Digitalising the fiscal contract: An interdisciplinary framework for empirical inquiry

von Haldenwang, Christian Working Paper Digitalising the fiscal contract: An interdisciplinary framework for empirical inquiry Discussion Paper, No. 20/2020 Provided in Cooperation with: German Institute of Development and Sustainability (IDOS), Bonn Suggested Citation: von Haldenwang, Christian (2020) : Digitalising the fiscal contract: An interdisciplinary framework for empirical inquiry, Discussion Paper, No. 20/2020, ISBN 978-3-96021-132-7, Deutsches Institut für Entwicklungspolitik (DIE), Bonn, https://doi.org/10.23661/dp20.2020 This Version is available at: https://hdl.handle.net/10419/226441 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Discussion Paper 20/2020 Digitalising the Fiscal Contract: Christian von Haldenwang An Interdisciplinary Framework for Empirical Inquiry Digitalising the fiscal contract: An interdisciplinary framework for empirical inquiry Christian von Haldenwang Bonn 2020 Discussion Paper / Deutsches Institut für Entwicklungspolitik ISSN (Print) 1860-0441 ISSN (Online) 2512-8698 Except as otherwise noted this publication is licensed under Creative Commons Attribution (CC BY 4.0). You are free to copy, communicate and adapt this work, as long as you attribute the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) and the author. Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über http://dnb.d-nb.de abrufbar. The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data is available on the Internet at http://dnb.d-nb.de. ISBN 978-3-96021-132-7 (printed edition) DOI:10.23661/dp20.2020 Printed on eco-friendly, certified paper Dr Christian von Haldenwang is a Senior Researcher in the research programme “Transformation of Political (Dis-)order” at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE). Email: [email protected] © Deutsches Institut für Entwicklungspolitik gGmbH Tulpenfeld 6, 53113 Bonn  +49 (0)228 94927-0  +49 (0)228 94927-130 Email: [email protected] http://www.die-gdi.de Abstract Tax systems worldwide face far-reaching transformations through the implementation of digital technologies. A growing body of academic literature addresses these transformations and explores how digitalisation is affecting the operations and efficiency of revenue agencies, and taxpayer compliance. However, the literature largely ignores the diversified body of research regarding the characteristics, dynamics and determinants of the “fiscal contract”. This term describes an implicit agreement between state and both citizen and business taxpayers that associates individual tax compliance and the distribution of the tax burden within a society with public service delivery and access to political decision-making. Fiscal contract theory helps us to understand that taxation is primarily a political – not a technical – issue. But what happens if some technologies cause profound power shifts in the relationship between revenue authorities and taxpayers? Will they trigger the emergence of broad-based, stable fiscal contracts, or might tax system digitalisation increase exclusion and decrease stability? What drives these changes? How do digital technologies in the tax systems of developing countries affect their fiscal contracts? This paper seeks to lay the conceptual groundwork at the intersection of two dynamic academic debates. Based on a thorough review of the literature, it proposes a research framework that combines economic, public management and political science perspectives in order to generate knowledge about institutional, attitudinal and behavioural responses to tax system digitalisation. Acknowledgements This paper has greatly benefitted from helpful comments by my DIE colleagues Sabine Laudage, Julia Leininger, Charles Martin-Shields and Armin von Schiller. Valuable input has also been provided by Jean-François Brun and Abdoul-Akim Wandaogo from the Centre d’Études et de Recherches sur le Développement International (CERDI) at Université Clermont Auvergne. I am grateful for the many useful remarks about an earlier version presented in the 8th International Domestic Revenue Mobilization Workshop at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) in Bonn (1-2 October 2019). Bonn, September 2020 Christian von Haldenwang Contents Abstract Acknowledgements Abbreviations 1 Introduction 1 2 Fiscal contracts 3 2.1 Taxation and political rule 3 2.2 Bargaining 5 2.3 Tax compliance and tax morale 6 3 Digitalisation and taxation 8 3.1 Digitalisation of the economy 8 3.2 Tax system digitalisation 10 4 Key technologies in tax digitalisation 13 5 A framework for empirical analysis 14 5.1 The impact of digitalisation on revenue agencies 14 5.2 The impact of digitalisation on perceptions of tax fairness 15 5.3 The impact of digitalisation on taxpayer behaviour 16 5.4 The impact of digitalisation on political attitudes and political behaviour 17 6 Conclusion 18 References 21 Figures Figure 1: A framework for research on taxation and digitalisation 17 Tables Table 1: Key digital technologies in taxation 14 Abbreviations AI artificial intelligence API application programming interface CERDI Centre d’Études et de Recherches sur le Développement International CIT corporate income tax CRS common reporting standard e-government electronic government ESRM electronic sales registration machine EU European Union GDP gross domestic product GIS geographical information system G2B government-to-business G2C government-to-citizen ID identity document