## fmc2 ## Source details **Canonical URL:** [fmc2](https://www.imf.org/-/media/files/publications/fiscal-monitor/2018/april/pdf/fmc2.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fiscal-monitor/2018/april/pdf/fmc2.pdf.md) - [Structured JSON version](/-/media/files/publications/fiscal-monitor/2018/april/pdf/fmc2.pdf.json) --- ### Introduction and overview - Digitalization is defined as the integration in everyday life of digital technologies that facilitate the availability and processing of more reliable, timely, and accurate information. - Fiscal policy (expenditure and tax policies) depends crucially on information about economic actors—their resources, behavior, and transactions—and on data about policy outcomes to inform future policy choices. - Relevant and reliable information is often not available or easy to use, constraining the design, implementation, and evaluation of tax and spending policies; lack of access to information by economic actors can reduce the effectiveness of fiscal policy and generate distrust. ### Opportunities for fiscal policy from digitalization - By reducing the collection and processing costs of information, digitalization can: - Improve implementation of current policies: - Reduce private and public costs of tax compliance and improve spending efficiency. - Digitally facilitate payments and improve compliance through greater access to taxpayer data. - Use better identification and authentication systems (for example, biometric technology) to reduce leakages and the cost of reaching targeted populations. - Enable improvements in governance and fiscal transparency, allowing better public awareness and scrutiny of the budget process. - Increase the range of policy options: - Greater access to information and enhanced digital capabilities open previously unavailable policy options for addressing new challenges, including designing domestic and international tax and spending policies for the digital economy. ### Risks and constraints created by digitalization - Policymakers must: - Navigate unfamiliar territory: - Digitalization can pose a direct threat to tax collection and efficient spending by creating new fraud opportunities (for example, use of cryptocurrencies to accumulate wealth outside the reach of tax authorities or digital identity theft to illegally claim benefits). - Privacy and cybersecurity can become new sources of fiscal risks: digital systems are vulnerable to cyberattacks that can disrupt government functions and jeopardize citizens’ digitally stored private information. - New digital business models and firms with little physical presence in countries where they operate challenge existing international taxation design. - Overcome financing and capacity constraints: - Governments with limited fiscal space may find it difficult to mobilize resources to purchase digital tools and improve cybersecurity. - Small businesses and vulnerable households can be left behind if they have little access to digital tools. - Weak administrative and institutional capacity will be an obstacle to technological adoption. ### Digital transformation trends and selected statistics - Internet users worldwide reached 3.2 billion at the end of 2015. - At the turn of the century, only one-quarter of data were stored in digital form; the ratio rose to more than 95 percent in 2010 and has continued to rise. - Almost all country governments now have national websites and automated financial management systems. - Electronic filing and payments have on average reduced tax-filing time by 25 percent in the five years after a digital system was introduced (World Bank 2016). - India’s Aadhaar has more than 1.2 billion registered citizens with a 12-digit unique identification number and biometric information. - Digital adoption is uneven: developing countries on average score lower in government digital adoption than advanced economies but are on par in selected areas such as customs administration and financial management. - Country leaders regionally include Estonia, Chile, Singapore, Rwanda, and South Africa. ### How digitalization is used in tax policy and administration - Digital tools enable: - Electronic tax filing, prepopulated tax returns, and verification of customs and business activity (for example, through electronic invoicing). - Improved compliance and enforcement through reconciliation of payments, monitoring real-time revenue collection, audits, and big data to assess taxpayer risks. - Use of electronic transaction information to validate tax collections (for example, VAT). - Country examples: - South Africa: electronic tax submissions, customs declarations, and payments rose from below 20 percent to close to 100 percent over the past decade after modernization and automation. - Estonia: use of big data to identify high-risk and anomalous taxpayer behavior. - China: increasing use of electronic receipts helped authenticate and process tax rebates in the VAT. - Distributed ledger technology and digital mapping have been explored for land registries and property taxation. ### How digitalization is used in public spending and financial management - Digital tools can improve financial management and public spending efficiency by: - Improving delivery of public services, communicating with beneficiaries, and monitoring public servants. - Facilitating dissemination of health and agricultural information via mobile technology. - Monitoring teacher absenteeism with digital devices. - Reducing fraud and corruption through electronic payment systems and facilitating distribution of social benefits. - Managing public sector wage bills using mobile payments to reduce leakages associated with cash payments. - Examples of digital transparency and participation: - Korea: web-based participatory budget system, D-Brain. - Brazil: daily fiscal data on the government’s Transparency Portal. - High-frequency fiscal aggregates can enable real-time macroeconomic analysis. ### What governments can do now: same policies, better implementation - Focus areas where digitalization can improve implementation now: - Cross-border tax compliance problems (international trade fraud and income/wealth sheltered in low-tax jurisdictions). - Digitalization of customs administration and its cumulative impact. - Improving access to entitlements and reducing leakages in income-support programs to address poverty and equity concerns. - Trade-related taxation context: - Trade taxes constitute close to 10 percent of total revenues on average in emerging market and developing economies. - Missing trader intra-community fraud (carousel fraud) under the EU VAT system incurs an estimated tax loss of EUR 45–60 billion to the EU annually (4–6 percent of VAT revenues). - How digitalization helps customs and trade compliance: - Improves authenticity, accuracy, and completeness of information via electronically signed cargo manifests, electronic certificates of origin, and secure records. - Blockchain technology could help secure authenticity of submitted information by recording initial submissions and all modifications. - Big data analysis of historical customs transactions enables better risk discrimination and resource allocation for fraud prevention. - Obstacles remain when trade payments involve credit and financial flows linked to the transaction that do not sum up to the value of the goods. ### Trade misreporting and potential revenue gains from digitalization - Trade fraud proxied using discrepancies between importer reported value—CIF—and exporter reported value—FOB. - Median trade gap ratios (difference between importer and exporter reported values in percent of GDP) in 2016: - AEs: –2.4 percent of GDP - LIDCs: –6.6 percent of GDP - Simulation of closing half the distance to the digitalization frontier (reducing the distance by 50 percent) — potential median revenue impacts (2016): - Potential VAT revenue gains (percent of GDP): - LIDCs: 1.7 percent of GDP - EMEs: 1.0 percent of GDP - AEs: 1.0 percent of GDP - EU: 0.5 percent of GDP - Potential tariff revenue gains (percent of GDP): - LIDCs: 0.5 percent of GDP - EMEs: 0.3 percent of GDP - AEs: 0.06 percent of GDP - Caveats: - Results are indicative only; reducing the distance to the digitalization frontier is likely to require significant fiscal resources and removal of institutional barriers. ### Offshore financial wealth, information exchange, and revenue potential - Offshore financial wealth as a share of overall financial wealth has grown substantially over the twentieth century. - Digitalization, cryptocurrencies, and fintech may facilitate financial transactions that escape traditional domestic jurisdiction and increase financial opacity (derivatives, shell corporations). - Common Reporting Standard (automatic exchange of information) created in 2014 by the OECD and the G20 enables participating jurisdictions to send and receive digital information on nonresident financial accounts without a specific request. - Automatic exchange requires standard digital formats, substantial computing power, and secure networks for encryption and access protection. - Estimated offshore wealth and tax revenue potential (2016, 178 countries): - Median estimates of offshore wealth by country income group (percent of GDP): range across income groups between 7.6 and 10.7 percent of GDP (median offshore wealth). - Under current policies, estimated maximum potential tax revenue from offshore assets: - Median potential tax revenue: a little more than 0.1 percent of GDP - Median tax base (offshore wealth): 10 percent of GDP - Assumptions and parameters: - Assumed rate of return on financial assets: 8 percent per year - Effective tax rates on wealth and associated capital income flows average 1.8 percent (under the assumptions used) - Halving the assumed rate of return would reduce the effective tax rate from 1.8 percent to 1.2 percent - Policy and administrative considerations: - Increased taxpayer information could enable collection of labor and capital income taxes at source before earnings are transferred to low-tax jurisdictions; sample average labor income tax rates are 30 percent. - Residence-based international taxation of individual shareholders could be strengthened as territorial corporate taxation declines; could be equity enhancing if the base is concentrated among high net worth individuals. - Important implementation challenges remain: porous exchange networks, high ICT costs, institutional barriers, limited administrative capacity, political capture, and resistance from tax collectors and officials. ### International cooperation, legal frameworks, and tax transparency - Global Legal Entity Identifier system: more than 1 million legal entities in 221 countries have registered identifiers; individuals eligible only if acting in a business capacity, limiting use for identifying beneficial ownership. - Limitations and concerns: - Central depositories often record only names of intermediaries, not ultimate owners of securities. - Privacy and security concerns over data exchanges, especially in countries with weak administrative capacity. - Without international cooperation, fiscal and regulatory competition can create systematic loopholes. - Policy and reform implications: - Cooperation is necessary for a comprehensive, enforceable, and equitable system, but other reforms are also required. - Significant changes to domestic legal frameworks are needed—for example, comprehensive financial information should be shared between tax authorities and financial regulatory bodies. - Enforceability may require noncompliance penalties such as withholding on resident-country-sourced payments or withholding taxes levied by host countries. - Comprehensiveness requires cross-validation of data between tax authorities and central security depositories globally. - Equity