Developing and emerging economies can potentially raise an additional $300bn in government revenue every year through digitising tax payments and related processes, according to a report.
‘Success Factors in Tax Digitalisation’, published by the Better Than Cash Alliance, is the United Nations (UN)-hosted organisation’s first publication dedicated to tax digitalisation. It is presented as a ‘powerful demonstration of how digital payments can positively impact millions of lives’ and focuses on progress made in three countries: Rwanda, Mexico and Indonesia.
The report describes tax digitalisation as a ‘promising’ tool to help governments address the ‘devastating’ fiscal impact of the COVID-19 pandemic.
It cites the top five benefits of tax digitalisation as being: higher revenue from increased compliance; lower administrative costs through automation; more transparency and accountability; better data for effective decision-making; and a broader tax base from greater business formalisation.
A further benefit in the context of COVID-19 is that tax digitalisation heightens the importance of touchless interactions, which help to minimise in-person contact, the report points out.
‘Heightened need for proven solutions’
The Better Than Cash Alliance is a partnership of governments, private sector and international organisations that aims to encourage economies to move to digital payments in the context of the Sustainable Development Goals (SDGs) – the 17 goals, including ‘no poverty’ and ‘zero hunger’, that were agreed in 2015 by the UN General Assembly, with the aim of achieving them by 2030.
Introducing the report, the Better Than Cash Alliance says that the $300bn headline figure represents almost one-third of the $1 trillion funding gap ‘that is pushing many of the Sustainable Development Goals (SDGs) out of reach’.
‘The devastating social and economic impacts of COVID-19 have heightened many of the challenges that the SDGs are designed to overcome. This, in turn, has heightened the need for proven solutions to keep the SDGs within reach. Digitalising tax systems is such a proven solution, and is now needed more than ever,’ the report says.
Cloud computing on the rise
Examples in the report of how digitising tax payments has benefitted government revenues include: in Mexico, mandatory e-invoicing between 2012 and 2017 drove a 48% increase in tax revenue from goods and services; and in Rwanda, electronic billing machines reduced the average time it takes businesses to file VAT returns from 45 hours down to five.
The ability of tech innovations such as cloud computing and advanced analytics to help with tax digitalisation efforts is also covered.
In respect of cloud computing, for example, the report says that the estimated global value of the government cloud market is expected to be $49.2bn by 2023. Examples cited of government initiatives include: the Philippines publishing a ‘cloud-first’ policy in 2017 to enable data-sharing among government agencies and eliminate legacy systems; and India’s launch, in 2019, of a cloud initiative entitled ‘MeghRaj’ to accelerate e-service delivery.
The report also highlights areas where there is room for improvement. For example, it says that in Indonesia supplier VAT declarations are not systematically checked against buyer VAT declarations, which has resulted in ongoing tax evasion through false invoicing; and that the data architecture of systems used for reporting different taxes (such as VAT and personal income tax) is often different, making data analysis highly challenging. ‘Standardised data collection will enable far more data-driven insights to underpin more effective policymaking and implementation,’ the report advises.
‘10 success factors’ to consider
The report, which constitutes 80 pages across a 43-page pdf, culminates in detailing ‘10 success factors’ for tax digitalisation. Each factor, such as ‘Implement a phased rollout’ and ‘Communicate well with taxpayers’, highlights actions to be considered and includes examples of countries that have successfully used these approaches.
The Better Than Cash Alliance has 75 members, which are committed to digitising payments in order to boost efficiency, transparency, women’s economic participation and financial inclusion.
Separately, the UN secretary-general’s taskforce on digital financing of the SDGs recently published an 118-page report, ‘People’s Money: Harnessing Digitalisation to Finance a Sustainable Future’, setting out out what its authors refer to as an ‘action agenda’ for policymakers aligned with the SDGs. It said that COVID-19 presents a historic opportunity to harness accelerating digitalisation and ‘put citizens in control of finance’.