IT information technology IMF International Monetary Fund MNC multinational corporation OECD Organisation for Economic Co-operation and Development PIT personal income tax RCT randomised control trial SDG Sustainable Development Goal UN United Nations UN-DESA United Nations Department of Economic and Social Affairs UNRISD United Nations Research Institute for Social Development US United States (of America) VAT value-added tax WBGU German Advisory Council on Global Change (Wissenschaftlicher Beirat der Bundesregierung Globale Umweltveränderungen) Digitalising the fiscal contract: an interdisciplinary framework for empirical inquiry German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) 1 1 Introduction The capacity to regularly collect taxes has long been considered a central feature of modern statehood (Tilly, 1975). Today, as developing countries are striving to mobilise additional domestic resources to finance the Sustainable Development Goals (SDGs) in the 2030 Agenda (see UNRISD, 2016, pp. 167-195) they are additionally challenged by the Covid- 19 pandemic. Mobilising domestic resources requires modernising tax systems and strengthening revenue agencies. Digitalisation, that is, the strategic and coordinated use of digital technologies to improve the internal processes and external service delivery of revenue agencies, is a key feature of such reforms (Jacobs, 2017). Although digitalisation has been an important element of public sector reform for quite some time (see Heeks & Bailur, 2007; von Haldenwang, 2004), its pace has greatly accelerated in recent years. The latest United Nations E-Government Survey reports that 143 of 193 UN member states allowed income tax declarations to be submitted electronically in 2020 (UNDESA, 2020, p. 25). That the number of countries almost doubled since 2014, when just 73 governments provided the service, is not entirely surprising: Many e-government strategies and digitalisation plans focus on tax systems because revenue agencies routinely manage complex processes involving large amounts of data and frequent interactions with taxpayers. While all governments are affected by the opportunities and challenges of digitalisation, they are not uniformly affected (Kochanova, Hasnain, & Larson, 2020). Developing countries tend to be less prepared for digitalisation. To give an example, revenue agencies worldwide experience difficulties accessing relevant information on economic transactions, but this is much harder in countries where more than 50 per cent of the workforce are employed in the shadow economy, such as Colombia (58 per cent in 2013: see Doligalski & Rojas, 2018). All tax systems are unique, but those in low- and middle-income countries share some characteristics that set them apart from those in high-income countries (Besley & Persson, 2014; Bird, 2013; von Haldenwang & Ivanyna, 2012). These characteristics include (i) greater dependence on business taxes, (ii) the higher relevance of big companies, including multinational corporations (MNCs), as taxpayers, (iii) greater economic dependence on natural resources or knowledge-extensive (but labour-intensive) activities that add less value, (iv) lower reliance on directly taxing private households, (v) more centralised tax systems and (vi) lower levels of administrative capacity. However, in all country income groups, some revenue agencies operate under legitimate governments and the rule of law, while others suffer from low levels of legitimacy, high levels of corruption and frequent political interference.1 It is well known that taxation is not simply about enforcing state authority on citizens and private sector companies. Nor can it be reduced to executing laws and regulations. A growing body of academic research indicates that claims of legitimacy, taxpayer acknowledgement of such claims and perceptions of tax fairness play important roles in public revenue systems.2 1 Von Haldenwang and Ivanyna (2012) identify a group of 22 countries that combine low levels of tax performance with low levels of governance and low non-tax revenue. The latter indicates that countries are unable to compensate their low tax revenue with rents from natural resource extraction. It is fair to assume that in these countries governance significantly influences tax collection capacity. 2 It should be noted that an important body of academic research analyses the inverse relationship – higher levels of fiscal capacity and taxation leading to more responsive and democratic government. From this perspective, states that have been able to regularly collect taxes from a broad range of societal actors have Christian von Haldenwang 8 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) 3 Digitalisation and taxation Tax experts agree that digitalisation changes the way tax administrations perform. But there is no consensus about whether it should be considered a truly transformative factor or a technical enabler of change. This largely depends on how present-day tax systems are perceived. Khwaja, Awasthi and Loeprick observe: It may sound paradoxical, but the main focus of a modern system of revenue administration is not to collect taxes. In a modern tax system based on self-assessment and voluntary compliance, tax liabilities are assessed by taxpayers themselves and paid through banks or the state treasury system. The main functions of the revenue administration are (a) to manage tax compliance in order to detect and prevent delinquent behaviour and (b) to provide taxpayer