DIGITAX working papers examine the intersection between technology, tax policies & collection methods
DIGITAX is a new ICTD research programme aimed at generating knowledge and evidence to support governments in overcoming the challenges and leveraging the opportunities of the rapid expansion of mobile money and other digital financial services (DFS), as well as the increased relevance of digital IDs across Africa and other lower-income countries.
The programme recently published three working papers examining the benefits and challenges new technologies present when applying them to tax policies & collection methods.
In The Promise and Limitations of Information Technology for Tax Mobilisation, authors Oyebola Okunogbe and Fabrizio Santoro describe the potential that information technology provides for tax mobilisation, as well as the challenges that still exist in low- and middle-income countries and which prevent them from reaping the benefits that new technologies can offer.
In the paper, Okunogbe and Santoro delve into how technology can be a powerful tool for understanding the tax base. Tax authorities can use technology-based tools to collect information to identify taxable entities, while also using it to collect information on the tax liability.
Technology can also be used to improve service delivery to taxpayers, even reducing the level of in-person interactions between taxpayers and tax officials, thus diminishing opportunities for extortion and collusion. Moreover, technology can contribute to strengthening the capacity for tax monitoring.
Okunogbe and Santoro conclude that no matter how sophisticated an IT system is, it is only effective as long as its users can employ it. On the one hand, taxpayers may be hesitant to use technology tools due to lack of information and trust, security concerns or high costs of adoption.
On the other hand, tax officials may not maximise the use of IT tools due to lack of skills and training, or may actively resist it to avoid losing the private benefits they received from the influence they had under a manual system. The paper’s authors also found that technology reform must not be a stand-alone project but should be part of a broad institutional strategy, where complementary reforms are designed. It requires a clear sequencing of reforms to avoid redundancies and disorder.
The effective use of digital technology in tax administration
In the second working paper published by DIGITAX, authors Fabrizio Santoro, Laura Munoz, Wilson Prichard & Giulia Mascagni examine key questions that are relevant for research and policy development to make more effective use of digital technology in tax administration in Africa and lower income countries (LICs).
Titled Digital financial services and digital IDs: What potential do they have for better taxation in Africa?, the paper delves into how digital financial services and digital IDs can help African revenue authorities improve their performance in a number of core functions. Among these functions, technologies can help identify and communicate with taxpayers more easily, thanks to higher-quality data on taxpayer profiles; reduce compliance costs and assist taxpayers to comply by means of digital payments; as well as enforce and monitor compliance through access to better information.
In addition, significant benefits, ranging from increased transparency and reduced corruption in the tax system, can come from higher-quality data produced by DFS and digital IDs. While the potential is clear, what are the barriers to achieving these outcomes?
The paper looks to answer three important questions which remain largely unanswered in existing literature:
- What is the nature and potential of these new technologies in the context of LICs specifically, given their unique economic structures, capacity, and patterns of usage?
- Given the relative lack of evidence relating to DFS, digital IDs and taxation, what can we learn from the use of existing data and technology in LIC tax administrations? What does this experience tell us about the potential of using other sources of data (such as DFS) to improve tax administration?
- How can tax administrations make the best use of DFS and digital IDs in the future?
Taxing digital financial services
Last but not least, the third working paper published by DIGITAX, Should Governments Tax Digital Financial Services? A Research Agenda to Understand Sector-Specific Taxes on DFS, looks at the core principles of good taxation and presents the existing debate around whether taxes on DFS observe them. It explains why understanding the landscape of financial services is essential to designing suitable tax policies and lays out a framework for developing the necessary analysis of the impacts of taxes on DFS. It also highlights the importance of better understanding the processes that give rise to these taxes.
There is intense debate surrounding taxes on digital financial services. This reflects the high stakes, as well as significant disagreements, over the rationale for these taxes and their likely impacts. Service providers and users argue that these taxes impose an undue burden on DFS services and suppliers, all while governments are looking for new revenue sources.
More evidence will make it possible to better understand the implications of new taxes across distinct groups and distinct financial services, assess the broader rationale for specific taxes on DFS, facilitate dialogue among different stakeholders and support evidence-based policy making more broadly.
Learn more about the DIGITAX programme and its related news, research and events here.