consideration: reciprocity should not be required for developing countries at an early stage if compliance costs are initially too high. - Offshore financial centers and jurisdictions labeled as tax havens should implement strong governance, financial supervision, due diligence, and AML/CFT systems, and strengthen frameworks for international cooperation and transparency through exchange of information. - From an AML/CFT perspective, these jurisdictions are encouraged to make tax crimes a predicate offense to money laundering. - Conclusion: Digitalization alone is not sufficient to curb tax evasion to low-tax jurisdictions; at current tax rates, potential revenue gains from improved digital information exchange on cross-border financial income and wealth holdings are limited and concentrated in advanced economies. A comprehensive and collaborative reform of domestic and international tax systems is necessary to capture full transparency potential. ### Strengthening social protection coverage: leakage, take-up, and digital solutions - Definitions: - Take-up: eligible population of individuals who receive income support. - Coverage: population who receive income support regardless of eligibility. - Leakage: noneligible population who receive income support. - Two types of errors: - Exclusion errors → non–take-up (eligible individuals do not, or only partially, receive benefits). - Inclusion errors → leakage (individuals receive benefits to which they are not entitled). - Sources: - Leakage often stems from identification and verification problems (ghost beneficiaries, inability to verify eligibility). - Take-up issues arise from complexity and lack of awareness (high transaction costs, lack of awareness about programs). - Magnitude and macroeconomic impact: - One-third of total spending on means-tested assistance programs in the EU is given to the top six income deciles. - Conservative estimates of non–take-up rates of monetary benefits in European countries are greater than 40 percent. - India (2012): an estimated 36 percent of total spending on the Public Distribution System never reached intended households because of ghost beneficiaries and illegal diversion. - Non–take-up can amplify macroeconomic volatility: non–take-up of unemployment benefits in Austria (about half of eligible unemployed workers) leads to a 15 to 30 percent increase in volatility. ### Digital solutions: country case studies and outcomes - India — LPG subsidy reforms: - From 2013, beneficiaries’ Aadhaar numbers linked to LPG program; electronic transfers of the subsidy directly to Aadhaar-linked bank accounts. - Estimated effects: depending on assumptions, estimated savings from digitalization range between 0.2 and 21 percent of cash transfers and 11 to 24 percent of wrongful payments. - Caveats: Aadhaar use coincided with termination of dual pricing and reduction in world natural gas prices; reported data breach compromising 135 million Aadhaar numbers. - South Africa — social grant payments (2012 reforms): - Re-registration of all social grant beneficiaries; introduction of a biometrically secured debit card; monthly proof-of-life via fingerprint or voice verification. - Outcomes: eliminated 850,000 ghost beneficiary and duplicate accounts; reduced monthly per-beneficiary administrative costs by 50 percent; gross fiscal savings of R2 billion (US$194 million) during 2013/14. - Caution: allegations of corruption and improper use of beneficiary data by private intermediary. - France — complementary health insurance (ACS) reforms (2013): - Systematic data exchange between local health and old-age administrations; targeted outreach with simplified application forms or an ACS check ready to cash upon purchase. - Outcomes: increase in take-up of 22 percent with the simplified application form and 50 percent with automatic enrollment. - Limitations: beneficiaries sometimes fail to purchase complementary insurance even after automatic checks. - Belgium — OMNIO medical reimbursement take-up (2014): - Harmonized and simplified eligibility criteria and application process enabling data exchange between tax authorities, national office for sickness and disability, and health insurance funds. - Outcomes: automatic enrollment and proactive outreach increased take-up; preconditions include harmonization, high-quality data, privacy rules, and digital inclusion. ### Lessons and implementation challenges from country experience - Attribution and evaluation are difficult: isolating digitalization effects from concurrent macroeconomic and policy changes is challenging. - Privacy, security, and governance require strong controls; examples of failures include Aadhaar breach (135 million Aadhaar numbers) and alleged misuse in South Africa. - Digital outreach alone may be insufficient; beneficiaries may need direct human assistance. - Technical and policy preconditions: harmonization across agencies, high-quality data maintenance, privacy rule establishment, and ensuring digital inclusion are crucial. ### Key quantitative points and summary statistics (preserved exactly) - Internet users worldwide reached 3.2 billion at the end of 2015. - Median trade gap ratios (2016): AEs = –2.4 percent of GDP; LIDCs = –6.6 percent of GDP. - Potential VAT revenue gains from halving distance to digitalization frontier (percent of GDP): LIDCs = 1.7; EMEs = 1.0; AEs = 1.0; EU = 0.5. - Potential tariff revenue gains from halving distance to digitalization frontier (percent of GDP): LIDCs = 0.5; EMEs = 0.3; AEs = 0.06. - Median offshore wealth estimates across countries: between 7.6 and 10.7 percent of GDP. - Median potential tax revenue from offshore assets under current policies: a little more than 0.1 percent of GDP versus a median tax base of 10 percent of GDP. - Assumed rate of return on offshore financial assets used in calculations: 8 percent per year. - Average effective tax rate on wealth and associated capital income flows under assumptions: 1.8 percent. - Sample average labor income tax rates cited as: 30 percent. - Aadhaar enrollment reported: 1.2 billion residents. - Aadhaar cumulative expenditures between 2009 and 2017: Rs 87.9 billion (about US$1.5 billion), implying a cost of US$1.25 per generated Aadhaar card. - South Africa social grant reform outcomes: eliminated 850,000 ghost beneficiary and duplicate accounts; gross fiscal savings of R2 billion (US$194 million) during 2013/14. - Estonia X-Road usage: serves 52,000 organizations as indirect users and handles about 500 million queries each year. - Estonia digital filing: about 95 percent of taxes are filed online and each filing takes on average about three minutes. - Digital payments savings estimate for developing countries: could save roughly 1 percent of GDP, or about $220 billion to $320 billion in value each year (equivalent to 1.5 percent of the value of all government payment transactions); assumptions include 15–25 percent leakage for government payments to individuals and savings of $0.50 to $1.20 per transaction from processing cost reductions. ### Digital firms, taxation, and social insurance challenges - Key features of archetypal digital companies and tax implications: - High profitability → need for more effective taxation of rents wherever they arise. - Heavy reliance on intangible assets → ease of locating intangibles in low-tax jurisdictions and difficulties in valuation. - Sales with little or no physical presence → raises debate on allocation of taxing rights and attribution of income to destination country. - User-generated value → controversial role in taxing rights; market valuations for user-generated data typically do not exist. - Observed policy responses and fiscal impact: - United Kingdom diverted profit tax raised £138 million in 2016/17 (plus an estimated £143 million in ordinary corporate tax because of behavioral changes); the Italian web tax is estimated to yield EUR 190 million. For both, this is approximately 0.6 percent of corporate tax revenue. - Social insurance and platforms: - United States: alternative work arrangements increased by nearly 50 percent between 2005 and 2015, from more than 10 percent of the workforce to close to 16 percent, representing 94 percent of the net employment growth over the period. - United Kingdom: between 2011 and 2017, alternative work arrangements increased about 30 percent for agency workers and 300 percent for zero-hour contracts. - Platform participation: between 2015 and 2016, 8 percent of adults in the United States earned money on digital platforms; in the United Kingdom, an estimated 3 percent of the workforce provides services on digital platforms. - Policy options include reducing or eliminating minimum income thresholds for social insurance and introducing contributions based on a percentage of income for platform workers. - Platforms can report earnings to tax administrations and potentially withhold taxes and contributions. ### Barriers to successful digitalization: resource, budget, and capacity implications - Cost estimates and budgetary magnitudes: - Aadhaar implementation and maintenance in India: about US$1.5 billion or US$1.25 per card between 2009 and 2017. - Other electronic identification systems: US$3 to US$6 per enrollee. - Low-income country estimate to establish a national biometric identification system: 0.6 percent of GDP, with maintenance costs of 0.1 percent of GDP annually. - Estonia spends approximately US$67 million (0.3 percent of GDP) per year on its digital platform. - Korea cumulative budget on e-Government between 1996 and 2002: 1.3 percent of GDP. - Deloitte estimate: 2015 present value cost of digitalizing customer transaction services for Australian federal and state governments could reach US$ 4.6 billion (0.4 percent of GDP). - OECD-country government digitalization unit budgets: represent 0.04 percent of total public expenditure on average. - US federal cybersecurity unclassified spending estimate in 2016: at least US$28 billion (0.2 percent of GDP). - Mobilizing adequate resources requires creating fiscal space for technology purchases, data storage, cybersecurity experts, and recurring maintenance costs. - Administrative and institutional capacity constraints, political commitment, and parallel institutional reforms are critical for successful outcomes. - Excessive spending risks arise from weak procurement procedures and vendor lock-in on proprietary technologies. ### Country case studies: South Africa, Estonia, India, and Kenya - South Africa (revenue administration): - SARS automation and modernization: - VAT compliance gap decreased from 30 percent of potential VAT in 2002 to 5 percent in 2012. - 95 percent of personal income tax refunds were paid within 72 hours by 2016. - 55 percent of VAT refunds were paid within 48 hours, up from 3 percent in 2006. - 95 percent of personal income tax assessments made within 3 seconds (down from 180 days in 2006). - More than 90 percent of customs transactions processed in less than 22 minutes. - Digital inclusion challenge: almost half of South Africans do not use the Internet. - Estonia (e-government and X-Road): - Provides 99 percent of state services online; X-Road is foundation of e-government and is based on blockchain technology. - Impact: - X-Road serves 52,000 organizations and handles about 500 million queries each year. - Government estimate for 2017: use of digital technology and e-services saved more than 1,172 years of working time. - Two-thirds of the population uses the digital identification card regularly. - Digital signatures save five days per year. - About 95 percent of taxes are filed online; each filing takes on average about three minutes. - ETCB’s collection efficiency: spending 40 cents to collect EUR 100 in taxes. - Risks: cybersecurity concerns following the 2007 cyber-attacks; plans for a data embassy in