service and education in order to help taxpayers to discharge their tax obligations with ease and with the least complexity and compliance burden. (Khwaja, Awasthi, & Loeprick, 2011, p. 1) In such an environment, digitalisation would primarily be seen as a provider of technical solutions to improve the efficiency and effectiveness of a well-functioning system. However, few tax systems fit this description of “modern”. Low- and middle-income countries in particular are often characterised by weak fiscal states and exclusionary fiscal contracts, as two recent volumes on taxation in Latin America and Africa confirm (Flores- Macías, 2019; Prichard, 2019). This typically results from a combination of factors, including high dependence on agricultural and natural resource exports, unequal distribution of income, wealth and political power, low public administration capacity, deficient public infrastructure, low levels of political trust and weakly legitimised development models. In such environments, digitalisation could offer the prospect of fundamentally changing the rules of the game by boosting the capacity of tax administrations and improving conditions for tax compliance. However, it could also reduce equity among taxpayers and create new avenues for coercion and manipulation. This can happen when some taxpayers obtain larger efficiency gains from digitalisation than others, public agencies use new data sources to effectively curtail basic freedoms of citizens, or individual technology providers dominate the public infrastructure. Digitalisation transforms tax systems at two different but related levels: (i) Digitalisation of the economy challenges many aspects of conventional tax collection, while (ii) digitalisation of the government – particularly revenue agencies – profoundly changes government-taxpayer relations. The following sections provide an overview of these aspects. 3.1 Digitalisation of the economy Digitalisation of the economy has made economic globalisation more dynamic by introducing new business models (such as platform and sharing economies, digital financial services and user-generated value), increasing the speed and ease of domestic and crossborder transactions and further enhancing the relevance of intangible assets (Chen, 2019; IMF, 2019). A key paradigm of international taxation – levying taxes where value is created – is being challenged by new business models that generate value without permanent establishment (Olbert & Spengel, 2019). At the same time, data has been identified as a significant value driver in the digital economy, and the ability to aggregate and analyse large Digitalising the fiscal contract: an interdisciplinary framework for empirical inquiry German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) 9 amounts of data has become a key feature of business models that seek to obtain value from users’ digital data trails (Becker, Englisch, & Schanz, 2019; Langley & Leyshon, 2020). The internet is evolving from a system that transfers information to one that transfers value. This process is largely driven by new digital financial services, including digital and mobile payments, remittances, credits and insurance (Ainsworth & Viitasaari, 2017; Gabor & Brooks, 2017; Pazarbasioglu et al., 2020). Revenue agencies are pressured to mirror the growing complexity of international business relations. On one hand, the rapidly expanding exchange of tax information across borders requires tax authorities to redesign internal processes and enhance their data collection and management capabilities.5 On the other hand, increasing taxation efficiency and lowering compliance costs for taxpayers have become crucial for international competitiveness. While public debate and policy-making about taxing the digitalised economy have been promoted by the Organisation for Economic Co-operation and Development (OECD 2019a; 2019b), the process has been stymied by the US government decision, in June 2020, to withdraw from OECD-sponsored multilateral talks on taxing the digitalised economy. The decision was mainly motivated by the wish to protect US technology companies from being taxed abroad.6 The US move may also reflect the fact that a number of countries have announced or introduced new domestic measures to tax the digital economy. Grondona, Chowdhary and Uribe (2020) provide an overview. They distinguish (i) taxes levied on the provision of digital services; (ii) taxes on “significant economic presence”, where profitable transactions take place without the company’s physical presence; (iii) withholding taxes on digital transactions; and (iv) taxes on diverted profits to counter abusive tax-planning practices. Apart from a number of European countries, several states in Africa (Nigeria, Kenya and Zimbabwe), Asia (India, Indonesia, Malaysia and Vietnam) and Latin America (Costa Rica, Mexico and Uruguay) have also introduced such measures. Although the way digitalisation impacts domestic resource mobilisation is highly relevant for developing countries, little research has been conducted on this topic. An incipient debate deals with the taxation of digitalised services (see Katz, 2015 for an overview). Among them, digital financial services (“FinTech”) have been identified as potentially driving economic inclusion and poverty reduction. FinTech covers digital and mobile payments, cryptocurrencies and distributed-ledger technology (“blockchain”), algorithmic asset management, crowdfunding, peer-to-peer lending and credit risk analysis (Langley & Leyshon, 2020). The introduction of digital and mobile payments has already profoundly transformed finance systems in developing countries. Several papers explore the role of mobile money transactions in taxation, as well as taxation of those transactions (Clifford, 2020; Fuchs, Musuku, & Symington, 2016; Ndung’u, 2017, 2019; Wasunna & Frydrych, 2017). Located at Université Clermont Auvergne, the Centre d’Études et de Recherches sur le Développement International (CERDI) has produced several insightful studies on linkages 5 Beer, Coelho and Leduc (2019) observe that the automatic exchange of information between tax authorities, in place since 2017-2018, has already led to an average 25 per cent reduction in foreign-owned deposits in offshore jurisdictions. 