The development of digital technology has profoundly transformed information processes in all the spectrum of the public and private sectors. For Tax Administrations (TAs), organizations whose business processes (services and audit) are based on data, technology advancements are driving profound changes in the way they carry out their tax collection functions.
Digitalization implies significant improvements in the efficiency and effectiveness of tax collection, making payment processes simpler for taxpayers and management control more effective for tax administrations. In addition, there are gains in many other dimensions of tax administration, such as cost reduction, fighting corruption, fostering transparency, and traceability of operations.
The digital transformation of TAs allows them to efficiently solve their eternal dilemma between facilitating tax compliance and maintaining effective control of taxpayers’ obligations.
Digital transformation investments represent the largest component of TA capital spending today, averaging 56% of capital expenditures for countries that participated in the IMF’s 2017 International Survey on Revenue Administration (ISORA). This percentage reaches 70% in Latin American countries, which means that digital transformation spending accounts for almost the entire TA investment in the region.
Digital Maturity Index
As part of our client support, we developed the Digital Maturity Index (DMI) that aims at evaluating, in a standardized form, the efforts carried out by TAs to transform themselves into digital institutions. In other words, the methodology that we use allows TAs to perform an analysis based on the premise that they are organizations that consume data to produce digital services based on information that allow citizens to easily and equitably comply with their tax obligations.
This index not only makes it possible to evaluate the progress achieved by a specific TA at a given time, but also provides a roadmap for those responsible for tax collection to advance the digital transformation process.
The IDB together with other international organizations such as the Organization for Economic Co-operation and Development (OECD), the Intra-European Organization of Tax Administrations (IOTA), the Inter-American Center of Tax Administrations (CIAT) have developed a very intense dialogue in recent years that has made it possible to identify and document best practices in the use of technology and information processes for tax collection.
As a result of this dialogue, we observed that the best practices are based on the following principles:
- Data enters the system only once (data-only-once).
- Data is managed and processed centrally for various products and services (single source of truth).
- Data travels and is stored on digital media (paperless).
- Information is received and processed in real time (real time).
Under these principles and best practice experiences, the index builds a scale with four levels of maturity: beginner, intermediate, advanced, and best practices that makes it possible to characterize the progress of a given TA in a series of dimensions that group the most critical aspects related to data and information services for tax collection.
Digital maturity dimensions
The DMI dimensions are grouped, on the one hand, in the enablers of the digital transformation process, such as the country’s digital environment and the resources available to the TA. On the other hand, we group the digital transformation under the information process approach, which are the collection of data and the generation of digital products and services.
The first dimension, which is the digital environment of the country, characterizes the external conditions faced by the TA in its digital transformation process, such as the country’s digital policy, the degree of connectivity, the legal framework for digital identity, electronic procedures, and the existence of leadership in the country’s digital development.
The second dimension analyzes the resources available to the TA to include technologies and implement processes supported by digital media, the human capital base, financing, strategic planning and, in a more in-depth manner, the technological platform and the architecture and integration of its information systems.
The third dimension evaluates data collection, aspects of the TA’s organization and its processes, such as the data policy, the existence of a specialized body responsible for this policy, data security and quality, and the specific channels used to receive data, including procedure portals, declarations and payments, third-party information, and especially electronic invoicing.
Finally, the fourth dimension, which refers to the generation of information products and services, reviews automation processes to generate products such as pre-filled tax returns for taxpayers, audit programs, risk management, widespread tax consistency controls and planning instruments through transactional information.
Benefits of Maturity Index for TAs in Latin America and the Caribbean
The implementation of this index allows public managers to map these dimensions in detail and diagnose their strengths and gaps to be closed to foster a digital transformation that will bring the expected efficiency gains.
We know from experience that these change processes are complex because they involve different stakeholders within an institution that need to align their efforts and capabilities to advance with the transformation. The index helps stakeholders to jointly visualize the opportunities and map the steps to follow in the design and implementation of the digital transformation strategy in a coordinated manner to meet expected results.
The IDB, through the Fiscal Management Division, has promoted the use of the DMI to carry out studies in countries such as Guatemala, Colombia, Chile, and the Dominican Republic. In a future blog we will be sharing the main conclusions of this study and the lessons learned from various TAs in our region in their digital transformation processes.
Finally, this index is part of the IDB’s efforts to support its member countries in their digital transformation processes, one of the main pillars of the Bank’s work agenda for the coming years with the region as detailed in the Vision 2025 document.