Luxembourg for disaster recovery. - India (JAM trinity and digital reforms): - JAM: Jan Dhan, Aadhaar, Mobile network; linkage of bank accounts to Aadhaar for direct electronic payments across multiple programs. - Impact estimates vary widely: - Government reports savings about Rs 150 billion (US$ 2.54 billion; 22 percent of major cash transfers) for 2014/15 from LPG reform. - Comptroller and Auditor General of India estimates savings about US$ 270 million (2 percent of major cash transfers). - Clarke (2015) estimates around US$22 million (0.2 percent of major cash transfers). - Ministry of Finance (2016) estimates a reduction in leakages of 24 percent. - Barnwal (2016) estimates a reduction in fuel diversion of 11–14 percent. - Public Distribution System savings by 2016: Rs. 140 billion (US$ 2.1 billion) attributed to deletion of 23 million ration cards and better targeting. - Mahatma Gandhi National Rural Employment Guarantee Act program: Rs 76 billion (US$1.2 billion and 11 percent of cash transfers) saved by 2015/16; 9.3 million fake job cards deleted in 2016/17; randomized rollout experiment in Andhra Pradesh finds leakages reduced by 41 percent relative to the control mean. - Risks: authentication failures, Internet availability constraints, Supreme Court rulings on mandatory use, data breach affecting 135 million Indians. - Kenya (digital finance and tax administration): - M-Pesa (introduced 2007) expanded financial inclusion: adult population served by financial services increased from 27.4 percent in 2006 to 75.3 percent in 2016. - iTax (introduced 2013) integrated tax administration, registration, filing, and payment; commercial banks and M-Pesa integrated. - Excise enforcement, Integrated Customs Management System rollout since 2017, Regional Electronic Cargo Tracking System (early 2017), e-Procurement (2014), and e-Promis (2009) introduced to modernize PFM and procurement. - Impact: iTax strengthened coverage, reduced costs, simplified filing, increased customer satisfaction, and reduced compliance costs. ### Annex: Estimating impact of digitalization on trade misreporting and revenue (methodology and regression results) - Dependent variable: trade gap defined as (V_xmt^m − V_xmt^x) / ((V_xmt^m + V_xmt^x) / 2). - Main regressor: United Nations Online Service Index (normalized between 0 and 1) as a proxy for digitalization (available since 2003). - Estimation in a gravity-model framework with importer/exporter characteristics, bilateral cost proxies, fixed effects, and macro controls. - TSLS instruments: Method 1: country-level R&D intensity (R&D expenditure in percent of GDP); Method 2: measure of R&D efficiency (ratio of patents to R&D intensity). - Selected coefficient estimates for Im.Digitalization Index: - OLS (EU) specification: 0.186 (standard error 0.107) - TSLS-1 (EU): 1.284 (0.505) - TSLS-2 (EU): 0.841 (0.436) - OLS (All): −0.069 (0.036) - TSLS-1 (All): 1.181 (0.575) - TSLS-2 (All): 1.733 (0.937) - Sample sizes: 716 (specifications 1 and 2), 670 (3), 36,626 (4), 13,318 (5), 10,944 (6). - Instrument diagnostics: reported first-stage F-statistics include values such as 13.05, 26.45, 16.34, 17.24. - Revenue gain simulation equation and parameters: - Revenue Gain_τ = τ_rate × Δ(V_Total^m − V_Total^x) - Alternative expression: Revenue Gain_τ = τ_rate × (1/2 (V_Total^m + V_Total^x)) × β_digit^m × Δ z_m - Assumed Δ z_m for halving distance to the frontier: 0.5 × (1 − z_m) - β_digit^m assumed to be 1.181 or 1.733 (from TSLS estimates) - Latest country-specific VAT and weighted tariff rates applied; average trade flow reported in 2016 used. - Conservative bias note: holding other determinants constant biases estimates downward, yielding conservative estimates of gains. ### Policy implications and recommendations - Comprehensive reform agenda: - Digitalization is not a substitute for administrative capacity, institution building, or structural reform; success hinges on parallel reforms and an overall reform strategy. - Pair digital tools with complementary policy changes (for example, pricing reforms in subsidy programs). - Risk mitigation: - Address privacy, cybersecurity, and fraud risks to maintain trust and program effectiveness. - Use biometric identification systems, merged administration and third-party databases with automated risk sweeps, and information-sharing hubs. - Adequate resourcing: - Create fiscal space for investments in capacity building, digital infrastructure, recurring maintenance, and cybersecurity. - Plan procurement to avoid vendor lock-in and excessive spending. - International cooperation: - Cross-country information exchange can help uncover and tax hidden wealth and income; success requires enforceability and secure data exchanges. - Coordinate specialized tax measures internationally to limit complexity and unintended spillovers; consider destination-based taxation as a more viable alternative with digitalization. - Inclusion and outreach: - Boost public investment in technological infrastructure and digital literacy. - Ensure harmonization of rules across public agencies, high-quality data maintenance, privacy rule establishment, and measures to ensure digital inclusion. _Italic: fmc2 - Introduction and Chapter 2 excerpts (Fiscal Monitor — Capitalizing on Good Times), International Monetary Fund | April 2018._ ### Introduction ### fmc2 - Introduction ### Overview - Digitalization is defined as the integration in everyday life of digital technologies that facilitate the availability and processing of more reliable, timely, and accurate information. - Fiscal policy (expenditure and tax policies) depends crucially on information about economic actors—their resources, behavior, and transactions—and on data about policy outcomes to inform future policy choices. - Relevant and reliable information is often not available or easy to use, constraining the design, implementation, and evaluation of tax and spending policies; lack of access to information by economic actors can reduce the effectiveness of fiscal policy and generate distrust. ### Opportunities for fiscal policy from digitalization - By reducing the collection and processing costs of information, digitalization can: - Improve implementation of current policies: - Reduce private and public costs of tax compliance and improve spending efficiency. - Digitally facilitate payments and improve compliance through greater access to taxpayer data. - Use better identification and authentication systems (for example, biometric technology) to reduce leakages and the cost of reaching targeted populations. - Enable improvements in governance and fiscal transparency, allowing better public awareness and scrutiny of the budget process. - Increase the range of policy options: - Greater access to information and enhanced digital capabilities open previously unavailable policy options for addressing new challenges, including designing domestic and international tax and spending policies for the digital economy. ### Risks and constraints created by digitalization - Policymakers must: - Navigate unfamiliar territory: - Digitalization can pose a direct threat to tax collection and efficient spending by creating new fraud opportunities (for example, use of cryptocurrencies to accumulate wealth outside the reach of tax authorities or digital identity theft to illegally claim benefits). - Privacy and cybersecurity can become new sources of fiscal risks: digital systems are vulnerable to cyberattacks that can disrupt government functions and jeopardize citizens’ digitally stored private information. - New digital business models and firms with little physical presence in countries where they operate challenge existing international taxation design. - Overcome financing and capacity constraints: - Governments with limited fiscal space may find it difficult to mobilize resources to purchase digital tools and improve cybersecurity. - Small businesses and vulnerable households can be left behind if they have little access to digital tools. - Weak administrative and institutional capacity will be an obstacle to technological adoption. ### The chapter’s approach and questions - The chapter brings together insights from existing literature, new analytical work, country case studies, and lessons from the IMF’s capacity development work. - The chapter addresses: - How digitalization can help governments improve the implementation of current policy, including tax compliance in cross-border transactions and greater spending efficiency through better coverage of income-support programs. - How digitalization can widen the range of policy options, for example, addressing corporate income tax and social insurance challenges posed by increasingly digital business models. - What the risks associated with digitalization are and lessons from country experiences in addressing these challenges. ### Digital transformation of governments — trends and selected statistics - Internet users worldwide reached 3.2 billion at the end of 2015. - More households in developing countries now have access to digital technology, such as the Internet and smart phones, than have access to secondary school or clean water (Figure 2.1). - At the turn of the century, only one-quarter of data were stored in digital form; the ratio rose to more than 95 percent in 2010 and has continued to rise. - Almost all country governments now have national websites and automated financial management systems. - Electronic filing and payments have on average reduced tax-filing time by 25 percent in the five years after a digital system was introduced (World Bank 2016). - Biometric identification example: India’s Aadhaar has more than 1.2 billion registered citizens with a 12-digit unique identification number and biometric information. - Digital adoption is uneven: - Developing countries on average score lower in government digital adoption than advanced economies but are on par in selected areas such as customs administration and financial management. - Country leaders regionally include Estonia, Chile, Singapore, Rwanda, and South Africa. ### How digitalization is used in tax policy and administration - Digital tools enable: - Electronic tax filing, prepopulated tax returns, and verification of customs and business activity (for example, through electronic invoicing). - Improved compliance and enforcement through reconciliation of payments, monitoring real-time revenue collection, audits, and big data to assess taxpayer risks. - Use of electronic transaction information to validate tax collections (for example, VAT). - Country examples: - South Africa: electronic tax submissions, customs declarations, and payments rose from below 20 percent to close to 100 percent over the past decade after modernization and automation. - Estonia: use of big data to identify high-risk and anomalous taxpayer behavior. - China: increasing use of electronic receipts helped authenticate and process tax rebates in the VAT. - Distributed ledger technology and digital mapping have been explored for land registries and property taxation. ### How digitalization is used in public spending and financial management - Digital tools can improve financial management and public spending efficiency by: - Improving delivery of public services, communicating with beneficiaries, and monitoring public servants. - Facilitating dissemination of health and agricultural information via mobile technology. - Monitoring teacher absenteeism with digital devices. - Reducing fraud and corruption through electronic payment systems and facilitating distribution of social benefits. - Managing public sector wage bills using mobile payments to reduce leakages associated with cash payments. - Examples of digital transparency and participation: - Korea: web-based participatory budget system, D-Brain. - Brazil: daily fiscal data on