6 See Rappeport, Swanson, Tankersley, & Alderman (2020). Christian von Haldenwang 10 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) between internet usage and taxation: Gnangnon and Brun (2018) analyse how closing the internet gap mobilises non-resource tax revenues. They show that in both developing and developed countries, reducing the gap can enhance non-resource tax revenues by increasing international trade. The impact appears to be higher in low-income countries than in middle- or high-income countries. In another paper, Gnangnon and Brun (2019) confirm that internet usage drives change towards non‐resource taxes, again mostly in low-income countries. The internet can help governments reduce their dependence on revenue from natural resources, particularly in resource‐rich countries. Gnangnon (2020) analyses the impact of internet usage on tax reform in developing countries from 1995 to 2015, and shows that internet usage has eased tax system modernisation by facilitating the shift from taxes on international trade towards domestic indirect taxes. These papers take into account how internet usage and internet access directly impact domestic revenue mobilisation, but do not address the indirect effects of a tax administration’s increased efficiency or improvements in tax policy. Furthermore, this research relies on macro data, which does not allow for exploring the impact of digitalisation on taxpayer behaviour or revenue authority operations. This could be done by accessing taxpayer data from declarations, payments and the use of financial services, or conducting surveys to assess how digitalisation affects perceptions and attitudes. Academic research about these relationships is discussed in the following section. 3.2 Tax system digitalisation The second transformation of tax systems through the strategic and coordinated use of digital technologies in public management (e-government) and tax administrations changes the nature of domestic tax systems in terms of the internal workings of revenue agencies, their cooperation with other public bodies and their relations to taxpayers (Awasthi et al., 2019; Lindgren, Madsen, Hofmann, & Melin, 2019). Presumably the impacts of these processes on the contents, bargaining patterns and institutional set-ups of the fiscal contract are far-reaching (see OECD, 2018) – albeit insufficiently researched. Tax authorities envision a time when non-compliance is simply no longer an option because of real-time, verifiable tracking of business transactions (domestic as well as cross-border) in combination with automated processes and advanced analytics. In a recent OECD guide to implementing application programming interfaces (APIs),7 an Australian tax commissioner succinctly observed: “The digitisation of our economies allows us to now imagine a world where ‘tax just happens’ as a by-product of people going about their normal business. [...] We can now begin to craft a new reality where services are seamlessly integrated and where the integrity of the broader system is assured within these integrated services” (OECD Forum on Tax Administration, 2019, p. 3). One factor driving these changes is the increased amount of data managed by tax authorities (OECD, 2016a). Data analytics allows revenue agencies to obtain detailed and timely 7 APIs are computing interfaces that allow different kinds of software to interact. They are a key technology for ensuring the interoperability of different applications and operation systems, for instance, between revenue systems, digital payment platforms and other service providers. See de Souza, Redmiles, Cheng, Millen and Patterson (2004). Digitalising the fiscal contract: an interdisciplinary framework for empirical inquiry German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) 11 information on taxpayers, which gives them more control over the whole taxation process. Some authors believe this could lead to significant improvements in tax administration (see Pijnenburg, Kowalczyk, & van der Hel-van Dijk, 2017). At the systemic level, digitalisation could eliminate informal, highly personalised tax negotiations between powerful corporate actors or rich individuals and political decision-makers – and lead to a more rules-based and impartial system. On a personal or relational level, if the digitalisation of tax payments became more predictable and less subject to informal negotiations and political connections, trust in government could increase. This would favour broad fiscal contracts based on principles of tax fairness. However, in the context of non-democratic politics, deficient market regulation and the weak rule of law, such new capacities of revenue agencies could be part of “surveillance