Policy Research Working Paper                    9848




 The Promise and Limitations of Information
      Technology for Tax Mobilization
                             Oyebola Okunogbe
                              Fabrizio Santoro




Development Economics
Development Research Group
November 2021
Policy Research Working Paper 9848


  Abstract
 Tax revenue in many low-income countries is inadequate                             transform tax administration by helping to identify the tax
 for funding investments in public goods and human capital.                         base, facilitate compliance, and monitor compliance. It also
 While tax systems have been adopting new technologies                              identifies possible limitations to the use of technology aris-
 to improve tax collection for many years, limitations to                           ing from inadequate infrastructure and connectivity, lack
 in-person interactions due to COVID-19 have further                                of adoption (or resistance) by taxpayers and tax collectors,
 highlighted the role of information technology in tax mobi-                        lack of institutional mainstreaming, and an unsupportive
 lization. This paper examines the potential of technology to                       regulatory environment.




 This paper is a product of the Development Research Group, Development Economics. It is part of a larger effort by the
 World Bank to provide open access to its research and make a contribution to development policy discussions around the
 world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may
 be contacted at ookunogbe@worldbank.org or F.Santoro@ids.ac.uk.




         The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development
         issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the
         names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those
         of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and
         its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.


                                                       Produced by the Research Support Team
The Promise and Limitations of Information Technology
                for Tax Mobilization∗
                       Oyebola Okunogbe, World Bank
       Fabrizio Santoro, International Centre for Tax and Development




Keywords: Technology, taxation, tax administration, tax compliance
JEL codes: H20, O33



   ∗
    Okunogbe ookunogbe@worldbank.org; Santoro F.Santoro@ids.ac.uk; We thank Moyo Arewa, Chris-
tine Awiti, Giulia Mascagni, Laura Munoz, Giovanni Occhiali, Dina Pomeranz and Abebe Shimeles for
helpful comments. This paper was supported by the African Economic Research Consortium (AERC).
Santoro acknowledges support from the Gates Foundation through the International Center for Tax and
Development DIGITAX program. The findings, interpretations, and conclusions expressed in this paper do
not necessarily represent the views of the World Bank Group, its Executive Directors or the countries they
represent.
1         Introduction

Over the last few decades, tax systems around the world have increasingly adopted new
technologies to improve administrative processes, reduce taxpayer compliance costs, and
enhance their overall effectiveness at collecting tax revenue. These developments come in
the context of digital transformation across all facets of life: from government to business
to interpersonal relationships and much more, an increasing number of interactions are con-
ducted virtually given the rapid development and expansion of digital infrastructure.1 While
this transformation has been occurring over the last few decades, the surge in remote work
experiences and the need for social distancing precipitated by COVID-19 has accelerated the
adoption of many technologies that already existed and spurred the development of others.2
        Given the rapid expansion in the use of information technology by tax authorities, this
paper discusses the potential and limitations of information technology for tax adminis-
tration, especially in low and middle-income countries (LMICs), with a focus on Africa.
Currently, technology adoption in LMICs is generally lower than in high-income countries.
However, there may be significant opportunities to leapfrog to the technology frontier, as
African countries were able to do with mobile phones and electronic payment technology
such as m-PESA. Compared to high-income countries, low and middle-income countries are
characterized by a higher level of in-person interactions between taxpayers and tax officials.
In African countries, 72 percent of firms report being required to meet with tax officials,
and for those affected, 3.2 meetings are held on average each year. In contrast, 37 percent
of firms in Europe and Central Asia are required to meet with firms and of those affected,
2.1 meetings are held on average (World Bank Enterprise Surveys). Robust adoption of
technology will move taxpayers from in-person interactions where they are susceptible to the
discretion of individual tax officials to interfacing with electronic systems where there is a
    1
     In 2020, 51 percent of the global population was connected to the internet. This figure was 7 percent
only 20 years earlier (source: Our World in Data/ World Bank indicators).
   2
     For example, in the United States, the average number of telecommuting days for all workers more than
doubled, from 2.4 per month to 5.8 before and after the onset of COVID-19 (Gallup 2021).



                                                    2
more consistent experience across taxpayers. However, it is still unclear whether taxpayers,
once used to in-person interactions and manual practices, will be able to seamlessly embrace
new technology.
   Against this background, the key research question is, how can African countries (and
other LMICs) improve tax mobilization using recent technological advancements? We draw
on a burgeoning literature on the role of technology in tax administration to highlight key
lessons on maximizing the potential of technology. We also discuss complementary reforms
that must be undertaken to ensure that investments in technology yield the desired results for
tax mobilization. Our approach is to provide a broad overview on the literature, combined
with deep dives into a few country case studies from selected academic papers.
   In the first part of the paper, we consider how technology can transform three core
functions of tax administrations. First, technology could be used to define compliance, that
is, to strengthen the capacity of tax administration to identify the tax base – or the pool of
subjects liable to remit a given tax amount. This could happen, for instance, when IT enables
the creation of a new database of taxable subjects (such as individuals or properties). In
the same fashion, IT could help define the actual amount to be remitted more transparently
by relying on the automatic capture of transactions as they occur, through electronic fiscal
devices (EFDs), or by accessing different data sources and reports.
   Second, technology can be used to facilitate compliance, that is, to simplify processes and
improve taxpayer experience. Technology could significantly reduce tax compliance costs,
which are often disproportionately borne by smaller taxpayers. For example, e-filing (often
accompanied by e-payment) of taxes can make the taxpaying experience less time consuming
and more consistent across taxpayers.
   Third, technology can be used to monitor compliance. Technology could significantly
boost the capacity of the tax administration to monitor and enforce compliance, through
the automation of crosschecks of self-reported tax liability with other data sources – thus
increasing the transparency of the audit experience – as well as through risk-based auditing


                                              3
practices which would result in more targeted and data-centric audit selection.3 As we would
see, certain technologies can address more than one of these three uses.
       In the second part of the paper, we consider factors that may prevent the realization
of the potential of technology to improve tax mobilization. First, lack of appropriate in-
frastructure and internet connectivity will hinder effective deployment of the technologies.
Second, users (taxpayers and tax officials) may avoid or actively resist the introduction of a
new technology due to lack of training, high adoption costs or loss of opportunity for unoffi-
cial behaviors. Third, the absence of a clear organizational strategy that involves high-level
change management and a proper sequencing of the digitization of different functions and
processes can hamper the effectiveness of technologies that are introduced. Fourth, without
a functional legal system to enforce tax laws, the revenue authority may be unable to collect
tax liabilities that have been uncovered with the use of technology. Relatedly, there needs
to be an appropriate regulatory framework that allows a balance between data privacy and
security and the use of new data and technology for tax purposes.
       While there are many applications of technology in tax administration, this paper focuses
on foundational technological innovations which are usually adopted at the core of the digital
journey of a tax administration, such as e-filing (often coupled with e-payment), electronic
fiscal devices (including electronic sales registers and electronic billing machines), IT solu-
tions used for taxpayer registration and communication, as well as tax data crosschecks and
third-party data analytics. We highlight these types of technology as they communicate with
each other and are likely to perform best when included in the same technological transfor-
mation package – usually supported by an integrated (and automated) tax administration
system (ITAS).4 Focusing on these foundational technologies also enables us to draw on an
   3
     Other core functions are impacted as well. These include the capacity to perform more timely data-
driven decision-making, as well as the capacity to run more elaborate statistical analysis and forecasting. We
decided to leave these aspects outside the scope of the paper, as we focus on those aspects directly affecting
taxpayers’ interactions with the tax administration.
   4
     For instance, the huge amount of data produced by EFDs is unlikely to be fully tapped without an
automated and integrated data management system on the receiving end. Likewise, e-filing without a flexible,
adaptive, timely response from the authority (which is often enabled by ITAS) is likely to be unsuccessful
(Santoro et al., forthcominga).