the government’s Transparency Portal. - High-frequency fiscal aggregates can enable real-time macroeconomic analysis. ### What governments can do now: same policies, better implementation - Digitalization can improve implementation of current policies; discussion focuses on three examples: - Cross-border tax compliance problems (international trade fraud and income/wealth sheltered in low-tax jurisdictions). - Digitalization of customs administration and its cumulative impact. - Improving access to entitlements and reducing leakages in income-support programs to address poverty and equity concerns. - Trade-related taxation context: - Trade taxes constitute close to 10 percent of total revenues on average in emerging market and developing economies (Figure 2.5). - Missing trader intra-community fraud (carousel fraud) under the EU VAT system incurs an estimated tax loss of EUR 45–60 billion to the EU annually (4–6 percent of VAT revenues). - How digitalization helps customs and trade compliance: - Improves authenticity, accuracy, and completeness of information via electronically signed cargo manifests, electronic certificates of origin, and secure records. - Blockchain technology could help secure authenticity of submitted information by recording initial submissions and all modifications. - Big data analysis of historical customs transactions enables better risk discrimination and resource allocation for fraud prevention. - Obstacles remain for completeness of information, especially when trade payments involve credit and financial flows linked to the transaction do not sum up to the value of the goods. - Country practices: - French customs are testing data mining methods to detect fraudulent taxpayer behavior. - Estonia Tax and Customs Board is implementing big data analysis to create risk profiles of tax payment transactions for closer monitoring of high-risk transactions. *Italic line: Source: fmc2 - Introduction (fmc2 - Introduction), Fiscal Monitor — Capitalizing on Good Times, International Monetary Fund, April 2018.* ### CHAPTER 2 dIgITAL gOveRNMeNT ### CHAPTER 2 dIgITAL gOveRNMeNT ### Trade misreporting and potential revenue gains from digitalization - Trade fraud leading to tax evasion can be proxied using discrepancies in trade statistics from origin and destination countries (difference between importer reported value—CIF—and exporter reported value—FOB). - Median trade gap ratios (difference between importer and exporter reported values in percent of GDP) in 2016: - AEs: –2.4 percent of GDP - EMEs: (not numerically specified in the excerpt) - LIDCs: –6.6 percent of GDP - Analysis (Annex 2.2) finds a strong positive association between improved digitalization indices and reduced trade reporting gaps, significant after controlling for tariffs, tax rates, level of development, and governance. - Simulation of closing half the distance to the digitalization frontier (reducing the distance by 50 percent) — potential median revenue impacts (2016): - Potential VAT revenue gains (percent of GDP): - LIDCs: 1.7 percent of GDP - EMEs: 1.0 percent of GDP - AEs: 1.0 percent of GDP - EU: 0.5 percent of GDP - Potential tariff revenue gains (percent of GDP): - LIDCs: 0.5 percent of GDP - EMEs: 0.3 percent of GDP - AEs: 0.06 percent of GDP - Caveats: - These results are indicative only; reducing the distance to the digitalization frontier is likely to require significant fiscal resources and removal of institutional barriers. ### Offshore financial wealth, information exchange, and revenue potential - Offshore financial wealth as a share of overall financial wealth has grown substantially over the twentieth century (Figure 2.9). - Digitalization, cryptocurrencies, and fintech may facilitate financial transactions that escape traditional domestic jurisdiction and increase financial opacity (derivatives, shell corporations). - A new global standard for automatic exchange of information was created in 2014 by the OECD and the G20, enabling participating jurisdictions to send and receive digital information on nonresident financial accounts without a specific request (Common Reporting Standard). - Automatic exchange requires standard digital formats, substantial computing power, and secure networks for encryption and access protection. - Estimated offshore wealth and tax revenue potential (2016, 178 countries, Annex 2.3): - Median estimates of offshore wealth by country income group (percent of GDP): - Range across income groups: between 7.6 and 10.7 percent of GDP (median offshore wealth) - Under current policies, estimated maximum potential tax revenue from offshore assets: - Median potential tax revenue: a little more than 0.1 percent of GDP - Median tax base (offshore wealth): 10 percent of GDP - Assumptions and parameters: - Assumed rate of return on financial assets: 8 percent per year - Effective tax rates on wealth and associated capital income flows average 1.8 percent (under the assumptions used) - Note: Halving the assumed rate of return would reduce the effective tax rate from 1.8 percent to 1.2 percent - Policy and administrative considerations: - Increased taxpayer information could enable collection of labor and capital income taxes at source before earnings are transferred to low-tax jurisdictions; sample average labor income tax rates are 30 percent. - Residence-based international taxation of individual shareholders (taxing capital income directly on shareholders) could be strengthened as territorial corporate taxation declines; could be equity enhancing if the base is concentrated among high net worth individuals. - Important implementation challenges remain: - The exchange of information network is porous because not all countries comply; enforceable supra-national sanctions beyond reputational costs are few. - High costs of ICT solutions and institutional barriers are significant challenges for implementing automatic exchange of information. - Administrative and political constraints (limited administrative capacity, political capture, resistance from tax collectors and officials) can limit the realization of revenue potential. ### Key quantitative points summarized - Median trade gap ratios (2016): AEs = –2.4 percent of GDP; LIDCs = –6.6 percent of GDP. - Potential VAT revenue gains from halving distance to digitalization frontier (percent of GDP): LIDCs = 1.7; EMEs = 1.0; AEs = 1.0; EU = 0.5. - Potential tariff revenue gains from halving distance to digitalization frontier (percent of GDP): LIDCs = 0.5; EMEs = 0.3; AEs = 0.06. - Median offshore wealth estimates across countries: between 7.6 and 10.7 percent of GDP. - Median potential tax revenue from offshore assets under current policies: a little more than 0.1 percent of GDP versus a median tax base of 10 percent of GDP. - Assumed rate of return on offshore financial assets used in calculations: 8 percent per year. - Average effective tax rate on wealth and associated capital income flows under assumptions: 1.8 percent. - Sample average labor income tax rates cited as: 30 percent. *International Monetary Fund | April 2018* ### CHAPTER 2 dIgITAL gOveRNMeNT ### CHAPTER 2 dIgITAL gOveRNMeNT ### International cooperation, legal frameworks, and tax transparency - Global Legal Entity Identifier system: more than 1 million legal entities in 221 countries have registered identifiers; individuals eligible only if acting in a business capacity, limiting use for identifying beneficial ownership. - Limitations and concerns: - Central depositories often record only names of intermediaries, not ultimate owners of securities. - Privacy and security concerns over data exchanges, especially in countries with weak administrative capacity. - Without international cooperation, fiscal and regulatory competition can create systematic loopholes. - Policy and reform implications: - Cooperation is necessary for a comprehensive, enforceable, and equitable system, but other reforms are also required. - Significant changes to domestic legal frameworks are needed—for example, comprehensive financial information should be shared between tax authorities and financial regulatory bodies. - Governments may need to consider making changes to tax policy rates to enhance credibility and enforceability of information exchange systems. - Enforceability may require noncompliance penalties such as withholding on resident-country-sourced payments or withholding taxes levied by host countries. - Comprehensiveness requires cross-validation of data between tax authorities and central security depositories globally. - Equity consideration: reciprocity should not be required for developing countries at an early stage if compliance costs are initially too high. - Offshore financial centers and jurisdictions labeled as tax havens should implement strong governance, financial supervision, due diligence, and AML/CFT systems, and strengthen frameworks for international cooperation and transparency through exchange of information. - From an AML/CFT perspective, these jurisdictions are encouraged to make tax crimes a predicate offense to money laundering. - Conclusion: Digitalization alone is not sufficient to curb tax evasion to low-tax jurisdictions; at current tax rates, potential revenue gains from improved digital information exchange on cross-border financial income and wealth holdings are limited and concentrated in advanced economies. A comprehensive and collaborative reform of domestic and international tax systems is necessary to capture full transparency potential. ### Strengthening social protection coverage: leakage and take-up concepts - Definitions clarified: - Take-up: eligible population of individuals who receive income support. - Coverage: population who receive income support regardless of eligibility. - Leakage: noneligible population who receive income support. - Two types of errors that cause benefits not to reach intended beneficiaries: - Exclusion errors → non–take-up (eligible individuals do not, or only partially, receive benefits). - Inclusion errors → leakage (individuals receive benefits to which they are not entitled). - Sources of leakage and non–take-up (taxonomy): - Leakage often stems from identification and verification problems: - Difficulty identifying beneficiaries or existence (ghost beneficiaries). - Inability to verify eligibility criteria or benefit amounts, leading to fraud and misallocation. - Take-up issues arise from complexity and lack of awareness: - High transaction costs to apply or receive benefits (lengthy forms, unclear links to other assistance, multiple interlocutors, limited access, absence of distribution networks). - Lack of awareness about programs prevents eligible households from applying. ### Magnitude and macroeconomic impact of leakage and non–take-up - Sizable scale: - In middle- and low-income countries, undercoverage of households at the bottom of the income distribution and coverage of households at the top are sizable, indicating considerable leakage and non–take-up. - One-third of total spending on means-tested assistance programs in the EU is given to the top six income deciles (sign of leakages). - Dubois and Ludwinek (2015): most conservative estimates of non–take-up rates of monetary benefits in European countries are greater than 40 percent, irrespective of benefit types. - Fiscal and economic effects: - Leakages in developing countries crowd out resources for eligible beneficiaries and growth-enhancing spending such as health and education. - India (2012): an estimated 36 percent of total spending on the Public Distribution System never reached intended households because of ghost beneficiaries and illegal diversion. - Non–take-up can amplify macroeconomic volatility: Kettemann (2017) shows non–take-up of unemployment benefits in Austria (about half of eligible unemployed workers) leads to a 15 to 30 