capitalism” (Zuboff, 2019), in which public institutions and big tech firms use broad institutional settings to control citizens and markets. In this case, digitalisation would help to perpetuate exclusionary fiscal contracts based on rent-seeking and restricted access to political decision-making. Such contrasting perspectives used to be matters for the distant – and uncertain – future. This is no longer the case. Today, many countries are implementing electronic invoicing (einvoicing) (Barreix & Zambrano, 2018) and paving the way for radical changes in tax collection, auditing and more. Countries like Brazil, India and China are linking digital or mobile tax payments to other public services, using combined data-based services (for eSocial in Brazil, see PwC, 2016; for biometric IDs and social coding in India and China, see Shahin & Zheng, 2020). The digitalisation of tax administration encompasses the application of digital solutions to all aspects of taxation. The management of registers (of taxpayers, tax objects, beneficial owners, tax rulings, etc.), the internal organisation of tax administrations (automation, front office/back office relations), the collection process (e-filing, e-billing, e-invoicing, epayments), compliance management and taxpayer services (risk management and auditing, online information services), and the management of liabilities, appeals and reimbursements are all being heavily debated. New fields of tax-related digitalisation include information exchange with other domestic or foreign agencies, the provision of data-driven services to other public or private sector entities and the establishment of joint platforms with other public service providers (see Junquera-Varela et al., 2017, pp. 45-72; OECD, 2016b). An emerging topic of discussion concerns the fiscal contract relationship. Most studies explore government-to-business (G2B) relations with respect to specific taxes. Ali, Shifa, Shimeles and Woldeyes (2015) and Mascagni, Mengistu and Woldeyes (2018) show that in Ethiopia, the use of electronic sales registration machines (ESRMs) improves tax compliance. ESRMs record sales, print receipts and store information on the tax authority’s server, permitting real-time insight into a company’s turnover and the ability to monitor reported values and the amount of tax declared and paid. Ali et al. (2015) show that using ESRMs positively impacts the amount of value-added tax (VAT) collected. However, revenue gains are also shown to quickly decrease after ESRMs are implemented because the system is apparently unable to prevent sales bypassing cash registers. A related paper by Eilu (2018) analyses the difficulties Kenya and Tanzania face while setting up electronic billing devices for VAT. Christian von Haldenwang 12 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Most studies on the digitalisation of tax systems deal with technical perspectives on public management issues or macro-level analyses with regard to revenue collection. For instance, Barreix and Zambrano (2018) present a collection of studies on the introduction of einvoicing in Latin America. They first discuss the state of e-invoicing and then explain the prerequisites for its successful implementation. Finally, they use an impact analysis of five countries (Argentina, Brazil, Ecuador, Mexico and Uruguay) to show that e-invoicing can improve tax revenue collection. However, like the Ethiopian case presented above, initial evidence indicates that revenue gains eventually level off or are even reversed as taxpayers learn how to flout the new conditions. In contrast, Bellon et al. (2019) show that in Peru, the introduction of e-invoicing has been accompanied by a systematic increase in company sales (and added value), which boosts VAT revenue. The results suggest that e-invoicing improves VAT compliance and may also have implications for corporate income tax (CIT), because it tends to increase declared value added. The connection between e-filing and the costs of tax compliance incurred by small and medium-sized businesses is explored in a World Bank research paper on South Africa, Ukraine and Nepal (Yılmaz & Coolidge, 2013). The authors show that for many small firms, the initial costs of adopting new technologies can be quite high, and may reduce the uptake and legitimacy of the whole reform process. Finally, a few studies shed light on citizen acceptance of tax digitalisation, specifically efiling and payments. Several studies are based on surveys of taxpayers or intermediaries. Ireland’s Revenue Online Service “has led to more efficient timely processing of tax returns, faster processing of tax repayments, […] redeployment of Revenue resources, increased accuracy in calculation of tax liabilities, and decreased uncertainty for taxpayers” (Robbins, Mulligan, & Keenan, 2015, p. 387). A study about Thailand shows that taxpayer acceptance of e-filing and e-payment systems is affected by the anticipated performance, competence and credibility of tax authorities (Bhuasiri, Zo, Lee, & Ciganek, 2016). Similarly, on introducing online person-to-government payments, “government agencies in Kenya have reported both increased revenue collections and citizen compliance as well as reduced costs, especially in the long run” (Wasunna & Frydrych, 2017, p. 6). Dečman and Klun (2015) provide evidence of increased user satisfaction following the introduction of electronic tax debt recovery in Slovenia. In this case and others, lower compliance costs and userfriendliness