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Cristina García-Herrera Blanco

Director of Research and Studies, Institute for Fiscal Studies

As it is well known, tax systems must be configured in accordance with the principles of justice and efficiency, and constitute a coherent set of taxes to finance public expenditures. In our days, the era of digital transformation requires us to adapt traditional taxes to achieve a modern tax system. But no matter how perfect a tax system is, it is as sound as the tax administration in charge of applying it is worth. Hence the important role that they are called to play in society.

The Congress that we held in 2018 and this book that is now being released focus on reflecting on the efficiency of the world’s tax administrations. Progress in recent times has been very relevant, especially with regard to cooperation between Administrations at the international level, particularly through the exchange of information, which has gone under a real revolution.

These lines are dedicated to outlining what, in my opinion, are the greatest challenges facing tax administrations in the globalized and digitized world in which we live, that is, the main challenges for tax administrations of the 21st century. It is true that digitization and new technologies have allowed, on the one hand, greater possibilities of fraud, especially in an international context. The possibility of conducting business without physical presence has convulsed the traditional principles of international taxation that has led us to a multilateral negotiation within the Inclusive Framework at the OECD level, the final result of which is yet to be achieved. However, on the other hand, this technology is an opportunity to serve tax compliance that tax administrations should take advantage of.

Undoubtedly, the Administrations must ensure the application of the tax systems, through the prevention and fight against tax fraud to ensure the effective fulfillment of the duty to contribute to the support of public expenditures. But what are the most relevant challenges? What changes are necessary? How should the tax administration adapt to the new context?

First off all, I believe that it is essential to promote the use of technology in the different areas of action of the tax administrations, both in the prevention and in the fight against tax fraud. The pace at which technological innovations progresses is very fast, which requires continuous analysis of their implications. In particular, artificial intelligence must be highlighted as a powerful tool since, as the European Commission points out, the growth of computing capacity, the availability of data, and advances in algorithms have made it one of the most strategic technologies of the 21st century –European Commission (2018), Communication of 7 December 2018, Coordinated Plan on Artificial Intelligence, Brussels, 7.12.2018 COM (2018) 795 final–, The benefits that can be achieved through the use of artificial intelligence are many. In the field of tax administrations we believe that these benefits will be very relevant, allowing better tax compliance, in the sense of easier compliance for taxpayers, who should also be able to benefit from better assistance services from the Administration.

The decisions that can derive from well-designed artificial intelligence algorithms fed with taxpayer data should allow a better application of the tax system, with fewer errors by the tax administrations and the existence of higher quality tax acts. This should imply unity of administrative criteria, more legal certainty for taxpayers, less conflict and a reduction in resolution times. In addition, the use of artificial intelligence should reduce the chances of tax fraud, which undoubtedly benefits society as a whole.

In our days tax systems rely to a large extent on voluntary compliance by taxpayers. The figures indicate this. According to the Report Tax Administrations 2019, Comparative Information on OECD and other advanced and emerging economies ninety percent of what is collected is paid by taxpayers in the voluntary period. This is a very high figure, but taking into account the number of taxpayers who declare and enter periodically, a small increase in these figures will be very significant. For this reason, tax administrations, including the Spanish Tax Agency, adopt strategies focused on promoting such voluntary compliance (AEAT, Strategic Plan 2020-2023).

Second, Administrations must be prepared and trained for the challenges posed by the taxation of the digitized economy and above all for the substantial change that it will imply in the field of tax control. We are still waiting the solution to be adopted within the OECD in the digital project on pillars one and two. And it is evident that the new rules for the distribution of tax power between countries will require a new mode of control, different from the one that has been exercised to this day. Thus, we can already verify it in relation to taxes on digital services which some countries have already approved unilaterally.

Third, a challenge in the coming years is trying to reduce conflict in tax matters in order to improve tax certainty. It is, on the one hand, to prevent conflict in order to avoid it from occurring and promoting voluntary compliance. In this context, it is important to continue improving the existence of preventive mechanisms such as multilateral APAS or multilateral cooperative compliance (such as the ICAP project). In relation to the latter, it implies that the transparency of the taxpayers, beyond their legal obligations is compensated with tax certainty, and above all, it allows control in real time. This real-time control is something that technology increasingly allows and that should be encouraged. In addition, on the other hand, there should also be efforts to quickly and efficiently resolve the conflict when it has occurred, advancing in alternative ways of resolving disputes. It is worth noting that according to the Report Tax Administrations 2019, Comparative Information on OECD and other advanced and emerging economies the tax debt pending collection is set at 1.8 trillion dollars.

Fourth, I believe that future taxation requires paying particular attention to the rights and guarantees of taxpayers. In this sense, it is necessary to review and adapt these rights as they are designed for traditional tax systems in the light of a new digital and technological Administration. In reality, the new context amplifies the traditional problems that already existed and it is necessary to pay attention to how the new reality influences the right to privacy, the protection of personal data or the right of defense, amongst others.

Finally, all of this must be accompanied by a change in the tax administrations’ personnel with the incorporation of new profiles trained in this digital context.

I would like to conclude this presentation by thanking Professor Eva Andrés for having counted on the Institute for Fiscal Studies and I for this project. Her concern for these issues and her collaborative spirit have allowed the success of this project. This is a great sign of the importance of collaboration of the Administrations with University.

Cristina García-Herrera Blanco

Madrid, March 2021