percent increase in volatility. - Data limitations: data on undercoverage of the poor are scarce for middle- and low-income countries; charts use available program targeting as first approximations. ### Digital solutions: country case studies and outcomes - Overview: governments have used digital tools to reduce leakages (unique identification of beneficiaries) and increase take-up (identify enrollment barriers, implement outreach). - India — LPG subsidy reforms: - Problems before reform: dual pricing system enabling diversion of subsidized LPG to commercial markets; inability to authenticate beneficiaries; proliferation of ghost beneficiaries and duplicate claims; inability to verify reported distribution by dealers. - Digital reforms: - From 2013, beneficiaries’ Aadhaar numbers linked to LPG program to prevent ghost beneficiaries and multiple claims. - Government eliminated the dual pricing system and made electronic transfers of the subsidy directly to Aadhaar-linked bank accounts of beneficiaries, bypassing dealers. - Estimated effects: - Depending on assumptions and expression (reduction in total transfers or wrongful payments), estimated savings from digitalization range between 0.2 and 21 percent of cash transfers and 11 to 24 percent of wrongful payments. - Caveats: Aadhaar use coincided with termination of dual pricing and reduction in world natural gas prices; data limitations and lack of assessment frameworks constrain ex post evaluations. - Privacy/security issues: alternating mandatory and nonmandatory use of Aadhaar in social programs; pending court decision on compliance with right to privacy; reported data breach compromising 135 million Aadhaar numbers. - South Africa — social grant payments: - Problems before reform: paper-based proof-of-life burdens, limited banking access, high-cost cash payments leading to fraud and beneficiary lock-in to pay points. - Digital reforms (2012): - Re-registration of all social grant beneficiaries. - Introduction of a biometrically secured debit card as payment platform and sole identification instrument. - Monthly proof-of-life via fingerprint or voice verification. - Outcomes: - Eliminated 850,000 ghost beneficiary and duplicate accounts. - Reduced monthly per-beneficiary administrative costs by 50 percent. - Gross fiscal savings of R2 billion (US$194 million) during 2013/14. - Caution: lack of proper controls for private intermediary led to allegations of corruption and improper use of beneficiary data and sales of financial products. - France — increasing take-up of complementary health insurance (ACS): - Context: 95 percent of social pensioners eligible for ACS but only 50 percent take it up; low take-up increases public health spending by about 30 percent because delayed care leads to higher bills. - Barriers: complex application process and lack of awareness. - Digital reforms (2013): - Systematic data exchange between local health and old-age administrations. - Old-age administration provided identifying information on social pensioners to health administration. - Health administration targeted potential beneficiaries with either a simplified ACS application form or an ACS check ready to cash upon purchase. - Outcomes: - Increase in take-up of 22 percent with the simplified application form and 50 percent with automatic enrollment. - Limitations: even after automatic checks, beneficiaries sometimes fail to purchase complementary insurance, indicating need for direct human intervention to address information gaps and social isolation. - Belgium — OMNIO medical reimbursement take-up: - Context: non–take-up rate estimated at 60 percent in 2011 for eligible low-income households. - Barriers: complicated means-tested and categorical eligibility assessment scattered across administrations. - Digital reforms (2014): - Harmonized and simplified eligibility criteria and application process to enable data exchange between tax authorities, national office for sickness and disability, and health insurance funds. - Health insurance funds can automatically enroll households already receiving a social benefit and proactively reach out with simplified application forms to households potentially below income thresholds. - Preconditions for success: harmonization of rules across public agencies, creation and maintenance of high-quality data, setup of privacy rules, and ensuring digital inclusion. - Risks: digital inclusion issues and technical failures (e.g., faulty Internet connectivity in India led to nonpayment of benefits to eligible households). ### Lessons and implementation challenges from country experience - Attribution and evaluation: - Difficult to isolate the effect of digitalization from concurrent macroeconomic and policy changes; data limitations and lack of proper assessment frameworks limit ex post evaluations. - Privacy, security, and governance: - Need for strong privacy and security controls when implementing large identification programs. - Examples of failures: alleged improper use of beneficiary data by private intermediaries in South Africa; Aadhaar privacy and security controversies in India. - Recent reported Aadhaar breach: 135 million Aadhaar numbers compromised, underscoring importance of sound privacy measures. - Digital outreach limitations: - Digital tools alone may be insufficient to secure take-up; beneficiaries may need direct human assistance to choose plans or overcome social isolation and disability. - Technical and policy preconditions: - Harmonization of rules across public agencies, high-quality data maintenance, privacy rule establishment, and digital inclusion are crucial for successful rollout. - Ensuring digital inclusion is necessary to prevent exclusion of genuine beneficiaries; example: faulty Internet connectivity in India led to nonpayment of benefits to eligible households. *Source: IMF staff, CHAPTER 2 dIgITAL gOveRNMeNT (Fiscal Monitor — April 2018).* ### 1. France2. Belgium ### 1. France2. Belgium ### Digital solutions and take-up outcomes - In France, digital exchange of information between agencies and automatic enrollment helped increase take-up in a local experiment (ACS). - In Belgium, automatic enrollment and proactive outreach to low-income households increased uptake of a medical benefit (OMNIO). - Note: Arrows in the source indicate the direction of improvements following the implementation of digital solutions. ACS = Aide à la Complémentaire Santé; OMNIO = medical reimbursement topping up the public health insurance system in Belgium. ### Addressing new fiscal challenges from digitalization Findings - Digitalization may improve tax compliance and spending efficiency under current policies but can create a case for policy change when lack of information previously prevented better policies or when new challenges arise. - New economic trends: emergence of digital businesses (giants such as Amazon, Apple, Google; and P2P platforms typified by Airbnb and Uber) are an integral part of the global economy and pose fiscal challenges. - Cross-border nature of digital activities may force new thinking on the international tax architecture; expansion of digital platforms may call for a new fiscal policy approach to income insurance. Key features of archetypal digital companies and tax implications - High profitability - Some digital companies combine first-mover advantage with strong network effects, giving rise to a natural monopoly. - High profit provides an attractive tax base; need for more effective taxation of rents wherever they arise. - Heavy reliance on intangible assets - Relevant intangibles include algorithms and data used to generate value (for example, personalized advertising). - Tax problems: ease of locating intangibles in low-tax jurisdictions and difficulties in valuation. - Not unique to digital companies (pharmaceuticals are also highly intensive in use of intangibles). - Responses: G20-OECD BEPS action items and US tax reform adoption of minimum taxation for foreign income deemed to derive from intangible assets (Global Intangible Low-Taxed Income). - Sales with little or no physical presence - Under current rules, taxable presence requires sufficient physical presence (permanent establishment). - Foreign digital companies often sell directly to citizens with little or no physical presence and thus may not be liable for corporate income tax in that country. - This raises debate on allocation of taxing rights and attribution of income to destination country. - User-generated value - Users generate commercially valuable information (even passively) that can be used to tailor products and sell targeted advertising. - Not unique—many firms collect customer data—but the role of user-generated value in taxing rights is controversial. Implementation and policy considerations - The core question: Can taxation of activities increasingly reliant on digital capabilities be accommodated within existing international arrangements or do they require modification? - If user-generated value is used to grant destination/market-country taxing rights, permanent establishment rules would need expansion. - Practical feasibility concerns: Distinguishing sales involving user-generated value from those that do not, given nearly all sales generate commercially valuable information. - Income allocation challenges: How much income should a globally operating platform assign to a particular country based on acquired user data? - Market valuations for user-generated data typically do not exist. - Services provided without an explicit price create barter-like issues where customers provide information in return for services. - Policy responses observed and their fiscal impact - Australia and the United Kingdom: special taxes on profits considered artificially diverted to other countries (diverted profit taxes). - India and Italy: levies on certain online transactions (equalization levy in India; web tax in Italy). - India has proposed expanding the definition of permanent establishment in domestic law. - Diverted profit tax in the United Kingdom raised £138 million in 2016/17 (plus an estimated £143 million in ordinary corporate tax because of behavioral changes); the Italian web tax is estimated to yield EUR 190 million. For both, this is approximately 0.6 percent of corporate tax revenue. - Coordination recommendation: If countries continue to adopt specialized measures, they should be (1) internationally coordinated, at least in broad design, to limit complexity and unintended spillovers; and (2) consistent with a longer-term vision on the international tax architecture. ### Social insurance and digital platforms Findings on labor market trends - Alternative work arrangements increased in major economies: - United States: alternative work arrangements increased by nearly 50 percent between 2005 and 2015, from more than 10 percent of the workforce to close to 16 percent, representing 94 percent of the net employment growth over the period (Katz and Krueger 2016). - United Kingdom: between 2011 and 2017, alternative work arrangements increased faster than full-time and wage-earning employment—about 30 percent for agency workers and 300 percent for zero-hour contracts (Coyle 2017). - Platform participation indicators - Between 2015 and 2016, 8 percent of adults in the United States earned money on digital platforms (Smith 2016). - In the United Kingdom, an estimated 3 percent of the workforce is providing services on digital platforms (Coyle 2016). - Empirical examples: number of US users of ride-sharing services increased from 8.2 million in 2014 to 20.4 million in 2020; Didi Chuang claims 250 million users in 360 Chinese cities. Upwork employers billing per quarter increased by more than 800 percent between 2009 and 2013. Implications for social insurance - Alternative work arrangements and platform