The world is digital, so should taxation
The budget season is upon us. And if you are reading this article, it is very likely that you have internet and television access (with some form of subscription). You have probably used some form of social media in the last few hours, where you may have seen some advertisements. You use your phone, not only to communicate with friends and family, but to also transact, whether buying LUKU or paying for your airtime, or at the local shop.
If you are from the younger generations, your shopping is also likely influenced through Instagram; and a recent purchase or a restaurant visit has been likely driven by a recent post. In other words, your social and economic life is digitising in ways that ten years ago seemed impossible. When you think of your shopping habits and spending patterns, they have all changed because of the digital world. However, taxation, in principal, has remained the same.
The reason taxation has remained the same is that tax legislations are still very physical location specific. This used to work when a business was obligated to have a physical place, and product. But in the service driven economy, the physical reality is changing. Transactions can happen virtually by a company which individuals working remotely and perhaps on a part-time basis. How do you tax its employees or a company structured in that manner? And where do you tax it from?
Undoubtedly, revenue agencies are being asked to hit a fast-moving target, guided by laws and regulations that were not designed with this digital reality in mind. What is the right way to tax a never-before-seen business model? Not only do revenue authorities deal with citizens, government agencies, private corporations, and other members of civil society, they also coordinate with revenue agencies of different jurisdictions, regionally, and globally. Therefore, they need to understand how to best be a part of this ecosystem.
Here are three recommendations.
Firstly, the Tanzania Revenue Authority (TRA) can approach taxation with the same focus on agility that drives software development; addressing emerging patterns of risk by implementing systems. The authority needs to adopt a responsive culture, and constantly enhance its ability to understand, track, and tax “new stuff”. This “new stuff” ranges from jewellery sales via Instagram, to apartment rentals via Airbnb, and to various forms of short-term “gig work” delivered via virtual global platforms.
The second, is to make reporting easy and in real time. Here we must commend the TRA. In a matter of a few years, most of the tax filings are now digital. We started with VAT a few years ago, but now we have income taxes filed electronically. This is a positive move as it drastically reduces the compliance burden. Filing taxes in the digital age should not be cumbersome, and the TRA has been agile in ensuring that filing and payment of taxes is truly digital.
However, it is important not to rely on a piecemeal approach to digital-based operations by building stand-alone digital products atop legacy foundations. This will create challenges related to cost, ease of use, and incompatibility withemerging technologies. Building a truly digital core will require a multipronged approach that can include automating tax submission review workflows and adopting modular, flexible approaches to systems architecture to respond to changing policy mandates. Steps that they can take in this direction include mapping the economic processes driven by members of the end-to-end tax community and partnering with private industry, government agencies, and international organisations.
Taxation may never become citizens’ favourite interaction with government. The easier that experience is made for a citizen—whether through reduction in manual calculations, better access to information, or user-friendly design interfaces—the greater their tax compliance. The clearest path toward elevating the tax experience is by meeting citizens where they are; on their mobile phones, in their email inboxes, or via smart home devices. However, implementing these changes will require serious digital capabilities—the kind that can only be built through deliberate investment.
The last recommendation is also an ensuing benefit of the second step. Investment in data is key for the tax authority to becoming more responsive to the ever-changing needs of taxpayers. The reason it is a benefit of the second point is that the more digital the revenue authority gets, the more it has the predictive capabilities to determine ebbs and flows of business seasons as well as collection performances. The revenue authority of the future will be best placed if it has real time access to data about the tax types as well as its taxpayers so that it can anticipate the changes that come and go.
It is my hope that this year’s budget speech will begin to address some of these systemic issues around our tax system
