Three-Part Series | Act Now
How governments act today will shape the post-COVID world for years to come.
The aftermath of the economic shock posed by the COVID-19 crisis forces governments to review their priorities and improve their efforts towards recovery and resilience for the future. In this three-part series, we focus on why tax authorities should not back out of much-needed investment in new tax administration systems and digital adoption during these times. With the right vision, knowledge, and decisiveness, they can play a crucial role in getting their countries’ economies back on track.
Part 3 | Moving Forward: Investing in Tax Administration Systems
After reading the first two parts of this series (1 and 2), you could say that at this point in time, holding off on investing in new tax systems is indicative of a lack of vision. We often say: “If you think compliance is expensive, try non-compliance”. A modern tax system plays an important role in getting our economy back on track. The most important thing is that tax authorities should be made aware of the solution. The following recommendations are crucial for tax administrations who decide to fully embrace digitalization and continue their efforts to modernize their tax system.
- The selection of new tax systems is often part of a procurement process. When formulating technical requirements, tax authorities frequently make the mistake of re-configuring their old system. Which basically means that you are re-automatizing the same steps and processes that no longer suit your needs in the first place. Of course, it is common human behavior to revert to familiarity and certainty. But tax authorities should thrive to be more forward-looking. It is important to conduct market research and to talk to suppliers when working on the tender. This provides valuable insights into new products, services, and business requirements that meet your needs, as well as new technology and best practices (the latter being well formulated by TADAT). Market orientation offers essential input for the formulation of a future-proof-driven request for proposal.
- Suitable human resources in the public procurement workforce are one of the crucial components of a successful procurement system. Tax domain and technological knowledge are necessary to properly assess all tendering parties. Under-professionalization in the selection committee leads to mismatched technical requirements and costly mistakes down the road.
- With the right vision and strategy, a tax administration system can last for a very long time. As the complexity of tax systems expands with the collection of an ever-increasing amount of data, tax authorities need to adopt long-term strategies. Future-proofing the system can be done with intelligent process automation, digital workflow support, and data analytics, preferably predictive or prescriptive to gain more insights into future outcomes.
- As a rule of thumb, the primary upfront investment of a tax administration system equates to 20% of the costs during the entire life span of the system. The other 80% is dedicated to yearly software maintenance and support of the system. A tender, therefore, needs to pay proper attention to creating a dedicated budget for corrective and preventive software maintenance, as well as for upgrades and adjustments to keep up with changing environments. Tax authorities need to make certain that they have enough funding for software maintenance, to ensure a longer life span of the system.
- An effective tax administration system considers further expansion into other government sectors to offer better public services at a lower cost. The need for a system that offers an integrated view of the taxpayer helps connect the dots across departments and other governmental organizations, such as social security. While insights into the informal economy are gained, it also helps to increase efficiency significantly, improve the taxpayer’s experience, and, ultimately, compliance.
- One of the most challenging processes an organization can go through is the implementation of new IT systems. Invest time in change management and training of your organization to avoid resistance to change. It’s not just about IT; a holistic organizational approach is crucial to a successful implementation.
- The return on investment in additional tax revenue is several times the cost of a new IT system. Hence the funding for the acquisition should never be an impediment. Financial instruments are available from institutions such as the World Bank, while software vendors often also provide different subscription fee models.
The most important thing when embarking on a journey to invest in new tax administration systems is realizing the hurdles and knowing that they are all solvable. At the end of the day, when the Minister of Finance realizes that the country is missing out on a substantial part of its tax revenue, you would expect more priority to be given to solve the issues. It all boils down to having the right vision and knowledge. Because the solutions to these problems are a lot more obvious than you might think.
Please be advised that the purpose of this three-part series is to provide ‘food for thought’ to the broad community of tax system stakeholders.