                                                      4
increasing, robust body of evidence that has been produced on them in the last few years. We
expect that the lessons from reviewing the existing evidence on the effectiveness of technolo-
gies that are more widely used in LMICs will help in understanding the potential impact and
constraints in the adoption of more sophisticated technologies that have been introduced in
some other contexts, such as the automatic withholding of taxes from sales payments made
via credit card,5 automatic pre-filling of tax returns using third-party information, and the
use of blockchain to verify transactions and tax records.6
       This paper contributes to both the academic literature as well as policy conversations
in LMICs. It provides a review of the booming literature on the use of technology in tax
administration (Bird and Zolt, 2008; OECD, 2015; World Bank, 2016; Kochanova, Hasnain
and Larson, 2020; Bellon et al., 2019; Santoro et al., forthcominga) and identifies outstanding
gaps in the literature for future research. It therefore complements other reviews on taxation
in developing countries (e.g. Mascagni (2018), Slemrod et al. (2017), Pomeranz and Vila-
Belda (2019)).
       More broadly, the paper adds to the literature on the use of technology in governance.
The evidence on the effectiveness of investment in e-government on strengthening govern-
ment capability to deliver services and expanding citizen participation is still rather mixed
(. World Bank, 2016). On the one hand, there is evidence of effective deployment of digital
public service provision in procurement (Lewis-Faupel et al., 2016), education (Aker and
Ksoll, 2019; Escueta et al., 2017), voting (Callen and Long, 2015; Fujiwara, 2015; Callen
et al., 2016; Aker, Collier and Vicente, 2017) and social protection (Aker et al., 2016; Baner-
jee et al., 2020). On the other hand, better information technology does not necessarily
translate into improved behaviors and welfare, especially in health (Nglazi et al., 2013, pro-
vides a review) and agriculture (Aker, Ghosh and Burrell, 2016; Courtois and Subervie, 2015;
   5
     See Brockmeyer and Hernandez (2016).
   6
     Such technology would enable a variety of services (such as e-registration with government entities, e-
filing of taxes, and sharing of data among government agencies) under a strong security model where all
information is digitally signed and encrypted and all incoming data are authenticated and logged (Martinovic,
Kello and Sluganovic, 2017).



                                                     5
Hildebrandt et al., 2014; Nakasone, Torero and Minten, 2014; Mitra et al., 2013; Camacho
and Conover, 2010; Fafchamps and Minten, 2012; Casaburi et al., 2014). This paper exam-
ines several studies where technology has led to improvements in government service delivery
but also describes conditions that may preclude successful outcomes. Relatedly, the paper
also addresses basic questions of digital technology access and usability (Aker and Cariolle,
2020; Santoro et al., forthcominga).
    For policy, the paper provides guidance to policy makers as tax authorities increasingly
adopt electronic systems in interacting with taxpayers in a post-COVID world where remote
interactions are more prevalent. It distills lessons from the academic literature on the vast
potential of technology as well as highlights the necessary technical, institutional and political
factors for a successful shift to technology. In particular, it emphasizes how technology
adoption must be contextualized within the current administrative capacity of the country.
Lastly, by highlighting the potential policy impact of rigorous and timely policy research, in
many cases made possible by the rich data produced from the use of technology, this paper
also seeks to encourage further collaboration between policymakers and researchers.



2     Potential of Technology in Taxation

2.1    Define Compliance

Information technology is crucial for addressing the “information problem,” a core challenge
for tax administration (Alm, 2021). In order to tax, the government must be able to iden-
tify the tax base. Prior research has shown that for taxes that are subject to third-party
reporting, such as wages paid to employees and capital income paid to clients, tax evasion
is negligible. However, evasion is substantially higher for taxes not subject to third party
reporting, where taxpayers self-declare their tax liability (Kleven et al., 2011).
    Tax authorities can deploy appropriate technology systems to obtain information on tax-
payer liabilities that may otherwise be hidden or manipulated by taxpayers. For third-party


                                                6
information, technology can enable the efficient submission of large amounts of data from a
reporting entity (such as an employer or financial company). Technology may also facilitate
linking databases that provide information on the different sources of taxable income/ prop-
erty of a taxpayer. The examples below will highlight the use of technology in defining the
tax base in two different settings. First, in addressing the challenge of information on trans-
actions that may otherwise go unreported, we examine the use of electronic fiscal devices
that report information on sales as they occur. Second, we examine the use of technology
in improving taxpayer registration, with a specific focus on how IT is used in real estate tax
administration to systematically capture information on tax liabilities that are observable
but not codified.


2.1.1   Obtaining Real-time Transaction Information with Electronic Fiscal De-
        vices

An interesting example of how electronic fiscal devices (EFDs) could help define compliance
comes from Ethiopia. The main premise of EFDs is that such machines, in their different
versions, are able to automatically record transactions as they are performed and smoothly
communicate with the tax administration through either a mobile network or the internet.
Such unprecedented flow of information holds the potential of assisting the tax administra-
tion in knowing more about their taxpayer population. The Ethiopian revenue authority
(ERCA) started the rollout of electronic sales register machines (ESRMs) – as EFDs were
named there - in 2008 with the goal of moving from paper-based receipts, which make moni-
toring business transactions on a daily basis extremely expensive and unfeasible, to a digital
solution. ESRMs, on top of printing out receipts, automatically report transactions via a
network to an ERCA server. Ali et al. (2017) evaluate the impact of such technology on both
tax payments and proxies of the tax base. They show that ESRMs statistically significantly
increase reported sales and tax payments, while also leading to positive impacts on actual
output – proxied by employment rates. Importantly, the tax base is not negatively affected


                                              7
by ESRMs as firms do not shun ESRM adoption – the authors do not find any significant
relationship between ESRM adoption and net entry rate. By and large, the evidence from
Ali et al. (2017) points to positive impacts on ERCA’s fiscal capacity, by which the authority
benefits from ESRMs in terms of more informative data flows, accompanied by increases in
tax remitted.
   The study of Mascagni, Mengistu and Woldeyes (2021), also set in Ethiopia, provides an-
other interesting angle to the narrative. In addition to Ali et al. (2017), the authors consider
the fact that ESRMs may well have compliance effects across other tax types beyond VAT,
following the recent shift towards studying compliance spillovers across taxes for a complete
                                        opez-Luzuriaga and Scartascini, 2019). The authors
evaluation of any policy intervention (L´
document that the ESRMs significantly improve the accuracy of firms’ reporting, measured
by the discrepancies in reported sales between VAT and income tax returns. The authors
first document a situation in which discrepancies are widespread: on average in 2010-2014, 60
percent of firms reported discrepancies in turnover in their declarations. Such discrepancies
more than halve after the introduction of ESRMs as a result of the combination of improved
record-keeping practices and increased perception of detection of misreporting – given that
the machines automatically communicate with ERCA and it is indeed a rational response
for taxpayers to improve the accuracy of their own reports, even across taxes (Mascagni,
Mengistu and Woldeyes, 2021).
   In addition to the positive evidence above, there are some more nuanced considerations.
First, while technology could help better identify transaction volumes and tax payable, as
shown in Ethiopia, behavioral and strategic responses from taxpayers could produce perverse
effects. Mascagni, Mengistu and Woldeyes (2021) show how taxpayers react to the adoption
of a technology on multiple margins. In the case of Ethiopia, the 87 percent increase in
VAT sales as a result of ESRM adoption is offset by simultaneous – and proportionally
larger, 150 percent - increase in deductible costs thus substantially reducing the potential




                                               8
revenue gains (Mascagni, Mengistu and Woldeyes, 2021).7 Second, while technology could
be an effective tool to identify the tax base and the tax due more accurately, it proves to
be ineffective in those contexts lacking robust traditional enforcement, as also mentioned
in section 2.3 below. While new technology could generate new data, it is only effective
if it spurs adequate deterrence actions from the authority – which in turn depend on the
resources available for traditional enforcement.


2.1.2    Using Technology for Taxpayer Registration

Technology could also significantly assist tax administration in registering taxpayers and,
more importantly, uniquely identifying them. In this sense, integrated tax administration
systems (ITAS) are crucial in streamlining the registration process. Unsurprisingly, one of
the first modules which is usually implemented when an ITAS is launched is the registration
module, enabling e-registrations. Qualitative evidence shows that it is quite hard to keep
proper registration data without a well-functioning, automated system. In its absence, rev-
enue authorities often implement suboptimal practices which translate into the existence of
parallel registries, often kept on Excel spreadsheets, and, ultimately, in administrative con-
fusion, duplication of work and difficulty in monitoring the taxpayer base (Ligomeka, 2019;
Stewart-Wilson, 2020). In light of the recent wave of automation in tax administration, more
research is needed to explore impacts on internal efficiency.
   A particular case study, for example, could refer to the new technology by which rev-
enue authorities link their registration process with the national registration agencies – as is
happening in Uganda and Malawi, among many other African countries – in order to auto-
matically extract taxpayers’ demographic details. This harmonization of registries revolves
around the national identification system, as taxpayers have to input their national ID num-
ber when registering with the authority, and presents an interesting example of cooperation
between public institutions. It is not clear however whether data from digital IDs could
  7
    Similar offsetting responses are found in the broader tax literature on firms (Ariel (2012); Carrillo,
Pomeranz and Singhal (2017); Slemrod et al. (2017); Mascagni and Nell (forthcoming)).


