Key message 3 – ICTs present enforcement opportunities to strengthen VAT systems but also new challenges.
The rapid innovation in ICTs is changing public administration in many ways and has provided tax authorities with new enforcement tools to improve the functioning of VAT systems. Some prominent examples include:
- In Uganda, and many other countries, business taxpayers are required to electronically file their VAT returns and report itemised B2B transactions.
- In Brazil, electronic invoices for B2B transactions have a unique key and are sent in real-timeto the tax authority (Gerard, Naritomi, and Seibold, 2018).
- More broadly, EBMs, which are being adopted by tax authorities across the developing world, capture data on firms’ sales in real time using unique taxpayer ID numbers of buyers and sellers.
These innovations substantially increase the amount of information that can be utilised by the government for tax enforcement. For instance, they enable the systematic cross-checking of reports of sellers and buyers to limit unilateral evasion (as in the Uganda case), and they even prevent sellers and buyers from reporting the same transaction differently (as in the Brazilian case). Fan et al. (2018) find that computerisation of the Chinese VAT allowed for more systematic cross-checks and an increase in tax payments by large manufacturing firms.
This enhanced access to information and data also provides new opportunities to limit tax credit fraud: receipts issued by EBMs are difficult to forge and the availability of transaction records in real time creates the possibility of identifying fly-by-night firms more quickly. In turn, by relaxing fraud and evasion concerns, these innovations could prompt tax authorities to refund tax credit more easily and improve the production efficiency of VAT systems more rapidly. They also have the potential to help enforce other taxes and relax the ‘revenue efficiency vs production efficiency’ trade-off discussed in the IGC growth brief on ‘third-best taxation’ (Kleven, Khan, and Kaul, 2016).
Consumer monitoring policies that aim to mitigate the last-mile problem of VAT systems are also increasingly leveraging technology. Lower-tech versions of such policies can impose quite high participation costs, as consumers have to collect receipts to be submitted to a government branch, and claiming rewards can be time consuming (Campbell and Naritomi, in progress). Recent versions of such programmes use online accounts and mobile money to reduce participation costs to increase programme take-up.
Further, as discussed in the box on page 4, web and mobile tools also allow tax authorities to build a direct communication channel with taxpayers for credible whistleblower threats. As a result, firms may become more reluctant to try to collude with consumers by offering them discounts to circumvent the rewards programme.
Although ICTs can open up new enforcement opportunities, they are far from providing a silver bullet. ICTs require complementary investments
to increase the ability of the tax administration to process the information it receives, and to follow-up with notifications and audits (Steenbergen, 2017). The technical and human resources needed for such tasks are not trivial in developing countries. In Uganda, for instance, Almunia et al. (2017) found large mismatches in the same transaction data reported by firms electronically, which could indicate that taxpayers do not believe that the government will follow up on their unilateral misreporting. Perhaps this issue would be worse without the technology, but the technology does not, in itself, close the compliance gap.
From the taxpayer perspective, while e-filing and EBMs can eventually reduce compliance costs (e.g., pre-populating tax returns with receipts information), their adoption can be initially costly. Many countries mandate the use of EBMs, and it is often expensive for businesses to procure and maintain them.
High set-up costs and poor connectivity can further increase taxpayers’ compliance costs. Note, though, that the use of ICTs in VAT systems can also have unintended benefits. For instance, electronic filing and receipt systems generate rich information about the economy that policymakers and academics are starting to use to shed new light on many important policy debates for the design of VAT systems (Gerard, Naritomi, and Seibold, 2018). In addition, as the quality of detailed receipt data such as prices, quantities, and product information increases, the government may be able to create new real-time price indices, richer input-output tables, and other analytical tools to inform policymaking beyond tax policy.
At the same time, the amount of information that governments can capture in VAT data can generate confidentiality concerns in contexts where there is little trust in governments. Detailed receipts can contain information about the production technology of firms and the timing and composition of transactions that could create fears of extortion and of leakage of strategic business decisions. The volume of information captured by tax authorities can also create an enforcement burden as many small mismatches may raise an excessive number of red flags. This may require changes in legal frameworks to facilitate amendments, protect sensitive data from taxpayers, and prioritise mismatches in order to screen likely mistakes from intentional misreporting.