work are associated with greater income volatility, lower weekly pay, fewer and less predictable hours, and reduced social insurance coverage compared with full-time wage employment. - Platform work can mitigate downsides by facilitating income smoothing and flexibility; many workers supplement primary job income through platform work. - Social protection traditionally associated with wage employment is often not available to self-employed digital workers. - Private insurance markets are limited by adverse selection and moral hazard. Policy options and recommendations - Labor regulation debate: treating digital workers as employees would obligate platforms to provide social insurance (for example, paid sick leave) but could reduce flexibility that platforms currently offer. - Fiscal policy instruments may be needed to address social insurance needs directly: unemployment benefits, access to health care, and pensions. - Possible measures: - Reduce or eliminate minimum income thresholds for social insurance. - Introduce contributions based on a percentage of income for platform workers. - Platforms as information sources: - Platforms collect transaction and wage data (they charge a commission based on transactions). - Platforms can report earnings to tax administrations and potentially withhold taxes and contributions (see Box 2.5 referenced in source). ### Barriers to successful digitalization: lessons from country experience Digital exclusion - Digitalization requires majority access by individuals, firms, and governments; lack of access creates a “digital divide” and may impose disproportionate burdens on small businesses and vulnerable households. - Global access statistics and concern: - More than half of the world’s population does not have access to the Internet, particularly in developing countries. - Fewer than half of the population of Africa subscribes to a mobile phone (GSMA 2017). - Risks of exclusion: - Eligible beneficiaries may be mistakenly excluded from payments due to technical reasons. - Governments risk falling behind private actors rapidly adopting digital tools, jeopardizing tax collection and spending efficiency. Policy responses to mitigate digital exclusion - Boost public investment in technological infrastructure and digital literacy to facilitate digital inclusion (World Economic Forum 2017). - Prioritize flexible digital platforms compatible with continuous upgrades and innovation to expand coverage. - Examples of flexible digital platforms: X-Road in Estonia; G-pay in Kenya (noted as being compatible with multiple information systems enabling firms, households, and government agencies to access common digital information). *Source: IMF staff; Fiscal Monitor — Capitalizing on Good Times, April 2018.* ### 3.2 billion ### fmc2 - 3.2 billion ### Key findings on risks from digitalization - Non-Internet users: 4.2 billion; Countries outside of the top 10, 1.6; Pakistan, 0.2; "3.2 billion" (as reported in the source fragment). - Fraud and evasion risks increase with digitalization: fraudsters can create large numbers of ghost entities and multiple small credit claims that fall below audit thresholds; retailers use software (for example, Zappers) to suppress electronic sales and evade taxes; decentralized cryptocurrencies enable transactions without traceable footprints. - Specific incidents and indicators: - Cyber intrusions: in 2015 the Office of Personnel Management of the United States identified a cyber intrusion that potentially compromised the personal information of 4 million people. - Ransomware and system disruption: May 2017 cyberattack on the National Health Service in the United Kingdom disrupted public health services. - Coordinated attacks in 2015 resulted in a blackout affecting 225,000 residents in Ukraine. - Public trust concerns: 65 percent of respondents in a poll in Germany, the United Kingdom, and the United States believed their governments abuse their power to access information on citizens; in a 2015 US survey less than a third of respondents were confident the government could keep their records secure. - Governments face limits to rapid scaling of countermeasures; as fraud opportunities evolve and become more complex it becomes harder to stay ahead. ### Resource, budget, and capacity implications - Example cost estimates and budgetary magnitudes: - Aadhaar implementation and maintenance in India: about US$1.5 billion or $1.25 per card between 2009 and 2017. - Other electronic identification systems: US$3 to US$6 per enrollee (comparative figure). - Low-income country estimate to establish a national biometric identification system: 0.6 percent of GDP, with maintenance costs of 0.1 percent of GDP annually. - Estonia spends approximately US$67 million (0.3 percent of GDP) per year on its digital platform. - Korea cumulative budget on e-Government between 1996 and 2002: 1.3 percent of GDP. - Deloitte estimate: 2015 present value cost of digitalizing customer transaction services for Australian federal and state governments could reach US$ 4.6 billion (0.4 percent of GDP). - OECD-country government digitalization unit budgets: represent 0.04 percent of total public expenditure on average. - US federal cybersecurity unclassified spending estimate in 2016: at least US$28 billion (0.2 percent of GDP). - Mobilizing adequate resources requires creating fiscal space for technology purchases, data storage, cybersecurity experts, and recurring maintenance costs. - Administrative and institutional capacity constraints can limit adoption; political commitment and parallel institutional reforms are critical for successful outcomes. - Excessive spending risks arise from weak procurement procedures and vendor lock-in on proprietary technologies. ### Country case studies: South Africa and Estonia (revenue administration) - South Africa — reforms and impact: - SARS implemented IT-led automation and centralization during 2001–06 and modernized administrative processes starting in 2006. - VAT compliance gap: decreased from 30 percent of potential VAT in 2002 to 5 percent in 2012. - Service improvements by 2016: - 95 percent of personal income tax refunds were paid within 72 hours. - 55 percent of value-added tax refunds were paid within 48 hours, up from 3 percent in 2006. - 95 percent of personal income tax assessments were made within 3 seconds (down from 180 days in 2006). - More than 90 percent of customs transactions were processed in less than 22 minutes. - Digitalization contributed to improved revenue growth, service levels, and reduced costs, but improvements cannot be attributed to digital tools alone without supporting reforms and leadership. - Digital inclusion challenge: almost half of South Africans do not use the Internet (International Telecommunications Union data). - Estonia — reforms and impact: - The Estonia Tax and Customs Board (ETCB) moved all tax processes online and integrated micro-data from taxpayer returns and other government departments to produce risk profiles. - 2014 mandatory transaction-level e-filing for VAT and automated data matching to combat missing trader intra-community (MTIC) fraud; mandatory e-filing of purchase and sales invoices allowed automatic matching of input tax credit claims against output tax payments. - Compliance gap evolution: - 2013: 14 percent of potential VAT. - 2014: 9 percent of potential VAT. - 2015: 5 percent of potential VAT. - Challenges: online registration and filing enable fraudsters to rapidly create many entities and test risk-profile parameters by submitting multiple declarations, leading to collective yields from many small claims with low individual detection risk. ### Policy implications and recommendations - Comprehensive reform agenda: - Digitalization is not a substitute for administrative capacity, institution building, or structural reform; success hinges on parallel reforms and an overall reform strategy. - Examples: South Africa paired digital tax administration with initiatives to improve tax compliance; India combined digital tools with pricing reforms to reduce LPG subsidy leakages. - Risk mitigation: - Governments must address privacy, cybersecurity, and fraud risks to maintain trust and program effectiveness. - Tools include biometric identification systems, merged administration and third-party databases with automated risk sweeps (for example, HM Revenue and Customs’ Risk and Intelligence Service Connect), and information-sharing hubs (for example, Australia’s Cyber Security Centre). - Adequate resourcing: - Create fiscal space for investments in capacity building, digital infrastructure, recurring maintenance, and cybersecurity. - Recognize substantial and recurring costs and plan procurement to avoid vendor lock-in. - International cooperation: - Cross-country information exchange can help uncover and tax hidden wealth and income; success requires enforceability and secure data exchanges. - The scale of cross-border activities may necessitate coordination on corporate taxation to avoid unintended spillovers, tax competition, and double taxation. - Destination-based taxation has become a more viable alternative to source-based taxation with digitalization. _Italic: Excerpt from Chapter 2, "Digital Government," Fiscal Monitor — Capitalizing on Good Times, International Monetary Fund | April 2018._ ### Box 2.1 (continued) ### Box 2.1 (continued) ### Digitalization and Property Taxation: potential and constraints - In many developing countries, property taxes are only a small fraction as a percentage of GDP compared with revenues from this source in advanced economies. - There is widespread recognition that the revenue potential of urban property taxation in developing countries is significant (Franzsen and McCluskey 2017). - Key constraints to property tax collection in developing economies: - Coverage of taxable properties is low. - Tax assessors inaccurately assess the value of property assets and the associated tax bill. - Tax administration is weak. - Paper-based record-keeping facilitates the falsification of data. - Catching up with best practices requires improved identification of property parcels and buildings, registration of ownership, and geographic mapping in a central fiscal cadaster. ### Digital mapping technologies and fiscal cadastres - Satellite imagery and GIS can: - Identify and map all taxable properties within jurisdictional boundaries. - Support tax administration cost-effectively as the “eye from the sky” will not easily miss expansion in capital improvements for a property parcel. - Complement door-to-door field surveys on nature, usage, construction type, number of floors, and age of buildings. - Enable digitized maps with GPS coordinates to be compared with current property registers, often revealing substantial information gaps. - Accelerated property tax collection becomes possible even if a central (legal) cadaster of all registered properties has not yet been established. - Where valuation capacity for tax assessment is weak, digitalization could facilitate the application of area-based property taxes that assign values based on physical attributes as a simplified formula approach, avoiding complexities of a value-based property tax based on annual rental value. ### Country experiences and examples - Indian municipalities have used satellite imagery to map properties and integrate this into a GIS (Kumar 2012). - Greece (2010): satellite photos revealed substantially more pool ownership than taxpayers reported when taxpayers were asked to tick a box indicating pool ownership; this illustrated technology’s value against tax evasion. - United States examples: - Big data is used to identify residency and multiple property ownership to prevent fraudulent or improper tax payments. - Anne Arundel County, Maryland: a pilot combining aerial imagery and property