                                                    9
fulfill all the informational needs of data-hungry tax administrations, as well as whether tax
administrations are adequately equipped with skills and staff to make the best use of such
new data.
   Technology could also significantly assist local authorities in moving away from obsolete
property valuation systems. Property tax is particularly placed for benefitting from simpli-
fied valuation systems as enabled by new technology. For instance, the Freetown City Council
(Sierra Leone) introduced a new simplified “points based” system (Fish, 2018), with tech-
nical support from the International Growth Center, the International Centre for Tax and
Development and aid from the UK government (Grieco et al., 2019). The project involved
the city’s authorities using satellite imagery to identify and measure properties in Freetown.
They then deployed teams to collect data on easily observable characteristics such as the
quality of walls, roofs and windows. And then they used existing data on rental values to
build a simple model for calculating the taxable value of each property. Importantly, and
highlighting again the need for complementary automation to strengthen tax administration
internal functions, the city council also developed a new IT system to manage this entire
process: from data collection to valuation, billing, payments, appeals and enforcement. This
new system should significantly grow property tax revenues. First, it almost doubled the
number on the tax register from 57,000 to about 110,000. Notably, the new system has
produced much higher tax bills for the most valuable properties, owned by the wealthiest
taxpayers, which have been historically under-taxed. This new IT solution is meant to cor-
rect societal inequalities as it will better reflect the enormous disparities in property values,
wealth, and ability to pay across the city (Kamara, Meriggi and Prichard, 2020).
   A similar example comes from Senegal. According to Knebelmann (2019), key challenges
impede the administration of a sound property tax in Dakar. Baseline data shows that, at
most, a third of cadastral plots are on the valuation roll - hence their value is known to
the tax administration. On top of that, rental values listed in the roll are on average lower
than values obtained through other sources (surveying owners and real estate experts), likely


                                               10
due to poor and biased valuation practices. Furthermore, cadastral information on plots,
as owned by the tax administration, is not linked to address information that is visible and
known by taxpayers, and which is taken as such in the current declarative system. This
lack of data harmonization results in the impossibility of sending tax notifications to most
property owners. As a final challenge, manual practices in collecting new information on
properties imply a cumbersome, time-consuming and error-prone data collection process by
tax agents.
   In an ongoing study led by the International Growth Center and the International Centre
for Tax and Development, a new technology has been introduced, namely a specific property
tax application digitizing the different steps of the fiscal chain, thus limiting the loss of
information and improving the quality of data (through linking of property information to
GPS coordinates), strengthening the efficiency of the local tax administration, and allowing
data sharing with the Treasury. Importantly, before introducing the app, the whole cadastral
information was added to the new system. Research is currently ongoing evaluating the
efficacy of the application in improving property tax collection and taxpayers’ perceptions
(Knebelmann, 2019). Along the same lines, in Box 1 we examine the case of real estate taxes
in Liberia and how the use of technology could systematically capture information on tax
liabilities that are observable but not codified.
   Despite these positive considerations that can be made in support of technology in reg-
istration, technology-enabled registrations could take place over-aggressively in developing
countries, along with the increasing drive towards formalizing as much as possible, often to
reach given annual targets (Moore, 2020). However, it is still unclear whether mass registra-
tion could translate into higher compliance.




                                               11
   BOX 1: Real Estate Tax in Liberia

   Problem: Real estate taxes in Liberia, like many low-income countries, is charac-
   terized by high non-compliance rates. One significant hurdle in administering the
   real estate tax is the lack of a property cadastral. In the absence of comprehensive
   information on property location, ownership and values, tax enforcement cannot be
   conducted in a systematic way and many properties remain outside the tax net. Only
   about 5 percent of residential property owners were estimated to be on the tax roll
   (Okunogbe, 2013).

   Technology intervention: The Liberia Revenue Authority (LRA) initiated a
   low-cost technology investment to create a new property database. The tax authority
   recruited and trained young people to use open-source software on tablets to capture
   the location, ownership, photo and GPS of properties. The “foot soldiers,” as they
   were called, went door-to-door, conducting a brief survey with the resident of each
   property to collect ownership information and record property characteristics, includ-
   ing a photograph of the property. This resulted in the creation of a new property
   database that the tax authority could then use for property tax administration.

   Research design: The tax authority used the information from this new database
   to send notices to taxpayers to request payment of real estate taxes. Four types
   of notices were sent out, with property owners randomly assigned to the different
   notices (Okunogbe, 2021). The first group received a “Plain Notice” that provided
   information on the property tax requirement and the procedures to pay. The second
   group received a “Detection Notice” that was addressed to the property owner by
   name and included a photograph of the property. The third group received a “Penalty
   Notice” that provided information on the legal consequences of not complying. The
   fourth group received a “Detection and Penalty Notice” that combined the features
   of those two notices.

   Impact: The Detection and Penalty notice tripled the property registration and tax
   payment rate among recipients, relative to the baseline registration rate of 4 percent
   and payment rate of 2 percent among those who received the Plain notice. The
   Detection notice and the Penalty notice alone did not have a statistically significant
   impact on registration or payment.

   This intervention highlights the effect of using technology to organize the publicly
   visible information on property tax liabilities to boost tax compliance.


      If anything, abundant evidence is being produced on the poor impacts on revenues due
to widespread non- and nil-filing8 - as well as to high compliance costs (Mascagni, Santoro
  8
      In Guatemala, the share of non-filers of income tax in 2013 was 39 percent (Kettle et al., 2016); in Costa



                                                       12
and Mukama, 2019) - of new entrants.


2.2     Facilitate Compliance

An important application of technology in taxation is to improve taxpayers’ experience by
making it easy for them to obtain information and fulfill their tax obligations. Many tax
authorities are increasingly adopting a customer service orientation towards taxpayers. One
initial step taken by tax authorities is to provide detailed instructions, forms and guidance
on their website on the compliance steps and requirements for each type of tax. A further
step is to make it possible for taxpayers to complete transactions online, such as the ability
to file and pay taxes online. Tax authorities may then also have individual taxpayer accounts
that contain the taxpayer’s transaction history with the tax authority. The tax authority
may also use electronic means of communicating with taxpayers such as SMS and email
reminders, payment confirmation and announcements.
    A major consequence of these technology-driven tools is that they allow taxpayers to
interact with the tax system in an impersonal way. In their absence, taxpayers would likely
be subject to the discretion of tax officials responsible for providing information, conducting
transactions and monitoring them in-person. We consider three specific technologies: (i)
e-filing and e-payment services in section 2.2.1; (ii) electronic billing machines in section
2.2.2; and (iii) online communication in section 2.2.3.
Rica, 50 percent of registered firms failed to file in the period 2006-2014 (Brockmeyer et al., 2019); in the
Rep´ ublica Bolivariana de Venezuela, the non-filing rate for the municipal income tax is 20 percent (Ortega
and Scartascini, 2015). In Eswatini, for CIT and PIT respectively, the 6-year average of missing returns is 43
and 57 percent, while nil-filers represent the 29 and 17 percent of CIT and PIT filing population, respectively
(Santoro and Mdluli, 2019). In Rwanda, over half of all newly registered taxpayers completely fail to file
a declaration in the first year (Mascagni, Santoro and Mukama, 2019), while 53 percent and 19 percent of
CIT and PIT returns are nil in 2013-18 (Mascagni et al., 2020). Also in Rwanda, Mascagni, Mukama and
Santoro (2019) show that 35 percent of VAT returns from July 2016 to June 2017 have both zero VAT on
sales and zero VAT on purchases. In Ethiopia, about 23 percent of CIT returns filed in 2006/2013 are from
nil-filers (Mascagni and Mengistu, 2016). Likewise, in Uganda 27 percent of PIT returns are nil over the
period 2013-2018 and, according to Almunia et al. (2021), 15 percent of VAT returns in 2012-2015 are nil.




