Carrot or stick? For tax authorities looking to increase revenue collection while minimizing fraud and evasion, it ultimately comes down to one of these two approaches.
The “stick” approach is adversarial: favoring a coercive approach to tax compliance, and threatening punishment for non-payment. The “carrot” approach seeks to create a culture in which taxpayers feel the tax authority is on their side, they clearly see the wider social benefit of paying taxes, and the process of submitting returns and making payments is easy and non-intimidating.
Carrots are better—for everybody
Many modern governments are finding the second approach more fruitful. Encouraging voluntary compliance doesn’t just result in a higher proportion of tax being collected on time. It also reduces the cost to the tax authority of collecting the revenue, since it spends less time and budget on investigations and enforcement.
Making it happen is more difficult. In many countries, there’s a climate of fear among citizens when it comes to paying tax. Turning that perception around takes time and effort, and isn’t helped by events like the recent phone scam here in Canada, where criminals posing as the CRA demanded immediate payment with menaces—netting CAN$10 million to date from terrified citizens.
Four technologies that help promote voluntary compliance
Our work with tax authorities around the world has shown that technology can play a major role in creating a culture of trust and cooperation that leads to voluntary compliance. Here are four technologies that can help taxpayers and tax authorities work more productively together:
Cloud: This is the first step for many authorities looking to move services online and make sure they’re always available. Offering 24/7 service in the cloud means citizens always have somewhere to find advice, submit returns, and make payments. The scalability of the cloud infrastructure means that services never go down—even at times of peak demand like payment deadline days.
Collaboration tools: When tax officials can easily collaborate and find the information they need, taxpayer queries and cases can be resolved faster. Officials can use online productivity tools to work smarter, and be more knowledgeable and productive when meeting with taxpayers. Mobile devices allow them to spend more time in the field, helping taxpayers to calculate tax owed—or refunds due—and submit the right paperwork.
Business process automation: Paper-based forms can be notoriously hard to navigate; even trying to find the right form can be an offputtingly difficult task. Infusing smart online forms with AI can help—by dynamically reconfiguring the form based on the information the taxpayer is entering, or by pre-populating the form with preexisting information to save time.
In Mexico, the Servicio de Administración Tributaria offers an online portal where taxpayers can input their ID and see automatically calculated deductions—helping them file returns faster and more accurately.
Cognitive services: Tax authorities can take a cue from innovative insurers, and use cognitive services like chatbots and voice assistants to make it easier for taxpayers to navigate services and find the information they need. The Australian Taxation Office, for example, has introduced ‘Alex,’ a virtual assistant that can help answer general enquiries from citizens and businesses.
Get the full guide to digital transformation
For tax authorities seeking to increase rates of voluntary compliance, all of these technology initiatives are worth exploring. To see how they can fit within a wider digital transformation strategy, download a comprehensive guide from Microsoft and PwC: Digital Transformation of Tax Administration.