A pivotal development in tax administration is the dramatic increase in the availability and adoption of powerful technology tools including, most recently, artificial intelligence (AI) solutions. Almost all countries have adopted elements of digitalization in their tax administration, and governments continue to make significant investments in them. Between 2010 and 2022, in 78 percent of countries with approved World Bank tax projects, there was at least one tax digitization component (Okunogbe and Santoro 2023). These projects span a wide spectrum—from integrated tax administration systems and customs modernization to digital taxpayer registration; electronic-filing (e-filing) and electronic-payment (e-payment) systems; electronic fiscal devices (EFDs); risk-based, automated audit frameworks; natural language processing for document analysis; and personalized customer service.
Technological advances provide new means for tax authorities to perform their three core functions: identification of taxpayers and the tax base, verification of true tax liabilities, and the collection of known liabilities (Okunogbe 2021). By enabling governments to understand their tax bases better and target their collection and enforcement efforts accordingly, these tools offer the promise of allowing governments to increase tax revenues by improving the efficiency of the tax system while also promoting equity by improving the transparency, coverage, and accessibility of the system.
However, these anticipated benefits are not always realized due to limitations in the tax system: For example, taxpayers are registered en masse, but in the absence of monitoring and enforcement, tax revenues do not budge; digital transactions generate vast amounts of data but without appropriate data infrastructure and advanced analytical skills, these data do not yield policy insights. Novel technology tools also introduce new ethical and privacy risks as data governance guardrails often lag behind.
This chapter examines the evidence on the extent to which emerging markets and developing economies (EMDEs) are realizing this promise of an expanded tax collection frontier and investigates the constraints to doing so. The chapter begins with an overview of the use of technology for taxation over time and across country groups. It then investigates the evidence on the use of technology for each of the core tax functions, highlighting the revenue and efficiency gains and equity impacts. The chapter then critically examines the limitations countries face in maximizing the promise of technology and concludes with policy preconditions for successful digitalization reforms.