                                                      13
2.2.1      E-Filing and E-Payment Services

Electronic filing and payment refers to digital services that allow taxpayers to (i) file their
taxes electronically – together with a range of other tax-related activities (attach annexures,
claim for refunds, make appeals, update their personal details, get assistance online, check
their filing history, etc.), usually through a web portal to which they have access or through
similar phone applications, (ii) to perform payments of tax liabilities online, by means of
digital platforms (mobile money, credit card or similar electronic transfers) which efficiently
connect the revenue authority, private banks or digital financial service providers, and the
central bank. The main promise that e-filing and e-payment hold refers to the capacity of
taxpayers to perform such activities in a less burdensome and more transparent way – saving
travel and queuing costs, error-prone manual inputting, and avoid physical interactions with
tax officials who may ask for bribes. Despite this potential, evidence on the impact of e-
filing (and e-payment) is rather scarce, especially so from Africa. Despite focusing on a
different context, Tajikistan, Okunogbe and Pouliquen (2022) provides important lessons for
African countries as they turn to e-services in response to COVID-related social distancing
measures.9 Box 2 below describes the study in detail.
       Another meaningful example of the potential of e-filing to facilitate compliance comes
from Uganda. Jouste, Nalukwago and Waiswa (2021) evaluate the impact of the introduction
of a new e-filing system – an online tax form - for presumptive taxpayers in 2015. Before
this technological innovation, taxpayers had to fill in more complex and less transparent
off-line Excel forms. These forms had to be submitted to URA’s website, while, in order
to get a payment receipt, taxpayers had to separately register the payment. With the new
system, instead, taxpayers simply log in on the URA’s website and fill in the form, which
automatically calculates the tax due and provides receipts in one single venue. The most
   9
    In more developed contexts, two evaluations of e-invoicing in Peru and China both reveal relatively
large revenue increases (Bellon et al., 2019; Fan et al., 2018). There are also reports on e-invoicing in Latin
American countries, available in Spanish, such as Ram´    ırez, Oliva and Andino (2018),Templado and Artana
(2018), B´ergolo, Ceni and Sauval (2018).




                                                      14
interesting aspect of this study is that the e-filing system, on top of doubling the number
of presumptive taxpayers and increasing revenues thanks to its simpler nature, performed
even better in conjunction with the parallel Taxpayer Register Expansion Project (TREP).
With TREP, the URA provided one-stop shop where tax officials offered assistance and
further lower taxpayers’ compliance costs. The complementary impacts thus arising indicate
that technology is likely to be more successful when coupled with taxpayer assistance and
awareness campaigns (Jouste, Nalukwago and Waiswa, 2021).10
    The increasing evidence on the benefits arising from technology in terms of reduced
compliance costs begs the question whether take-up could be incentivized and barriers to
adoption could be more carefully considered. Some studies from Africa attempt to under-
stand the nature of such barriers and document that more sophisticated taxpayers are more
likely to adopt the technology in the first place. In Nigeria, Efobi et al. (2019) analyze the
factors which drive small businesses to adopt and use e-filing and e-payment facilities. The
study concludes that internal firm characteristics like owner’s education, age of the company,
and use of an external auditor and computerized accounting system, are most strongly corre-
lated with the use of these online tools. These results resonate with a more specific study on
North-Western Nigeria Mas’ ud (2019).11 In a different context, Obert et al. (2018) identify
the knowledge gap as a key challenge as taxpayers agree that dearth of technical knowhow
and lack of training significantly impact their likelihood of adopting the e-filing system.
  10
     According to . World Bank (2016), in Belarus, e-filing was similarly part of a broader reform to lower
compliance costs for citizens, including simplifying the tax code, setting up taxpayer facilitation services,
and reaching out to the business community.
  11
     Mas’ ud (2019) finds that, while microentrepreneurs hold positive views on the impact of e-filing usage,
they lack awareness of its operating modalities and need assistance from intermediaries.




                                                     15
   BOX 2: E-filing in Tajikistan

   Problem: Small business owners in Tajikistan faced high compliance costs as
   they had to submit monthly tax declarations in person at the tax office. These
   frequent meetings with tax officials also provided opportunity for unofficial payments.
   Thirty-two percent of taxpayers said they expect to give gifts in a meeting with tax
   officials (Enterprise Survey 2013).

   Technology intervention: The Tax Committee introduced electronic tax filing to
   allow firms to file online. Initially, take-up was low due to lack of awareness, lack of
   trust in the system, complicated e-filing registration procedures, among others.

   Research design: E-filing was available to all firms, so the intervention was to
   encourage a randomly selected group of firms to e-file by removing some of the
   constraints to e-filing through providing training on e-filing as well as logistical help
   to complete the e-filing registration process.

   Impact: The treatment group e-filed at a higher rate than the comparison group.
   Firms that were more likely to be evading at baseline (measured by a risk score used
   by the tax authority) were less likely to adopt e-filing and also more likely to stop
   e-filing after a few months. Tax payments doubled among these high-risk score firms.
   While there was no average effect on bribes, e-filing led to a large reduction in bribes
   (18 percentage points) among firms less likely to have been evading. More broadly,
   e-filing resulted in a large reduction in compliance cost across firms with 5 hours
   saved each month (about 40 percent of the time spent on fulfilling tax obligations).

   This intervention highlights the role of technology in not only reducing compliance
   costs for taxpayers, but also affecting tax payments and unofficial payments by chang-
   ing the interactions between taxpayers and tax officials. It also underscores the im-
   portance of thinking about distribution effects in the impact of technology as certain
   taxpayers may be more affected than others. Lastly, it provides lessons on the take-up
   of technology solutions as taxpayers may be strategic in deciding to take up and those
   for whom the technology may have greatest impact may be least likely to adopt.


   As a final consideration, evidence shows great heterogeneity in impacts which can be
attributed to the specific design of the e-service. Important aspects in the design of IT
solutions could have unintended consequences on taxpayers’ compliance costs, especially
when solutions are not customer-centric, reliable and trustworthy. In this regard, Yilmaz
and Coolidge (2013) critically compare the different policy experiences of South Africa, Nepal
and Ukraine and show how the potential of e-filing in reducing compliance costs depends


                                              16
on the policy design itself. E-filing is impactful in those cases, like South Africa, in which
it completely replaces paper-based filing with no additional work required from firms.12 In
Nepal, where e-filing was mandatory and particularly cumbersome, it actually increased
compliance costs. In Ukraine, where businesses kept filing on paper in parallel to e-filing due
to lack of trust on the online system, compliance costs increased as well Yilmaz and Coolidge
(2013). Analogously in Africa, the Kenyan Revenue Authority (KRA) continued to maintain
two concurrent tax filing systems - manual and i-tax - even after the introduction of the latter.
As these two systems were not integrated with one another, they likely generated confusion
among taxpayers and the KRA eventually detected discrepancies in the taxpayers’ records
(Maisiba and Atambo, 2016).
       Along the same lines, Kochanova, Hasnain and Larson (2020) suggest that the policy
implementation of complementary online tools such as e-payments plays a crucial role –
whereas a simpler e-filing system that does not enable online payment of taxes has no effect
on compliance costs and interactions with tax officials. Likewise, the existence of an ITAS on
the tax administration side could considerably improve the e-filing experience – as taxpayers
would be able to monitor their tax obligations on their web-profile, provide feedback and
receive timely assistance. A highly policy-relevant message that can be derived from the
literature is that the success of a given technology does not only depend on the effectiveness
and design of that specific solution, but most importantly hinges on the comprehensive
implementation of a coherent set of IT measures which together address interlinked taxpayer
needs (such as file and pay online), communicate smoothly and, thus, combined have an
impact.
  12
     It is also true that government mandates can produce unintended consequences. As a response to
COVID-19, some low-income countries are making e-filing the only choice for taxpayers, regardless of their
size. Anecdotal evidence from Eswatini, for example, shows how taxpayers in remote rural areas, where
internet coverage is poor, have to travel to internet kiosks where they could file online, assisted by tax
officials. While this practice would probably enhance the quality of tax returns, it is unclear whether small
taxpayers could see any benefit in terms of compliance costs, an aspect which in turn could deteriorate their
willingness to comply and exacerbate socioeconomic inequality.