seem to be key to winning acceptance for the new technologies. Multiple levels of social and institutional trust combined with well-designed technology are crucial for user uptake by both citizens and business. As Tsikas puts it: The determinants of intrinsic (or voluntary) tax compliance, for example the equity and complexity of the tax system, the efficiency and reliability of the government and the absence of corruption, can be understood as characteristic features of “good” institutions. When faced with high institutional quality, people seem to feel more obliged to pay taxes. Put differently, institutions need to appear trustworthy. (Tsikas, 2017, p. 2) Digitalising the fiscal contract: an interdisciplinary framework for empirical inquiry German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) 13 4 Key technologies in tax digitalisation What are the key digital technologies driving changes in the fiscal contract? In its 2019 flagship report, “Towards Our Common Digital Future”, the German Advisory Council on Global Change (WBGU, 2019, pp. 65-86) identifies the Internet of Things (IoT), big data, artificial intelligence (AI, or machine learning) and blockchain among the technologies expected to cause far-reaching societal and technological changes. Ainsworth and Viitasaari (2017) and Ainsworth and Shact (2016) discuss blockchain as a “foundational technology” that is starting to change payroll and VAT systems. Alper and Miktus (2019) describe how mobile networks have evolved from the first generation of voice applications to the fourth generation (4G) of fast and secure data transfers and the new fifth generation (5G) with enhanced mobile broadband for new applications. For obvious reasons, empirical research should focus on technologies that are already implemented in a large number of developing countries. The IoT, blockchain and 5G networks do not belong to this category. In contrast, mobile payment systems, big data and AI already play critical roles in tax administration reforms worldwide, so it is possible to empirically assess their impact on the fiscal contract. When applied to tax systems, key technologies generate far-reaching impacts in at least one of two dimensions: Either they enhance the power of tax authorities vis-à-vis taxpayers by improving revenue agencies’ information basis or they enhance their service quality by raising overall efficiency and lowering compliance costs for taxpayers. The latter includes reducing corruption in tax systems and protecting taxpayers from other types of discretionary or unlawful action by tax authorities. Key technologies also concern the tax subjects. Business taxation should be distinguished from the taxation of private households. Most significantly, the density and frequency of G2B tax relations is much higher than that between governments and citizens (G2C). In many low- and middle-income countries, only a minority of private households are registered taxpayers, and those who are liable to pay income tax have only sporadic contact with their revenue agencies. In contrast, businesses interact much more frequently with tax authorities, not only with regard to CIT, but also VAT or sales taxes, customs duties, withholding taxes, social contributions, and so forth. Thus, compliance costs and efficiency are much more important for G2B relations, and the possible gains from digitalisation (using automated processes and online services) are much higher. This is why digital applications are often first introduced in G2B contexts. At the same time, digital technologies in G2C relations can heavily impact perceptions of tax fairness, efficiency and certainty. The automation of processes, digitalisation of registers and taxpayer ID systems, and provision of digitalised taxpayer services such as online filing and payment systems can be expected to affect the perceptions, attitudes and behaviour of citizen taxpayers. Most fiscal contract studies focus on G2C relations, which must be included in empirical research strategies. Based on the literature review presented above, Table 1 provides an overview of the digital technologies used in a growing number of countries that are likely to have far-reaching impacts on tax authority-taxpayer relations. Christian von Haldenwang 14 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) The adoption of new technologies can be a highly politicised process in which reforms are fiercely resisted. A digitalised tax administration that features greater predictability and transparency should also be in the interest of business owners. However, in many countries with weak tax administrations, big companies (both domestic and multinational) use their bargaining power to negotiate highly beneficial tax deals which they want to keep (see Durst, 2019). Likewise, politicians who can access rents through informal deals with businesses do not have strong incentives to implement reforms that increase transparency (Bussell, 2012). In weak states, highly centralised administrative structures make political capture of the bureaucracy even more likely. Politicians who benefit from a captured bureaucracy tend to not be interested in reforms, including tax system digitalisation, which could cost them their benefits. 