tax data doubled the number of inspected properties. - Louisiana (one parish, 2014): aerial imagery identified 6,000 property improvements not on the tax rolls, raising a further US$18.1 million in tax. ### Digitalizing government payments: scope and estimated savings - For a sample of seven emerging market economies (Brazil, China, India, Indonesia, Mexico, Nigeria, and South Africa) representing 61 percent of developing-country GDP, Lund, White, and Lamb (2017) estimate: - Average share of digital payments is 55 percent of the volume of government expenditures and 41 percent of the volume of government receipts. - These compare to averages of 95 percent and 70 percent, respectively, in advanced economies. - Lund, White, and Lamb (2017) identify three main sources of savings from digitalizing government payments: - Reducing leakages. - Limiting fraudulent payments and tax evasion. - Reducing the costs of processing payments within the government. - Assumptions used in their estimates: - For government payments to individuals, 15–25 percent of the total value of payments is lost to leakage and fraud. - For government payments to businesses, leakage rate is between 5 and 15 percent. - For payments from individuals and firms to government, assume that 5 percent of payments are lost to bribery. - Savings from reductions in processing costs are estimated at $0.50 to $1.20 per transaction. - Aggregate estimated impact: - Digitalizing government payments in developing countries could save roughly 1 percent of GDP, or about $220 billion to $320 billion in value each year. - This is equivalent to 1.5 percent of the value of all government payment transactions. - Roughly half of these savings would accrue directly to governments and help improve fiscal balances, reduce debt, or finance priority expenditures; the remainder would benefit individuals and firms as government spending would reach intended targets. - The estimates exclude potential additional benefits from improved public service delivery, wider use of digital finance in the private sector, and reduction of the informal sector. ### Real-time fiscal data and nowcasting economic activity - Consolidation of government banking arrangements and automation of public finance systems mean real-time daily fiscal data exist in many countries. - Two main uses of real-time fiscal data: - Enhance monitoring of revenue and expenditure aggregates for fiscal surveillance and management. - Enhance forecasting of economic activity (nowcasting), especially where national accounts statistics are poor or delayed. - Example (United States): - Daily payroll tax indicators (60-day and 180-day cumulative sums, moving average) mirror key features of the US business cycle proxied by a seasonally adjusted indicator of industrial production. - The peak of the recession in 2009 is picked up by payroll tax indicators with a lag of only a few weeks relative to the industrial production benchmark. - Drawbacks of nowcasting with fiscal data: - Data reflect noise and seasonality. - Data are largely unaudited and mostly reflect cash-based transactions only. - Conclusion: strong case for wider use of real-time fiscal data in governments and multilateral institutions as it will require some automation and has potential to disrupt current surveillance practices. ### P2P economy, small-business taxation, and the role of platforms - Expansion of peer-to-peer (P2P) platforms raises questions about regulation, taxation, scale, scope, and fairness relative to traditional businesses. - Small-business dimension: - Growth in P2P workers/sellers increases the number of unincorporated small businesses at lower income levels. - Small businesses commonly account for less than 15 percent of domestic tax collections and often much less in low-income countries (IMF 2015). - Taxing large numbers of small businesses poses higher compliance costs and potentially more distortionary effects. - Policy trade-offs: - Governments could consider lowering direct and indirect tax thresholds to bring more small-business activity into the tax system, but this risks higher noncompliance and administrative costs. - Reclassifying P2P sellers as employees would alter these considerations. - Special tax rules for small businesses can help, but the growth of P2P activity could amplify distortions or render special rules obsolete over time. - Platforms as tax-administration partners: - P2P platforms record transaction data that governments can access to alleviate information constraints, strengthen enforcement, and better quantify previously misreported or undocumented activity. - Example precedent: Estonia allows P2P sellers on certain platforms to opt to have their incomes automatically reported to the tax authority. - Platforms can withhold and remit single-stage indirect taxes (Airbnb’s role in withholding and remitting hotel taxes in several countries). - Withholding for direct (income) taxes is more difficult because P2P sellers often use multiple platforms and have multi-stream incomes; end-of-year reconciliation could help but at the cost of simplicity. - Policy choices vary by country: some may aim for tax neutrality between P2P and traditional businesses; others may offer incentives to encourage P2P activity (for example, the United Kingdom introduced an allowance for income earned from online trading). *International Monetary Fund | April 2018* ### Box 2.5 (continued) ### Box 2.5 (continued) ### Annex 2.1. The Digitalization of Public Finances: Country Case Studies — Estonia - Reform Efforts - Estonia provides 99 percent of state services online. - Crucial components: digital identification and a digital data exchange system (X-Road). - Digital identification card: mandatory for all citizens; electronic chip with two pin codes for authentication and signing; used as national health insurance card, proof of identification for banking services and digital signatures, to check medical records, for e-prescriptions, and for submitting tax claims. - X-Road: foundation of the e-government; based on blockchain technology; secure Internet-based data exchange layer enabling public and private information systems to communicate and exchange data; institutions apply to join X-Road to access services such as client authentication, authorization, registry services, query design services to state-managed data repositories and registries, and secure data exchange. - Estonian Tax and Customs Board (ETCB): first government body to introduce e-services; all tax and customs declarations can be filed online; system prepopulates forms using data integrated through X-Road; companies can declare corporate income tax and social contributions. - E-health records and e-prescriptions introduced in 2010: centralized national database; patients access medical history and prescriptions via digital identification card. - E-school (introduced in 2003): online communication system among parents, teachers, and children for grades, attendance, homework, evaluations, and administrative reports. - Impact - X-Road serves 52,000 organizations as indirect users and handles about 500 million queries each year. - Government estimate for 2017: use of digital technology and e-services saved more than 1,172 years of working time. - Two-thirds of the population uses the digital identification card regularly. - Digital signatures save five days per year. - About 95 percent of taxes are filed online and each filing takes on average about three minutes. - ETCB’s collection efficiency: spending 40 cents to collect EUR 100 in taxes (OECD 2015c). - E-health record receives 800,000 queries per year by doctors and patients; 97 percent of patients have digital records, and 99 percent of all prescriptions are digital. - E-school is used by 85 percent of schools and has more than 200,000 active users—15 percent of the population. - Risks and Challenges - New opportunities for fraud have materialized in tax administration. - Cybersecurity concerns following the 2007 cyber-attacks prompted Estonia to develop protections and scalable blockchain technology to mitigate security risks. - Government plans to establish a data embassy housed in Luxembourg for disaster recovery to reboot the country in the event of a cyberattack. - Legal acts (for example, the Personal Data Act (1996)) provide basis for security and privacy protection of data stored in government repositories. *International Monetary Fund | April 2018* ### Annex 2.1. The Digitalization of Public Finances: Country Case Studies — India - Reform Efforts - Central government implemented several digital platforms to overcome leakages in subsidy schemes; the “JAM trinity” has three pillars: - Jan Dhan: promotes financial inclusion and facilitates delivery of social benefits directly to bank accounts. - Aadhaar: biometric identification system providing each citizen a 12-digit unique identification number with demographic and biometric information (fingerprint and iris scan); 1.2 billion residents enrolled. - Mobile network: covers more than 1.16 billion phones and serves as an effective service delivery platform. - Under Jan Dhan, bank accounts linked to Aadhaar to enable direct electronic payments for schemes including Direct Benefit Transfer for LPG subsidies, the Public Distribution System for rice and wheat, and the Mahatma Gandhi National Rural Employment Guarantee Act program; in 2008 wage payments and job applicants were digitalized by linking job cards to Aadhaar. - Public procurement: e-procurement and the Central Public Procurement Portal (launched October 2012); threshold set at Rs 1 million (US$58,000) in 2012 and lowered to Rs 0.2 million (US$11,600) in 2016; all ministries required to use e-procurement. - Tax collection: e-filing introduced in 2007; mandatory for firms requiring statutory audit and individuals with income above a threshold (Rs 0.5 million (US$29,000)); most central government taxes are filed and deposited electronically; in 2017 Permanent Account Number required to be linked to Aadhaar for processing income tax returns; 2017/18 introduced goods and services tax with a single portal through the Goods and Services Tax Network. - Impact - Assessing digitalization effects is challenging; estimates of reductions in leakages vary: - Prime Minister (2015) and Ministry of Petroleum and Natural Gas (2016/17) report savings about Rs 150 billion (US$ 2.54 billion; 22 percent of major cash transfers) for 2014/15 from LPG reform. - Comptroller and Auditor General of India (2016) estimates savings about US$ 270 million (2 percent of major cash transfers). - Clarke (2015) estimates around US$22 million (0.2 percent of major cash transfers). - Ministry of Finance, Government of India (2016) estimates a reduction in leakages of 24 percent. - Barnwal (2016) estimates a reduction in fuel diversion of 11–14 percent. - Public Distribution System savings by 2016: Rs. 140 billion (US$ 2.1 billion) reported by government (18 percent of major cash transfers) attributed to deletion of 23 million ration cards and better targeting. - Mahatma Gandhi National Rural Employment Guarantee Act program: Ministry of Finance (2017) reports Rs 76 billion (US$1.2 billion and 11 percent of cash transfers) saved by 2015/16 due to Aadhaar integration and digitalization of payments; in 2016/17, 9.3 million fake job cards were deleted; randomized rollout experiment in Andhra Pradesh for 19 million people finds leakages reduced by 41 percent relative to the control mean (Muralidharan, Niehaus, and Sukhtankar 2016). - Aadhaar costs: Unique Identification Authority of India reports cumulative expenditures between 2009 and 2017 of Rs 87.9 billion (about US$1.5 billion), implying a cost of US$1.25 per generated Aadhaar card (compared to US$3 to US$6 for other systems). - Risks and Challenges - Controversy over Aadhaar’s