                                                     17
2.2.2    Electronic Billing Machines

Electronic fiscal devices, already discussed in section 2.1 for their potential in better defining
tax liabilities, could also play a major role in terms of reducing compliance costs. The
evidence available is rather mixed. On the one hand, current research indicates that EBMs
are impactful in making the taxpayer experience less burdensome, more predictable and less
frustrating. In a recent survey, Ethiopian firms highlighted the following benefits from SRM
adoption: ‘less opportunity for theft’ (mentioned by 20 percent of respondents), ‘updated
and easily available sales information’ (22 percent), ‘easy to comply with tax requirements’
(17 percent) and ‘better sales and inventory control’ (16 percent) (. World Bank, 2015,
p. 26). In Rwanda as well, electronic billing machines have been rolled-out since 2013 with
the aim of improving VAT compliance by transmitting transaction records directly to the
Rwanda Revenue Authority in real time. In this context, Eissa and Zeitlin (2014) document
that EBM impacts on tax declared have been larger for smaller firms, which, in a manual
system, are those generally facing higher compliance costs (Yilmaz and Coolidge, 2013).
   At the same time, also in Rwanda, evidence from a mixed methods approach - based
on administrative data, focus group discussions (FGDs) and a nationally representative
survey - from Mascagni, Dom and Santoro (2021) shows that medium and large taxpayers
considerably value EBMs as a tool for facilitating their compliance. A more sophisticated
version, EBM2, which is software-based and works on computers, is also quite appreciated
by this group as it improves record-keeping, monitoring of transactions on a daily basis and
business reputation, thus attracting new IT-savvy costumers (Mascagni, Dom and Santoro,
2021).
   On the other hand, Mascagni, Dom and Santoro (2021) show that technology-enabled
facilitation is not always granted as especially small taxpayers bear the largest burden of
adopting EBMs. The authors first show that the incidence of poor record keeping (as proxied
by inconsistencies between VAT returns and EBM data) is larger for smaller firms. They
then use FGDs to demonstrate that taxpayer confusion, complexity and practical difficul-


                                               18
ties with the machine are particularly severe for smaller taxpayers. Technical problems -
for example, issues with topping up SIM cards, and with the necessary equipment (com-
puters, connection, etc.) required to keep up with the new EBM version (EBM2) – seem
to disproportionately affect smaller taxpayers. Mistakes with inputting the correct trans-
action amount are also commonplace – thus explaining the large discrepancies mentioned
above. The more advanced version EBM2 seems still expensive for smaller taxpayers, who
already face budget constraints in using the traditional EBM.13 This disproportionate ef-
fect brought about by more and more sophisticated technologies could however exacerbate
existing inequalities in the taxpayer population.
       Similar impediments are witnessed in the deployment process of EBMs in Kenya and
Tanzania. Eilu (2018) reviews the evidence from seven studies based on the adoption ex-
periences of these two countries, to conclude that the most-cited challenge with the use of
electronic billing machines (EBMs) was the lack of training of VAT-collecting enterprises,
mentioned as a hindrance in six of the studies. As identified in five of the studies, the second
most-cited challenge was the high sunk costs associated with technology adoption.
       It is also important to acknowledge that revenue authorities are attempting to reach
less educated, often rural, taxpayers, through user-friendlies technologies, to facilitate their
compliance. This is the case of the M-declaration tool in Rwanda, discussed more in detail
in section 3. With M-declaration, presumptive taxpayers could easily declare their taxes and
pay through mobile money by using a simple feature phone. The Malawi Revenue Authority
also introduced a similar M-mobile application with the intent of streamlining the payment
process of less sophisticated taxpayers, building on the widespread nature of mobile money,
which is accessible to the lower strata of the population. As these technologies are extremely
new, no robust impact evaluation has yet been conducted and future research should examine
  13
    At least in Rwanda, EBMs need airtime as they transmit information through the mobile network.
Taxpayers, especially the smallest ones, easily forget (or are unaware they have) to top up airtime, thereby
impeding the EBM from communicating with the authority. Also, they face higher costs in procuring the
equipment needed in conjunction with EBMs, such as printers or computers (for the new, app-based, EBM2
version). Most importantly, businesses have to buy the machine themselves without any subsidy (Mascagni
et al., 2020).


                                                    19
whether they alleviate the compliance costs of smaller taxpayers.
   A key takeaway from these case studies is that, while EFDs can bring positive impacts
in terms of facilitating compliance – which often translates into higher revenues, their in-
troduction should be accompanied by sustained taxpayer education and assistance, both at
the stage of installing the device and of routine checks after adoption (also see section 3).
Incentives schemes could also be applied, even if the evidence of their effectiveness is scant
(Brockmeyer and Somarriba, 2021). As they incrementally introduce new technology, often
at a rapid pace,14 tax administrations should increasingly rely on timely communication
and proactive feedback mechanisms for taxpayers, the ultimate users of such technology.
Unintended inequitable repercussions should be considered, as smaller and less educated
taxpayers can be those struggling the most in using any new technology.


2.2.3   Online Communication

Linked to its role in facilitating compliance, technology also holds a great potential in terms
of communicating information around the tax system and easing the burden with complying.
By accessing e-portals, for instance, taxpayers could seek for tax-related assistance online or
browse through tax laws and similar official documents. In the literature of the so-called tax
nudges, communication experiments manipulating the message content and testing different
motivations behind compliance, most examples refer to traditional delivery methods, such
as letters, while increasing attention is being devoted to more modern and cheaper solutions,
such as SMSs and e-mails (Mascagni, 2018). More scientific research is needed in this direc-
tion, given the huge potential that IT-based communication retains in potentially reshaping
the way in which revenue authorities assist, educate, train their taxpayers (. World Bank,
2016; FIAPP OECD, 2015).
   In this sense, an illustrative case study comes from Rwanda, where in early 2016 the rev-
enue authority sent messages to 9,000 taxpayers, aimed to encourage compliance. Mascagni
 14
    This is the case of Rwanda, which already introduced an EBM2 version and is planning to launch a
more sophisticated EBM3 version as well.


                                                20
and Nell (forthcoming) compare the efficacy of different delivery methods, from more tra-
ditional (physical letters) to more digitized (SMS, email). They show that non-traditional
delivery methods, specifically SMS, are highly effective and significantly increase tax due
of nudged taxpayers, in contrast to physical letters. This exercise is particularly relevant
from a policy perspective, as governments in developing countries are constantly looking for
cost-effective ways to achieve policy goals, in the context of very limited capacity (Mascagni
and Nell, forthcoming). In this setting, it would be difficult to scale up the delivery of letters
beyond a relatively small group – also considering the often poor quality of taxpayer contact
information in tax registries (Ortega and Scartascini, 2015; Mayega et al., 2019).


2.3       Monitor Compliance

Recent developments in the use of technology in taxation have generated troves of data that
tax authorities can leverage to detect non-compliance. For example, many tax authorities
compile data from several dimensions of a taxpayer’s behavior to generate a risk profile, that
reflects the likelihood that a taxpayer is evading (Khwaja, Awasthi and Loeprick, 2011).
Selecting audit cases using this data-driven approach would lead to a more targeted and
efficient audits. Beyond this, with the appropriate technology-based reporting systems, tax
authorities can systematically crosscheck information provided by a taxpayer with third-
party information sources (Dogan, 2011).15 The examples below highlight the potential
compliance gains from reconciling firms’ VAT declarations. Box 3 below presents a case study
from Uganda on the potential compliance gains from reconciling firms’ VAT declarations.
       Using a similar approach to Almunia et al. (2021), Mascagni, Mukama and Santoro
(2019) focus on Rwanda and study how data from VAT returns is used for monitoring and
enforcement purposes. By analyzing the universe of VAT returns in 2016-2017, the authors
find that discrepancies are abundant. In terms of within-taxpayer discrepancies, 43 percent of
  15
    A success story in this sense comes from Turkey, where a data warehouse system collects information from
both private (including commercial banks) and public organizations to curb VAT fraud and misreporting.
The impacts of extensive data-matching exercises and a conducive cross-agency administrative environment
have been remarkable (Dogan, 2011).


                                                    21
VAT payers either over- (18 percent) or under-report (25 percent) their VAT sales compared
to what is automatically recorded in the Electronic Billing Machines (EBMs). While practical
difficulties in using the machines and inputting mistakes could be a reason behind this finding
(see section 2.2.2), evasion could also explain underreporting of VAT sales compared to EBM
data. This challenge is particularly alarming given that the Rwanda Revenue Authority is
planning to increasingly rely on automated data from EBMs to crosscheck VAT returns
and curb evasion. If the information inputted by taxpayers on the machines is likely to be
filled with mistakes, it will not be useful for enforcement. In any case, technology could
help the tax administration with closing these gaps through automated crosschecks and
data-driven enforcement. Addressing these discrepancies seems to be a low-hanging fruit,
with considerable revenue implications, which is however left hanging due to administrative
complexity and weak capacity (Steenbergen, 2017).
   The potential of data analytics and automatic cross-checks to identify non-compliance is
likely to matter for most of Africa (Santoro et al., forthcomingb). Recent evidence shows that
a concerning pattern of extensive taxpayer misreporting also applies to Ethiopia (Mascagni,
Mengistu and Woldeyes, 2021). In Ethiopia, as mentioned already in section 2.1.1, in 60
percent of cases total sales from VAT returns are different from the same figure from the profit
tax returns (Mascagni, Dom and Santoro, 2021). It is unclear why revenue authorities do not
automatically identify such gaps, notify the taxpayers to correct them, and eventually boost
revenues through accurate compliance. As in the case of Rwanda, a possible explanation
could lie in the lack of adequate capacity to run automated crosschecks at large scale. The
inability to fully exploit the VAT data, which already sit within the tax administration
system itself, inevitably impairs the potential of using data from external sources, such as
third-party reports.