5 A framework for empirical analysis How does the use of key digital technologies in tax systems affect fiscal contracts, particularly in developing countries? This section presents a framework for disentangling and relating this question to the respective academic debates and their current blind spots. Empirically addressing the question involves assessing changes in the institutional set-up and operation of revenue agencies associated with digitalisation as well as examining the extent to which digitalisation affects taxpayer perceptions of fairness. A third research agenda explores the impact of digitalisation on taxpayer behaviour, especially tax compliance and investment. A fourth line of research analyses how digitalisation impacts political attitudes and behaviour. 5.1 The impact of digitalisation on revenue agencies Any empirical study that focuses on the linkages between digitalisation and taxation has to first address a basic question: How do revenue agencies change as a result of digitalisation? Table 1: Key digital taxation technologies Focus on enhancing the power of tax authorities Focus on enhancing service quality and lowering compliance costs Government-to-business (G2B) • Electronic invoicing & billing (informational aspect) • Big data analytics using different data sources • Electronic registers (business, customs, etc.) • Electronic invoicing (regarding compliance costs) • Automation of processes • Digital and mobile payments • Data-driven bundling of services Government-to-citizens (G2C) • Electronic registers (property, beneficial ownership) • Electronic IDs • Exchange of information between tax authorities and with other government agencies • E-filing • Digital and mobile payments • Automation of processes Source: Author Digitalising the fiscal contract: an interdisciplinary framework for empirical inquiry German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) 15 The literature on tax digitalisation and e-government presented above leads us to expect such changes to occur in three dimensions: internal governance models, operational modalities and patterns of interaction. • Digitalisation leads revenue agencies to change their internal governance models, for instance by setting up new information technology (IT) or data management departments. Opening new channels for online access can cause units that are engaged in face-to-face customer relations to lose staff and rank, with units responsible for automated processes or data analysis gaining importance. Digitalisation has also been identified as accompanying the creation of semi-autonomous revenue agencies that enjoy a certain autonomy with regard to investments, staffing and political interference (von Haldenwang et al., 2009). • Revenue agencies change their operational modalities, sometimes while automating processes. In the best of all worlds, new modalities are more efficient, faster and easier to monitor, but this is neither a necessary nor an automatic outcome of digitalisation. Revenue agencies would need to employ data specialists and other experts, who are not always available on the labour market – particularly in poorer countries. Hence, it is likely that human resources policies, salary structures and labour conditions would also undergo profound changes. • Finally, revenue agencies change their political interactions and ways of dealing with other public agencies and taxpayers. Higher levels of collection efficiency and new methods of reporting can impact relations with political leaders. Interactions with other public agencies could include agreeing to combine service provisions and use revenue agencies as major data hubs. Interactions with taxpayers are transformed through the growing relevance of online transactions and mobile applications, including payment systems. As shown above, empirical research about these changes largely relies on case-specific process tracing and inductive inference with limited external validity. Few comparative studies have been made. 5.2 The impact of digitalisation on perceptions of tax fairness Based on this descriptive analysis, a second line of research deals with the question: Does tax digitalisation lead to changing perceptions of tax fairness? Such research engages the literature on survey-based inquiry and motivations for tax compliance mentioned in Section 2. With several possible causalities driving this relationship, it makes sense to assess perceptions of tax fairness for business and citizens separately. Recent research indicates that tax collection efficiency, tax certainty and low levels of corruption are associated with higher levels of trust in government (Gangl et al., 2019; Koumpias et al., 2020; Santa, MacDonald, & Ferrer, 2019). In G2B tax relations, a key issue shaping perceptions of fairness is the degree to which specific tax systems are considered to distort markets. While taxes necessarily cause some market distortion, the degree depends on numerous factors, some of which can be influenced by digitalisation. In principle, digitalisation could reduce distortion by lowering compliance costs, increasing transparency, reducing space for discretionary action and tax officials’ Christian von Haldenwang 16 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) corrupt behaviour, as well as helping to close loopholes for tax avoidance and evasion. At the same time, however, it can be used to increase the power of tax authorities without any concomitant improvements in public service delivery – which would be detrimental to any perception of tax fairness. With regard to G2C, survey data can be used to explore if tax system digitalisation causes citizens to perceive greater horizontal and vertical equity. Another issue concerns customer satisfaction when dealing