effect on leakages and limits related to Internet availability and authentication failures: - Household survey in Rajasthan: 4 percent reported inability to authenticate in a timely manner or at all. - Jharkhand survey: exclusion errors mainly due to fingerprint recognition problems and limited Internet connectivity. - Supreme Court ruled that Aadhaar can only be mandatory when citizens owe funds to the government (such as tax payments) but not in the distribution of social benefits. - Privacy and security concerns: Supreme Court ruling in mid-2017 affirmed privacy as a fundamental right; reported data breach affecting 135 million Indians when service providers misused access to steal identity information; lack of sufficient security controls makes the system vulnerable. *International Monetary Fund | April 2018* ### Annex 2.1. The Digitalization of Public Finances: Country Case Studies — Kenya - Reform Efforts - M-Pesa introduced in 2007: mobile-phone based money transfer service enabling transfers, deposits, withdrawals, bill payments, small savings and investments, and tax payments; spurred financial inclusion and formal inclusion among women. - Adult population served by financial services increased from 27.4 percent in 2006 to 75.3 percent in 2016 (Ndung’u 2017). - Tax administration: iTax (introduced 2013) provides integrated and automated administration of all domestic taxes; taxpayers register with unique personal identification number, file and pay taxes, and monitor tax status; commercial banks and M-Pesa integrated into iTax. - Excise enforcement: rollout of excisable goods management system to track and trace stamped and unstamped products through the supply chain to prevent smuggling and misreporting; helps manage stock and inventory and prevent theft of stamps (African Tax Administration Forum 2016). - Customs administration: since 2017 rollout of the Integrated Customs Management System to replace SIMBA; objectives include consolidating customs cargo clearance processes, automated valuation benchmarking, automated release of green-channel cargo, importer validation and declaration, and two-way iTax integration to monitor domestic tax declarations (Gitaru 2017). - Regional Electronic Cargo Tracking System (launched early 2017) monitors transit cargo along the north, connecting Kenya with Uganda and Rwanda, expected to reduce or eliminate customs revenue leakage. - Public financial management: e-Procurement launched in 2014 for submitting and evaluating procurement applications (currently used for simpler procurements with plans to extend coverage to all government entities); Electronic Project Monitoring Information System (e-Promis) introduced in 2009 to coordinate development efforts, harmonize project delivery, measure project performance, strengthen accountability, and manage project resources. - Impact - iTax has strengthened coverage and reduced costs of tax collection, simplified tax-filing, increased customer satisfaction, and reduced compliance costs. *International Monetary Fund | April 2018* ### introduction, the expanded tax base and administra- ### fmc2 - introduction, the expanded tax base and administra- ### Digitalization and tax collection: examples and outcomes - iTax increased tax compliance levels while reducing human error and fraud vulnerabilities through comprehensive automation. - The number of steps for corporate income tax filing decreased from 59 to 16 (African Tax Administration Forum 2016). ### Risks and challenges of digitalized administration - System vulnerabilities from cybercrime, data theft, and performance challenges. - Need to build a workforce with adequate skills. - Need to ensure proper network coverage. - Challenge of increasing adoption of digital platforms in a population with relatively low computer literacy. ### Annex 2.2 — Estimating the impact of digitalization on tax evasion from cross-border fraud: approach - Dependent variable: trade gap defined as (V_xmt^m − V_xmt^x) / ((V_xmt^m + V_xmt^x) / 2), where V_xmt^m is imports reported by the importer and V_xmt^x is exports reported by the exporter (trade gap can range from 2 to –2). - Estimation strategy: gravity-model framework with importer and exporter observable characteristics (Z_xmt^m and Z_xmt^x), bilateral cost proxies Z_xm^σt (distance, common borders, languages), year fixed effects a_t, country-pair fixed effects a_xm, and controls including GDP, GDP per capita, inflation, exchange rates, regional trade agreement membership, GATT/WTO membership, and governance indicators. - Main regressor of interest: United Nations Online Service Index (normalized between 0 and 1) as a proxy for digitalization (available since 2003). - Data sources include IMF Direction of Trade Statistics, World Economic Outlook, World Development Indicators, IMF Fiscal Affairs Department Tax Database, CEPII Gravity Dataset, World Governance Indicators, and UN E-Government Survey. ### Annex 2.2 — Main regression results (selected coefficients and diagnostics) - Im.Digitalization Index coefficient estimates across specifications (from Annex Table 2.2.3): - Specification (1) OLS (EU): 0.186 (standard error 0.107) - Specification (2) TSLS-1 (EU): 1.284 (0.505) - Specification (3) TSLS-2 (EU): 0.841 (0.436) - Specification (4) OLS (All): −0.069 (0.036) - Specification (5) TSLS-1 (All): 1.181 (0.575) - Specification (6) TSLS-2 (All): 1.733 (0.937) - Ex.Digitalization Index coefficients: 0.383*** (0.13) in (1); 0.703 (0.53) in (2); 0.304 (0.44) in (3); 0.066* (0.038) in (4); 0.054 (0.701) in (5); −0.982 (0.927) in (6). - Selected control variable signs and significance (examples from table): - log Im.GDP: 0.385 (0.61) in (1); 1.570* (0.827) in (2); 1.227* (0.721) in (3); −0.370*** (0.114) in (4); −0.831*** (0.191) in (5); −0.861*** (0.221) in (6). - Importer VAT rate: −0.004 (0.008) in (1); −0.029** (0.014) in (2); −0.020 (0.013) in (3); 0.005 (0.004) in (4); 0.003 (0.007) in (5); 0.004 (0.009) in (6). - Exporter corruption control: 0.121*** (0.029) in (1); 0.155*** (0.059) in (2); 0.166** (0.071) in (3). - Sample sizes and fit: - Number of observations: 716 (specifications 1 and 2), 670 (3), 36,626 (4), 13,318 (5), 10,944 (6). - R^2 reported for select specifications: 0.060 (specification 1), 0.013 (specification 2). - Instrument diagnostics (TSLS specifications): - F-stat (first stage) reported as: 13.05, 26.45, 16.34, 17.24 (values listed in table footnote row "F-stat (first stage)"). ### Annex 2.2 — Identification, instruments, and robustness - TSLS instruments: - Method 1: country-level R&D intensity (R&D expenditure in percent of GDP). - Method 2: measure of R&D efficiency, the ratio of patents to R&D intensity. - Exclusion restriction: instruments assumed uncorrelated with the trade gap conditional on macro controls such as GDP and GDP per capita. - Robustness: - First-stage Kleibergen-Paap F statistics exceed Stock and Yogo (2005) critical values for weak instruments. - Results robust to clustering standard errors at the country-pair level and to inclusion of alternative governance quality indicators (rule of law, government effectiveness). ### Annex 2.2 — Revenue gain simulation methodology and parameters - Back-of-the-envelope revenue gain equation (2.2.2): - Revenue Gain_τ = τ_rate × Δ(V_Total^m − V_Total^x) - V_Total^m = ∑_x (V_xm^m) and V_Total^x = ∑_x (V_xm^x) - τ_rate refers to the tax rate of interest (VAT or tariff rate). - Alternative expression using digitalization change (2.2.3): - Revenue Gain_τ = τ_rate × (1/2 (V_Total^m + V_Total^x)) × β_digit^m × Δ z_m - Assumption for advancing digitalization toward the frontier: - Reducing the distance to the digitalization frontier for each importer by 50 percent implies Δ z_m = 0.5 × (1 − z_m). - Parameters used in the simulation reported in main text: - β_digit^m assumed to be 1.181 or 1.733 (from column (5) or (6)). - Latest country-specific VAT and weighted tariff rates applied. - Average trade flow (V_Total^m − V_Total^x) reported in 2016 used. - Conservative bias note: - Rearranging to obtain equation (2.2.3) holds other determinants and the denominator imports constant, which effectively biases estimates downward, yielding conservative estimates of gains from reaching the digitalization frontier. ### Contextual and supporting statistics cited - The share of the missing trader intra-community fraud in the VAT gap has been estimated to average 24 percent (European Commission 2017, p. 20). - The Online Service Index is normalized between 0 and 1 and available since 2003. - The index is significantly correlated with other digitalization indices (Annex Table 2.2.1 pairwise correlations: Online Service Index correlated 0.89*** with E-Government Index; 0.85*** with Digital Adoption Index; 0.46*** with Government Success in ICT Promotion; observations vary by correlation pair). _Italic: International Monetary Fund | April 2018 — Chapter 2 excerpts and Annexes (as provided)._ ### Annex Table 2.2.4. Median Revenue Gains per Country Group from Closing Half the Distance to the ### Annex Table 2.2.4. Median Revenue Gains per Country Group from Closing Half the Distance to the Digitalization Frontier, 2016 ### Median Revenue Gains (Percent of GDP) - Advanced Economies - VAT Revenue Gains: (0.7 – 1.0) - Tariff Revenue Gains: (0.04 – 0.06) - Emerging Market Economies - VAT Revenue Gains: (0.7 – 1.0) - Tariff Revenue Gains: (0.2 – 0.3) - Low-Income Developing Countries - VAT Revenue Gains: (1.2 – 1.7) - Tariff Revenue Gains: (0.4 – 0.5) - EU-28 - VAT Revenue Gains: (0.3 – 0.5) Note: - Latest available VAT rates were used to compute the revenue gains. - EU-28 = European Union group of 28 countries (Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Italy, Ireland, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovak Republic, Slovenia, Sweden, Spain, United Kingdom); VAT = value-added tax. ### Complementary Annex Table 2.3.1: Median Offshore Wealth and Revenue Potential, 2016 (Percent of GDP) - Offshore Wealth - Advanced Economies: 11.48 - Emerging Market Economies: 12.42 - Low Income Developing Countries: 6.49 - Full Sample: 10.29 - Revenue Potential - Advanced Economies: 0.24 - Emerging Market Economies: 0.13 - Low Income Developing Countries: 0.07 - Full Sample: 0.13 - Number of Countries (sample with available data for offshore wealth) - Advanced Economies: 348 - Emerging Market Economies: 361 - Low Income Developing Countries: 178 Sources and notes: - Sources: Bank for International Settlements; Zucman 2015; and IMF staff estimates. - Note: The number of observations corresponds to the sample with available data for offshore wealth; the samples used in estimating revenue potential are smaller because of data constraints. *Source: IMF staff calculations.* ### CHAPTER 2 dIgITAL gOveRNMeNT ### CHAPTER 2 dIgITAL gOveRNMeNT ### References cited in Chapter 2 - International Monetary Fund | April 2018 - Working Paper 22593, National Bureau of Economic Research, Cambridge, MA. - Kenya Revenue Authority. 2016a. “Challenges and Opportunities of Modernization in Tax Administration: The Experience by Kenya.” Kenya Revenue Authority presentation to the ICPAK Annual Tax Conference. - ———. 2016b. “Successes and the New Applications of the Kenyan Track and Trace System.” CG’s Meeting, Nairobi, Kenya. - ———. 2017. “Challenges and Success of Tracking Illegal Trade in Excise Products.” Presentation at the 3rd Annual Tax Summit, Nairobi, Kenya. - Kettemann, A. 2017. “The Macroeconomics of Incomplete Unemployment Insurance Take-Up.” Unpublished report, Department of Economics, University of Zurich. - Khera, R. 2011. “The UID Project and Welfare Schemes.” Economic and Political Weekly 46 (9): 38–43. - ———. 2017. “Impact of Aadhaar in Welfare Programmes.” Economic and Political Weekly 52 (50): 61–70. - Kim, S., and C. 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