                                              22
   BOX 3: VAT compliance in Uganda

   Problem: VAT is supposed to be self-enforcing because government receives a report
   of a transaction from both buyer and seller (with opposite incentives). However,
   in practice, while many tax authorities may analyze this information for specific
   taxpayers, for example in the case of an audit, often they do not routinely use this
   information systematically in their tax enforcement.

   Technology intervention: Since 2012, the Uganda Revenue Authority required all
   VAT firms to electronically file their monthly VAT declarations, including detailed
   transaction-level records (sales and purchases with other VAT firms). Firms also
   electronically submit customs declarations, providing transaction level data on
   imports. These electronic submissions ensure that in recent years, for all VAT firms,
   the URA has detailed data in electronic format.

   Research design: Researchers worked with the tax authority to match these data,
   comparing the amounts reported by buyer and seller for transactions done each month
   (Almunia et al., 2021).

   Impact: Sellers and buyers report different amounts in 79 percent of transactions.
   Importantly, in about a third of the cases, the discrepancy is due to “disadvantageous
   reporting”, that is reporting errors in VAT returns that increase the firm’s overall
   liability and leave money on the table. The paper estimates that VAT misreporting
   cost Uganda USD 446 million in revenue from 2013-2016. Systematic crosschecks of
   these data from the tax authority could help recover, at least partially, the foregone
   revenues.


   More positive examples come from Asia, whose technological trajectory could potentially
be followed by Africa. In Pakistan, the revenue authority managed to curb fake VAT input
claims by a computerized VAT refund validation mechanism (Shah, 2020). Success has
been possible only after a decade-long period of transition towards a fully computerized
infrastructure, funded by donors. Also, the reform received wide institutional and political
support from both the government and the constitution, an aspect that is often seen to be
missing in low-capacity countries. Similar promising evidence comes from India (Mittal and
Mahajan, 2017), where third-party reporting in New Delhi increased compliance by the top
1 percent of firms, and China (Fan et al., 2018), where the digitization of VAT annexes
improved tax compliance with VAT.


                                            23
3     Limitations of Technology

While the evidence discussed above highlights the unprecedented potential of technology in
improving tax administration and revenue mobilization, it is also true that technology alone
is likely to be ineffective in a context in which pre-existing, complementary factors are not
yet in place (Bird and Zolt, 2008). This is also true in high income countries as failure to get
these preconditions right explains the poor take-up of e-government services there as well
(Gauld, Goldfinch and Horsburgh, 2010; Reddick and Turner, 2012). The relevance of these
preconditions, and the evidence produced on them, is summarized here below.


3.1    Hard Infrastructure and Connectivity

Even the most user-friendly technology will hardly function if basic infrastructure and, for
those technologies based on the Internet, stable connectivity are lacking. Immediate im-
plications concern the take-up and usage – neither taxpayers/users nor tax officials could
smoothly take-up and use a technology that halts in peak periods or functions only intermit-
tently. On top of that, inadequate infrastructure and connectivity could also pose important
equity repercussions, as those taxpayers most likely to be disconnected from the internet are
more likely to be smaller, rural, and less-educated. In turn, their broad taxpaying experi-
ences could be frustrating and their tax attitudes and perceptions could likely deteriorate.
Particular attention should be devoted to these unintended consequences, especially in light
of the current shift to e-filing and e-payment as a response to the pandemic - as in certain
cases (for instance, in Eswatini and Cameroon) revenue authorities imposed the adoption of
e-tools to avoid physical interactions. However, it is unclear whether making adoption com-
pulsory would prove to be effective for compliance if large portions of the taxpayer population
are simply not covered by connectivity or stable electricity.
    Some descriptive evidence describes the challenges taxpayers face in adopting technology
in less IT-friendly contexts. In Zimbabwe, Obert et al. (2018) study the underutilization



                                              24
of the e-filing tax system and conclude that connectivity is indeed a major challenge to
most taxpayers, with around 33 percent of respondents reporting absolutely no access to any
form of network connection. For instance, one challenge unearthed by this study was that
the server used to operate the e-filing system frequently faltered during peak periods, with
negative repercussions on taxpayers’ filing experience. Likewise, in Eilu (2018) review of six
studies on EBMs adoption in Kenya and Tanzania, poor internet connection is cited in three
of the studies, while power outages come just next.
       It is also true that tax administration can proactively roll out less sophisticated technolo-
gies with the clear policy intent of reaching less connected taxpayers and facilitating their
compliance. This is the case of Rwanda, where the RRA launched the M-declaration tool as
an offline declaration and payment solution for rural taxpayers, working on simple feature
phones. M-declaration has been introduced as a simpler complement to the more IT-heavy
E-tax platform, which instead works on computers and through the internet. Solutions like
M-declaration could easily address connectivity issues and enable digital payments through
the widespread mobile money system. The survey study of Santoro et al. (forthcominga)
shows how user profiles of M-declaration and E-Tax are different by policy design and how
the two technologies get adopted by those who need them most.16


3.2       The Human Factor

Technology could rightfully be considered as a tool, which does not live by itself but is meant
to be used by people. If people refrain from, resist, or manipulate technology, the latter is
unlikely to produce any impact. This human factor is crucial to understanding the potential
of technology more realistically. In this context, users of IT can be divided into two broad
categories: taxpayers and tax officials.
  16
    They also document that the major issues with both E-tax and M-declaration is that the system is slow,
with two-thirds of respondents reporting that.




                                                   25
3.2.1       Taxpayers

Taxpayers could fail to adopt a technology for a number of reasons. First, apart from
the infrastructural limitations mentioned above, taxpayers may have little understanding
and practical knowledge of sophisticated innovations. As mentioned in section 2.2, lack of
awareness and training could be a key obstacle to the uptake of a given technology (Obert
et al., 2018; Eilu, 2018; Efobi et al., 2019; Mas’ ud, 2019). It would be beneficial for African
tax administrations, which already devote a great deal of resources to taxpayer training and
sensitization programs (Mascagni and Santoro, 2018), to update and adapt their training
modules in light of the ever-changing technological possibilities. When tax systems are
overly complex, taxpayers may resort to using third-party service providers (such as cyber
   e workers and not tax professionals) who may exacerbate problems with inaccuracies with
caf´
taxpayer data.
       Second, users can fail to adopt a new technology if sunk costs for its implementation
are too high. There could be resistance in adoption from taxpayers within certain categories
having to cover significant costs for accessing the service (Yilmaz and Coolidge, 2013). Qual-
itative evidence from Rwanda (Mascagni, Dom and Santoro, 2021) documents high levels
of frustration, as taxpayers have to buy the EBMs with their own funds,17 and also have
to cover all ancillary costs on the equipment needed for using the machines (airtime, inter-
net connection, computers, printers, etc.). In this sense, digital technologies can reinforce
socioeconomic disparities already present in the taxpayer population. Limited evidence ex-
ists on the impacts of subsidies for technology uptake, with rather inconclusive results. A
notable exception comes from Brockmeyer and Somarriba (2021) which, despite considering
a different technology (POS terminals) provide mixed evidence on the impact of incentives,
which could inform the design of incentive schemes for other technology, namely EFDs, as
well.18
  17
    Also Ethiopian taxpayers had to buy the ESRMs themselves (Mascagni, Mengistu and Woldeyes, 2021).
  18
    In the broader context of Uruguay’s Financial Inclusion Reform, (Brockmeyer and Somarriba, 2021) find
that firms are largely unresponsive to the financial incentives for the rental fee of point-of-sales terminals



                                                     26
    Third, more IT-sophisticated taxpayers could blatantly manipulate the technology in
order to avoid paying taxes. A tax administration whose internal systems are not integrated
and automated is open to manipulation attacks from taxpayers. In Malawi, among many
other countries, the revenue authority makes use of several disconnected systems running
in parallel, making registration, tracking and monitoring quite challenging. Being aware
of these weaknesses, taxpayers seem to use multiple TINs for the same business to cut
tax liabilities, while not being automatically detected (Ligomeka, 2019).19 At the same
time, even less sophisticated taxpayers could be reluctant to adopt a new technology due to
mistrust towards the tax administration, especially for concerns issues around data security
and confidentiality.