with tax authorities. In both cases, perceptions of corruption in tax systems should also be assessed. All in all, digitalisation associated with clear improvements in public service can be expected to increase perceptions of tax fairness, whereas digitalisation mainly linked to shifting power to tax authorities reduces them. These relationships are likely to be influenced by the characteristics of political regimes, as Ricciuti et al. (2019) and others show. Digitalisation can be assumed to be considered less threatening if tax agencies are embedded in a functional regime of checks and balances and the democratic rule of law. 5.3 The impact of digitalisation on taxpayer behaviour A third line of research asks if tax digitalisation is associated with changes in tax compliance and investment. This research question is partly linked to perceptions of tax fairness: Taxpayers who consider a tax system as highly unfair are more inclined to justify tax evasion. They also tend to regard taxation as a negative factor in their investment decisions. However, the relationship between digitalisation and compliance is also driven by other factors, most notably the perception of risk, ease of compliance and effort needed to dodge taxes. This line of research builds on the literature on tax compliance behaviour. It assumes that digitalisation lowers compliance costs and increases the efficiency of taxation, and that taxpayers may adapt their behaviour to changing patterns of tax collection. Some studies have found such adaptive behaviour in the context of e-billing and e-invoicing, as discussed in Section 3 (see Ali et al., 2015; Barreix & Zambrano, 2018). Research on taxpayer behaviour should study tax compliance in G2B and G2C relations separately. For G2B, several research strategies seem feasible: At the macro level, data on VAT and CIT collection could be useful for measuring changes in aggregate compliance. However, that data may be of limited use in time series analyses because digitalisation impacts data quality and availability. Values can change as a result of changes in compliance or measurement. Digital tax registers can be used to show the broadening of tax bases, while data from electronic cash registers could reveal changes in VAT collection. Surveys can provide relevant information on the evolution of compliance costs for business. Firm data has recently been used in several studies that seek to assess the scale of tax avoidance in cross-border transactions (Clausing, 2020; Wier & Reynolds, 2018). Some revenue authorities rely on geographical information system (GIS) data to track economic activities; research could use this data to explore changes in tax compliance. With regard to G2C, data on the collection of PIT and property tax could be used, though it should be said that many countries do not levy any property taxes. Research should also examine how tax digitalisation impacts investment. Some factors often associated with digitalisation, such as lower compliance costs, better protection for businesses from discretionary action by tax authorities and lower levels of corruption, Digitalising the fiscal contract: an interdisciplinary framework for empirical inquiry German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) 17 increase investment. At the same time, however, more efficient tax collection through digitalisation can cause business elites to reassess the fiscal contract and perhaps threaten to withdraw from the market (Bates & Lien, 1985). 5.4 The impact of digitalisation on political attitudes and political behaviour The fourth research question focused on G2C relations addresses changes in political attitudes and behaviour after tax digitalisation. It assumes that perceptions of changes to taxpayer services and in levels of corruption, tax fairness, control and enforcement impact political behaviour. Increased tax efficiency could enhance compliance and increase pressure on the delivery side of the fiscal contract, raising resistance to bad governance and deficient service delivery. This research builds on literature about the politics of taxation and the bargaining and political settlements discussed above. Findings from the four lines of inquiry feed into current debates about the fiscal contract and update them regarding the changing nature of taxation. For instance, research focusing on how revenue agencies change due to digitalisation connects to debates on state capacity and its impact on the fiscal contract (Baskaran & Bigsten, 2013; Besley & Persson, 2009; Kochanova et al., 2020). Research studying perceptions of tax fairness provides inputs to current debates about revenue bargaining and individual motivations for tax compliance (Flores-Macías, 2016; Gangl et al., 2019; Sjoberg et al., 2019). Evidence about taxpayer behaviour (tax compliance and investment) regarding tax digitalisation could inform research on political settlements and debates about taxation and legitimation (Hassan & Prichard, 2016; Kjær et al., 2017; von Haldenwang, 2017) and behavioural approaches to tax compliance (Alm, 2019; Bellon et al., 2019; Prichard et al., 2019). Finally, research linking digitalisation to changes in political attitudes and behaviour could produce important insights into the relevance of political regime properties for taxation (Cheibub, 1998; Ricciuti et al., 2019; von Schiller, 2018). Figure 1 shows the contours of the research agenda sketched out in this section. 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