Digitalisation is the adoption in use of digital technology by the market players, i.e. the use of computers and internet in information transformation. Digital transformation in society has had significant effects on the way we interact with one another through the rise of social media and the way we do business in the internet age. It is destroying physical barriers by allowing companies and individuals to enter new markets in which they have no physical presence. It has also resulted in improvement in efficiency and when used intelligently, the digitalization of business can lead to a significant increase in productivity and can reduce some costs. The digitalisation and modernisation of tax systems must be a prerogative of African countries as it enhances the collection of revenue and allows them to tap into the revenue of the digital economy which has grown too rapidly to the extent that our tax laws are left lagging behind.
Governments can boost their tax collection as the system would be able to report illicit financial flows, tax avoidance and evasion. Domestic revenue mobilisation is central to African governments meeting their sustainable developments goals in light of the donor fatigue and shrinkage in development partners. African governments need neither donors nor development partners, but their people and systems.
Benefits of digitalisation
Although digitalisation guarantees significant cost savings and efficiency its challenge is that it requires resources during the development phase. Because of this reason and resistance to change, most African governments have been slow to adapt to the changing global economy. The jig is up for African economies, they need to shape up by embracing technology for the building of sustainable economies through efficient collection of taxes. Automated tax systems reduce the scourge of corruption that often wreaks havoc in African tax administrations caused by human interface. It also reduces administration costs by making it easier for taxpayers to fulfil their obligations whilst freeing up tax authority staff to work on value adding activities. The collection of data and determination of liabilities based on data and not on information supplied by the taxpayer which may often not be a true reflection of the actual revenue generated in a particular business enhances tax collection. The data will also include transaction and income data, behavioural data generated from taxpayers’ interactions with the tax administration, operational data on ownership, identity and location, and open source data such as social media and advertising. This can be used as individual sources or in combination to enable partial or full reporting of taxable income and to uncover under-reporting, evasion or fraud as well as using it to measure the impact of activities and to identify the most effective interventions, both proactive and reactive. Taxes could be paid automatically without the taxpayer’s input. Technology also facilitates advances in tax transparency internationally as well as domestically, in particular through enhanced information exchange between tax administrations. For example the fiscalisation of VAT transactions allows a tax authority to have full data on all sales of goods and services in the country. This way they will be able to see who actually sold what, where and at which price and see anomalies that might indicate non-compliance. It opens opportunities for analytical work and measuring economic performance indicators in real time on a countrywide scale.
Stages in digitalisation
According to a worldwide research carried out by Ernst & Young, the digitalisation of tax administrations can be categorised into 5 levels. The 1st level is E-filing; the 2nd is E-accounting; the 3rd is E-matching; the 4th is E-auditing and the 5th is E-assessing. E-filing is the first level which involves the use of standardized electronic form for filing tax returns required or optional; other income data (e.g., payroll and financial) filed electronically and matched annually. E-accounting on the other hand entails the submission of accounting or other source data to support filings (e.g. invoices and trial balances) in a defined electronic format to a defined timetable. At this level there may be frequent additional filings. The 3rd level is E-matching which entails the submission of additional accounting and source data; the government accesses additional data (bank statements) and begins to match data across tax types, and potentially across taxpayers and jurisdictions, in real time. This is a more advanced level than the 1st and 2nd levels. The 4th level involves the analysis of accounting and other source data by government entities and cross-checked to filings in real time to map the geographic economic ecosystem and taxpayers receive electronic audit assessments with limited time to respond. E-assess which is the 5th level of digitalisation, entails government entities using submitted data to assess tax without the need for tax forms and taxpayers are allowed limited time to audit government-calculated tax. This is the highest level of digitalisation of tax administration.
Challenges in digitalisation
There are significant challenges for any tax authority to achieve these levels. ICAEW stated that the largest of these challenges is digital exclusion – taxpayers who do not have reliable internet access or are unable to file online. Although Zimbabwe has wide internet coverage, internet reliability compounded by the cost of maintaining it have been a challenge to most Zimbabweans. The exorbitant license fees and levies that the government collects from the internet service providers, frustrate expansion and in turn has a bearing on the drive to digitalise our tax systems. This also makes the cost of internet services expensive to the ordinary Zimbabwean. There is more revenue to be realised in future by allowing internet service providers to expand as opposed to heavily taxing the sector. Government must strike a balance between realising tax now from the service providers and the drive to expand digitalisation which widens the tax net and taps into even more revenue in the future. Meanwhile Zimbabwe is failing to take off the first stage of digitalisation. It introduced E-filing in 2015 and commands fiscalisation of all VAT registered operators with effective from 1 January 2017. Both these systems are not fully working largely because of resource constraints hence government needs to free up resources for these projects in order to reach the next level of digitalisation.
Digitalisation is a bedrock of African governments meeting their sustainable development goals through domestic revenue mobilisation. It will enable them to monitor tax compliance, prevent tax avoidance and evasion and improve taxpayer services. The decisions they make in the area of technology will change the scene of tax administration thereby boosting tax revenues. They should stay on top of this technological race and make sure that they have access to new digital data flows to be able to respond to the challenges of the new economy. This topic will be discussed in detail at the Tax Conference Victoria Falls 2019 to be hosted by Matrix Tax School from May 22 to 25. Marvellous Tapera is the Founder of Tax Matrix (Pvt) Ltd and the CEO of Matrix Tax School (Pvt) Ltd. He writes in his personal capacity.