot project is complete.

These simple tips require tax authorities to change the way they approach reforms and pilot projects, including planning, implementation, and evaluation of results. This is much more difficult than thinking up reforms while sitting in an office and then immediately introducing them into the tax code without considering the consequences, and “twisting the arms” of affected taxpayers. It is a more rational approach that should lead to decent results.

[1] Source: Source Global Research. The Global Tax Advisory Market in 2020. URL: https://www.sourceglobalresearch.com/reports/6935-the-global-tax-advisory-market-in-2020

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