3.2.2    Tax Officials

Tax officials as well are adopters of technology and could sub-optimally use it due to a
number of constraints. First, tax officials could resist change and prefer keeping up the
usual, often manual-based, practices. Tax officials can have a disincentive to reorganize their
work to take full advantage of digital technologies, often due to the possibility of losing the
discretionary benefits they have been accumulating with a manual, discretionary system.
However, very little causal evidence has been produced on how technology could shape the
interactions between taxpayers and tax collectors – with the exception of Okunogbe and
Pouliquen (2022) -, as well as on incentive schemes for motivating tax officials in taking-up a
new technology.20 Regarding the latter, Chalendard et al. (2020) argue that the effectiveness
of third party reporting in Madagascar is undermined by the limited incentives to tax officials
(POS). Surprisingly enough, 80 percent of firms taking up the subsidy already had a POS while only a small
fraction of firms without a POS take up the subsidy. In terms of impact on compliance, the latter group of
firms actually increases reported VAT liabilities while effects are null on those firms already using a POS.
   19
      It is also true that this strategic behavior is observed in Uganda as well, despite the URA maintains a
uniform registry (Mayega et al., 2019). This is to stress again that even a sound integrated system, which
could in theory easily identify fraud, would prove inefficient if not used to its full potential by the tax
administration.
   20
      Outside technology, notable exceptions are Khan, Khwaja and Olken (2016) and Amodio et al. (2021),
who study the impact of performance pay for tax collectors on revenue and bribe payments.



                                                     27
to optimally make use of this new information. The authors find that even though better
information on import values from a third party significantly enhanced performance of the
customs department by enabling a more exact determination of tax liabilities, yet its impact
on revenue appeared compromised by misaligned incentives of custom officials. Thus, the
absence of strict sanctions against opportunistic behavior and the prevalence of rampant
corrupt practices in Madagascar customs – as in customs of other low-income countries
- could explain why the provision of information to inspectors have not yielded stronger
impacts.
      Mayega et al. (2019) provides some interesting qualitative evidence on staffs’ resistance to
technology in Uganda. It documents the negligence of under-incentivized registration staff,
who do not respond to TIN duplicates warning triggered by the system, hence clogging up
the registry with duplicates. In Sierra Leone, anecdotal evidence tells that tax officials may
record tax return information on separate excel sheets instead of using the formal platform.
This means that tax returns could be missing from the system because of issues with data
entry (Stewart-Wilson, 2020). In Malawi as well, preferences for manual practices imply
that a specific, separate registry exists for large taxpayers, stored and managed on separate
Excel files, not integrated on a uniform platform and controlled by the LTU staff (Ligomeka,
2019). Anecdotal evidence suggests that these discretionary practices are commonplace in
other countries as well.
      A second major impediment for tax officials is a lack of adequate skills and training. It is
true that revenue authorities in Africa routinely assign their staff to intense training periods,
often incentivized, as well as make completion of certain learning modules compulsory for
promotion.21 Notwithstanding, it seems that more could be done in terms of building more
specific, tailored skills on how to use technology and, correspondingly, how to manage tax
data. Observational evidence indicates that revenue authorities in low-income countries often
do not cross-check their tax records, even if it would be relatively straightforward to do so
 21
      A successful example of staff training is provided by the case of Rwanda (Schreiber, 2018).



                                                      28
(Kangave et al., 2016; Almunia et al., 2021; Mascagni, Mukama and Santoro, 2019). This,
for instance, is documented in Rwanda, where easily identifiable discrepancies across VAT
returns are not closed likely due to limited know-how from tax officials. Robust evidence is
lacking on this aspect but most existing studies point to the lack of IT skills as one of the
concurring causes for limited usage of different technologies, such as systematic cross-checks
       a (2017).
Pirttil¨


3.3    Institutional Strategy and Change Management

The adoption and implementation of technology should not happen in a single step, mo-
tivated by a political frenzy or competitive imitation of peers, but rather within a clearly
defined, long-term transformational journey.
   As a first consideration, the sequencing of technology adoption, as delineated in a strategy
of structural reform, is crucial. Digitization of functions and processes is usually pioneered
by customs departments, as they tend to use internationally standard information systems.
After piloting a new automated and integrated platform in customs (such as ASYCUDA
+++ and ASYCUDA World), revenue authorities turn to digitizing their internal functions,
by automating all internal processes. In this phase, it is preferred that clear sequential
actions are taken. For instance, a new integrated and automated tax administration system
is unlikely to succeed if the existing data within the tax administration are not properly
cleaned first, so as to be adequately analyzed by the new system. A clear example of this
is given by the experience of the local tax administration in Dakar (Knebelmann, 2019), as
mentioned in section 2.1.2. Likewise, retraining and reengineering tax officials should come
before introducing the technology, as well as repeatedly over time. Also, there seems to
be a clear sequencing in how the different functions get automated. After customs, usually
e-registration modules are introduced next, to improve the quality of taxpayer registries.
Then, the most relevant taxes are digitalized first, with VAT and income taxes being the
priority. All the remaining taxes and fees usually get digitized at a later stage.


                                               29
       Once all internal functions are integrated successfully, the next step entails providing
e-services to taxpayers. E-filing and e-payment systems could develop naturally and directly
feed into a well-running automated tax administration system. Often, e-services are rolled
out sequentially, first imposed as a pilot on large taxpayers, and only later to the taxpayer
population at scale. More and more sophisticated modules could be added as the opportu-
nity arises. For instance, the M-declaration phone application introduced in RRA was meant
to represent an additional service building on the already existing e-filing system. Similar
mobile-based additional services are introduced in Senegal and Malawi as well, among many
other African countries. More generally, a brilliant example of a long-term (2006-2021) digi-
talization journey is offered by the Mauritius Revenue Authority. The authority inaugurated
its plan in 2006 by integrating three different legacy systems and introduced e-filing in 2007;
it then launched a fully-integrated ITAS in 2010, which has then been upgraded routinely
after; it introduced mobile payments and filing in 2013-2014 and eventually went ahead with
more and more digitalized solutions, ranging from a digitally-enabled COVID assistance
scheme in 2020 and a behavioral insight unit with the goal of predicting risky behaviors by
building on machine learning techniques in 2021.22
       As a second related point, technology provides the opportunity for an unparalleled cul-
tural change within the tax administration, where obsolete analog practices are abandoned
and a new mindset, based on efficiency and transparency, is embraced. Descriptive evidence
from different contexts in Africa shows that it is difficult to change the silos mentality with
which different departments within a revenue authority tend to operate. It is commonplace
to see different IT systems operating in parallel to manage taxpayer data. This simultaneous
use of distinct systems creates a host of structural challenges for the tax administration. One
major challenge is the duplication of work. Given that different units manage the systems,
another challenge pertains to the authorization required by officials in a unit to access the
data from a different unit within the same institution. As a result, officers often concentrate
  22
    Presentation by Soobhash Sonah, Director of the Information System Department at the Nigeria Gov-
ernors’ Forum Technology and Tax Event on April 19, 2021.


                                                 30
solely on recording information on taxes under their mandate and ignore any other tax-
relevant data (Ligomeka, 2019). Ethiopia, among many other countries, is emblematic of a
context in which administrative data, such as PAYE returns, is inadequate due to this silo
mentality. In Ethiopia, as many as four institutions collect data on employment income.23
Despite having common challenges and aligned interests, such institutions do not communi-
cate for both political and technical reasons (Mascagni, Santoro and Mukama, 2019). This
challenge is strictly intertwined with the unclear regulatory framework surrounding the ad-
ministration of PAYE, an aspect that is also discussed below. Systems working in parallel
exist in Sierra Leone as well, and produce disconnected information, often inaccessible out-
side of a given department (Stewart-Wilson, 2020). More broadly, customs and domestic
tax department still appear not to communicate systematically. To properly address this
challenge when introducing new technology, it is acutely important to have a rigorous pro-
curement process that carefully gathers system/ business requirements, understands user
needs, and reviews business processes to ensure that the procured technology systems are
fit-for-purpose and avoid needless duplication.
       At a higher level, the implementation of technology requires strong buy-in from key
leaders and a long-term strategy at the national level. The Rwandan case is very much
emblematic of how technological transformation has been enabled by the strong political
support from the very top government through the Vision 2020 development plan (Schreiber,
2018). A number of concurring strategic actions have been taken in order to unleash the
full potential of technology in Rwanda. First, government and donors massively invested in
high-speed fiber-optic network, serving the whole country. This directly enabled the RRA to
make use of more advanced online technologies and to eventually launch its automated data
management system. Second, a target-oriented and performance-based staff management
culture has been crucial to build higher professionalism within the authority – often coupled
with intense trainings on IT tools. Third, the government eliminated import taxes on com-
  23
    The ERCA, the Ministry of Finance and two institutions for social security provision, both for the public
and private sectors.


