Geneviève VerdierFiscal Affairs Department

International Monetary Fund

Chapter 2 of the April 2018 Fiscal MonitorApril 2018

Digital Government

2

Digital government

3

The digital transformation is underway

The rapid growth of the digital transformation is outpacing the

provision of basic public services

Digital technologies are spreading across governments, with some

regional leaders

NA EUR MENA CIS LAC AP SSA

KOR SGPKAZ

RUSEST ESP

CHL URY

ARE ISRUSA

CAN RWA ZAF

TUV MHL

CAF GNQ

KNA FSM

CYP SMR

SYR LBY

TJK TKM

International Digital Adoption by Governments(Digital adoption index for governments, latest available year)

Source:World Bank 2016.

Access to Public and Digital Services in Developing Countries(Percent of population)

0

20

40

60

80

100

1990 95 2000 05 10Improved water access InternetImproved sanitation Mobile phoneElectricity Mobile broadband

4

What governments are doing

Tax policy and administration• Digital tax administration systemsE-filling, e-invoicingPre-populated tax returnsMobile paymentsBig data analysis

• Cross-border exchange of informationPublic spending and financial management• Public service delivery: Information dissemination (health, agriculture)Biometric identification and digital payment

systemsDigital monitoring (education)

• Governance:Transparency portals

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20

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Citizens Government administrativefunctions

Number of countries with selected digital services

1. What governments can do now

– Reducing tax evasion from cross-border fraud

– Lowering revenue losses from personal income and wealth sheltered in tax havens

– Reducing leakage and take-up problems in social protection

2. Challenges, obstacles and risks

– Fiscal policy and digital businesses—A new challenge

– Digitalizing public finances—Obstacles and risks

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Outline

What governments can do now

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Improving tax compliance: Customs

Trade misreporting is non-trivial, particularly in LIDCs…

…but VAT-related fraud is also a concern in Europe

Could digitalization help reduce fraud in cross-border transactions?

AEs EMEs LIDCs

Difference between importer and exporter reported values in percent of GDP

French company A exports VAT

zero-rated goods to B in another

member country (United

Kingdom).

Pays no VAT on purchase, charges VAT on sale to company C, and disappears without

remitting the VAT.

Buys goods at VAT inclusive

price, and exports goods to France,

reclaiming the VAT not paid by

B.

United Kingdom: Company B "Missing trader"

France: Company A

United Kingdom: Company C

The Missing Trader and Carousel Fraud

The EC estimates that EUR 45-60 billion are lostannually

8

Improving tax compliance: customs

Median revenue potential is between 1 to 2 percent of GDP. In Europe, total gains of 0.5 percent of European GDP in VAT collection.

The link between evasion and digitalization is significant and potential revenue gains are substantial

AEs EMEs LIDCs

Potential Tariff Revenue Gains

AEs EMEs LIDCs

Potential VAT Revenue Gains

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Improving tax compliance: Tax havens

Wealth sheltered in tax havens is large

Could digitalization help reduce evasion to tax havens?

0

2

4

6

8

10

1910 1940 1970 2000 2013

Estimated Wealth of Europeans in Low-Tax Jurisdictions(Percent of the financial holdings of European households)

AEs EMEs LIDCs

Offshore Wealth

The share of European financial wealth held in tax havens has grown

dramatically

• Revenue gains on existing wealth are low.

• But increased taxpayer information could facilitateCollect taxes before income is

transferred to tax havens

• Design and success of automatic exchange of Information on taxpayers

10

Improving tax compliance: Tax havens

11

Improving social protection coverage

Sources: EUROMOD; World Bank, Atlas of Social Protection Indicators of Resilience and Equity (ASPIRE); and IMF staff calculations.1/ 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, Slovakia, Slovenia, Sweden, Spain and United Kingdom).

Inclusion (leakages) and exclusion (non take-up) errors are sizeableIn developing economies, coverage of the poor is far

from completeIn Europe, 1/3 of total spending on means-tested programs is

going to the top 6 income deciles

0

10

20

30

40

50

60

70

Upper-middle-income countries

Lower-middle-income countries

Low-incomecountries

Poorestquintile

Household Coverage by Social Assistance Programs in Developing Countries(percent of households in income quintile)

0

10

20

30

40

1 2 3 4 5 6 7 8 9 10Income deciles

Average Share of Total Spending on Means-Tested Social Assistance Programs in EU 28(percent of total spending across income deciles)

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Improving social protection coverage

13

Improving social protection coverage

IndiaLPG

subsidies

IndiaLPG

subsidies

FranceSocial

benefits

FranceSocial

benefits

IndiaLPG subsidies

FranceSocial benefits

Digitalization can help … … but is only part of the solution

• Comprehensive reforms (India)

• Privacy and security controls are essential (India and South Africa)

• Digital exclusion can put program objectives at risk (India)

• Digital outreach tools are not sufficient (France)

14

Improving social protection coverage

Challenges, obstacles and risks

Tech giants are increasingly dominant

High profitability

Heavy reliance on intangible assets

Sales with little or no physical presence

User-generated value16

Taxation and the digital economy

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The Race to a TrillionGlobal Top 20 Firms By Stock Market Capitalization(Billions of US dollars, March 7, 2018)

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Taxation and the digital economy

• What is different? The scale of operations.

• But they should not be singled-out for taxation purposes

• Measures should be internationally coordinated and consistent with a long-term vision for international corporate taxation

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Obstacles and risks

Digital exclusion

Resources

Institutional capacity

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Obstacles and risks

Fraud

Privacy and cybersecurity

• Digitalization is transforming how we live and the conduct of policy

• Governments cannot stay on the sidelines of this transformation

• Overcoming challenges will require:– A comprehensive reform agenda– Risk mitigation– Adequate resources– International cooperation

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Policy implications

Thank you!