Digitization Bringing Change to Tax Administration

SATO Motohiro
Faculty Fellow, RIETI

The National Tax Agency (NTA) announced the Future Vision of Tax Administration, a long-term vision looking roughly 10 years ahead. In addition to promoting electronification by shifting such necessary procedures as tax returns and year-end adjustments from the paper document format to electronic data, the NTA will use artificial intelligence (AI) to analyze inquiries from taxpayers and give optimal replies under this vision.

The NTA will also use the My Number personal identification number to automatically check the accuracy of submitted tax information by comparing it against information from its own database. In this way, the use of AI and big data is expected to facilitate prioritization and improve efficiency in conducting tax investigation and examining tax arrears. For example, the NTA will make more precise judgment as to whether an investigation is necessary with respect to individual taxpayers by conducting statistical analysis and also develop a system that indicates the optimal method of contacting taxpayers—either through telephone or in writing—and the necessary investigation items. The Organisation for Economic Co-operation and Development (OECD) is also recommending analysis of tax administration data as a way to improve taxation efficiency under the Forum on Tax Administration.

Digitization of tax administration, including the use of AI, is a global trend. AI has been tested in such countries as Singapore. Some countries, including South Korea and Estonia, have made remarkable progress in this field. Under its tax digitization scheme, the United Kingdom is planning to develop a system that in the future will enable individual taxpayers to file tax returns easily by directly communicating online with the taxation authority. Northern European countries have already adopted a pre-populated tax return system, under which the taxation authorities fill in necessary information items, such as income and deduction amounts, in tax return forms and taxpayers check and submit the filled-in forms online. These systems are notable in that they are intended not only to enhance taxation but also to improve convenience for individuals and companies.

On the other hand, in Japan, most taxpayers can complete the income tax payment process through the withholding of tax at source and year-end adjustment, with little opportunity left for individuals to file tax returns for themselves. Therefore, the notion of tax payment convenience may be unfamiliar to Japanese taxpayers. However, the situation could change in the future.

If the practice of engaging in side businesses becomes popular among salaried workers, more people will need to file tax returns. Freelance workers providing service for multiple businesses on a contract basis will also need to file tax returns. As working styles become more diverse, the number of people who file tax returns will rise. To deal with this situation, it has been proposed that the My Number portal site, which will start operating in earnest in October 2017, should be utilized in line with the diffusion of the My Number personal identification number card.

Information concerning individuals, including income information provided by companies and financial institutions, statements of healthcare fees provided by healthcare institutions, and insurance premium deduction information provided by insurance companies will be concentrated and centrally managed in the individuals' respective accounts at the My Number portal site. As there will be no need for taxpayers to collect pay stubs and various receipts for themselves, they can easily calculate their income tax amount. If this system is linked with the e-Tax system, it will become possible to make tax payments without submitting paper tax returns. In the future, the Japanese system may develop into a pre-populated tax return system.

Income information held at the My Number portal site may be used for the purpose of not only tax payments but also benefit provision. For example, when individuals apply for childcare allowances, they can use the information held at the portal as a substitute for an income certificate. In the United Kingdom, income information submitted by employers to the taxation authority is also used for benefit provision. Naturally, there may be concern over possible leakage of personal information among the Japanese population. Needless to say, it is essential to establish a third-party organization responsible for overseeing appropriate operation of the system. Strengthening the Personal Information Protection Commission is one such option.

>> Original text in Japanese

* Translated by RIETI.

July 15, 2017 Weekly Toyo Keizai

August 3, 2017

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