                                                     31
puters, cell phones, and telecommunications equipment, facilitating digital inclusion. Lastly,
to facilitate compliance of micro-entrepreneurs through digital means, the finance ministry’s
policy committee moved quickly to create a simple, new presumptive tax for them, easily
payable through mobile phones (Schreiber, 2018). More research is needed in to understand
how the political vision of a country could spur successful technological transformation.24


3.4       Regulatory Framework

A broader key consideration refers to the regulatory and legal framework in which technology
exists. As technological innovations develop at a faster and faster pace and tax administra-
tions keep updating themselves, the same should be true for the legal system. However, the
latter is typically much slower to respond and adapt to change.25 . On the one hand, revenue
authorities could strengthen themselves through the use of technology. On the other, the
ultimate ability to enforce, prosecute, impose sanctions and collect taxes often lies outside
the authority itself. Hence, countries need a functional, modern legal system enabling the
technology-enhanced tax administration to fully benefit from this transformation.
       There are many ways in which the legal system could hamper the potential of technology
in tax administration. For instance, technology could empower revenue authorities in their
enforcement capacity, helping them with assessing the underlining true liability, tracking
defaulters, identifying blatant evaders (see section 2.3). All these efforts are however likely
to be unfruitful if actual prosecution does not materialize due to long delays in courts.
Likewise, technology could spur mass registration and formalization, which however would
not deliver better compliance outcomes if the tax code is silent about tax obligations of
new entrants (Mascagni, Mengistu and Woldeyes, 2021). Furthermore, confusion could arise
about the legal requirements to use a given technology, such as e-filing. In a situation where
e-filing is made compulsory by decision of the revenue authority but where the national laws
  24
     In a different context, take-up of e-procedures in Caribbean countries has been very low due to faulty
strategic direction (Schlotterbeck, 2017).
  25
     Qualitative evidence from Malawi shows how the MRA is constrained from introducing e-filing services
given that the tax code is still silent about how to regulate such service (Santoro et al., forthcomingb)


                                                    32
are still ambiguous on whether the adoption of a digital practice is mandatory or voluntary,
or for whom, navigating the regulations could lead to higher compliance costs of taxpayers,
alongside greater mistrust and frustration.26
       On top of that, gaps in regulation could arise when it comes to co-using a given technology
across different public institutions. As mentioned above, data sharing between revenue
authorities and a range of public and private actors does not happen systematically, often
due to privacy and confidentiality concerns. One possible approach is for policy makers
in a country to work towards setting up a central automated platform which would be
accessible from a variety of government institutions and banks for identification of taxpayers
and cross-checking of information. Robust evidence on the effectiveness of such mechanisms
is needed to determine how effective this approach may be. Along the same lines, in order
to boost tax compliance, more developed countries have enacted specific legislation whereby
processors of debit or credit cards and electronic payment systems are mandated to report
to the tax authorities the gross receipts of the enterprises accepting these forms of payments.
Legislation in lower income countries is still mostly undefined.
       Lastly, a crucial consideration is that as technology evolves, adjustments in the regu-
latory framework are needed in order to protect citizens from unintended consequences in
terms of privacy, confidentiality, data leakages and cybersecurity. Accessing third-party data
from, say, digital financial services providers comes with risks of breaching confidentiality
agreement with the clients of those services. Likewise, the institution of national ID systems,
as well as any technology at scale (see, for instance, mass medias) in contexts which are not
fully democratic poses new risk in terms of the government ability to surveil and restrict
citizens’ rights. In these cases, a conducive regulatory framework needs to be in place, al-
lowing keeping a balance between data protection and security and the use of new data and
technology for tax purposes. In sum, technology needs to be thought of as a unique catalyst
  26
     In this sense, the recent move of some African countries (such as Cameroon and Eswatini) to make e-
filing and e-payment mandatory to reduce physical interactions offer an interesting case study, and adequate
quantitative research is needed to measure the impacts of it (Santoro, Amine and Magongo, forthcoming).



                                                    33
for broader regulatory reforms within public institutions and an opportunity to modernize
tax codes, eventually promoting the country to a higher development trajectory.



4     Conclusion

This paper describes the potential that information technology provides for tax mobilization,
as well as the challenges that still exist in low- and middle-income countries in order to tap
into it. First, technology could be a powerful tool for understanding the tax base: tax
authorities can use technology-based tools to collect information to identify taxable entities
(such as individuals or property during registration drives) as well as to collect information
on the tax liability, for example, through the use of electronic billing machines that record
sales transactions, or from third-party sources like employers, vendors, customers or financial
institutions.
    Second, technology is also valuable for improving service delivery to taxpayers. Technol-
ogy solutions like electronic filing and payment can reduce the time and other compliance
costs borne by taxpayers. Electronic billing machines reduce the costs of compiling and
submitting information. Electronic communication tools (such as email and SMS) provide
a timely and cost-effective way of keeping taxpayers informed of their tax requirements and
account status. These technologies also reduce the level of in-person interactions between
taxpayers and tax officials, thus reducing opportunities for extortion and collusion.
    Third, technology also contributes to strengthening the capacity for tax monitoring. It
provides tools for collecting and analyzing large amounts of data to detect inconsistencies,
such as mismatches between sales reported for income tax to those recorded for VAT, or
between VAT sales and purchases reported by sellers and buyers. By using different electronic
sources of information on taxpayers’ behavior, tax authorities can systematically assign risk
of tax evasion to different firms to prioritize audits to maximize revenue recovery.
    A common theme to these uses of technology is that they move the tax system towards



                                              34
becoming more standardized and delivering a consistent experience across taxpayers and
away from the use of tax official discretion in the treatment of taxpayers.
   At the same time, several country examples highlight several challenges associated with
the adoption of technology in taxation. First, given the infrastructure deficit in many African
countries, access to internet and electricity may hinder the effective adoption of technology
by taxpayers, especially the disadvantaged, raising equity concerns. Some governments have
responded by opening up spaces for people to conduct electronic tax transactions or by rolling
out simpler tools accessible to mobile devices. Ongoing research is exploring the impacts of
more and less sophisticated e-filing solutions (Santoro et al., forthcominga).
   Second, no matter how sophisticated an IT system is, it is only as effective as its users can
employ it. On the one hand, taxpayers may be hesitant to use technology tools due to lack
of information and trust, security concerns or high costs of adoption, such as with electronic
billing machines. Taxpayers could also deliberately respond to technology in perverse ways,
by adjusting multiple margins in their tax returns and thus muting the impacts on revenue
mobilization. Tax authorities have responded by conducting regular trainings for taxpayers
and in some cases subsidizing the costs of technology adoption or rolling out less sophisticated
alternatives to serve disadvantaged taxpayers.
   On the other hand, tax officials may not maximize the use of IT tools due to lack of skills
and training, or may actively resist to avoid losing the private benefits they received from
the influence they had under a manual system. Tax authorities must ensure that their IT
agenda focuses on empowering staff members with the skills and training they need, while
also being as manipulation-proof as possible. Related to that, tax administrations should
be equipped with sufficient resources to conduct traditional strategies in enforcement and
monitoring, to which IT-enabled audit solutions could contribute.
   Third, technology reform must not be a stand-alone project but should be part of a
broad institutional strategy, where complementary reforms are designed. It requires a clear
sequencing of reforms to avoid redundancies and disorder. For example, it is important to


                                              35
coordinate human resource needs (recruitment and training) with hardware and infrastruc-
ture needs (e.g. internet, electricity, computers) alongside investment in different software
and complementary e-solutions. Different tax modules should be sequenced so they build
on one another. Importantly, adequate investments in traditional tools for monitoring and
enforcement should be planned for as well.
   Fourth, the success of technology reforms in taxation is dependent on the broader reg-
ulatory environment. In many countries, the legal authority to enforce, prosecute, impose
sanctions to recover delinquent taxes does not lie within the tax authority but with the
judiciary, which may be slow and inefficient. Also, the regulatory framework needs to be
updated on data sharing between institutions and private actors, and provisions to protect
citizens’ rights. As such, technology-based reforms in tax administration must be backed
by a functional, modern legal system to realize the full revenue gains and ensure a fair and
equitable tax system.
   The recent upsurge in the literature on taxation in low and middle-income countries is, in
large part, due to the availability of administrative tax data in electronic format. As countries
continue on their technology transformation journey, there are two key opportunities for
collaborating with researchers. First, tax authorities can work with researchers in real-time
to understand the impact of different technology interventions they adopt to guide expansion
or modifications to the technology. Second, tax authorities can collaborate with researchers
more broadly to understand the implications of different tax policy choices for efficiency
and equity through the analysis of tax data in electronic format (Pomeranz and Vila-Belda,
2019).
   In conclusion, while technology has the potential to transform tax administration, its
success depends on the presence of an enabling environment within and outside the tax
authority.




                                               36
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