How government use big data to improve taxation system?
Last Updated: August 25, 2020

Governments around the world are advancing their use of big data on tax, focusing heavily on tax compliance and eliminate waste. Governments are figuring out the way to analyze the huge amounts of data available on corporate and individuals to improve the tax collection system. Big Data refers to a set of data exceeding normal amounts of traditional database technology, the amount of data is so huge and diverse that it requires more advanced technology to handle the data. Big Data is characterized by the terms volume, velocity, variety, and veracity; in a more specific explanation, volume refers to the amount of data, variety refers to the different sources of data (mobile, website, etc) and as well as the formats (unstructured, structured, semi-structured, etc), velocity refers to the speed of data changing or being updated, and lastly, veracity indicates the quality of the data.


Taxation is a necessary activity to raise the revenue so the government can provide goods and services for its citizens. Let’s take a look at how big data is used by one of the top social media globally, Facebook uses big data to customize advertisements, optimize news feed, accurately promoting contents, and personalizing the best experience for every user. Originally, data scientists, policymakers, and tax experts are trying to utilize the same big data mechanism to advance the taxation system. Since every citizen and enterprise is entitled to pay tax, there’s a huge amount of data available to be collected, processed, managed, and analyzed.


Big data for the taxation system is focused on an increasing scale, precision, advance computational potential, monitoring, and informing the evolution of tax policy. Specifically, data scientists and tax experts are working together to use tax data for two new features, insight and foresight. Insight means looking closely, analyzing it to gain understanding and visualization from existing data. Foresight means predicting the future based on existing data or commonly known as predictive analytics.


Big data is awesome not merely just because of the scale of data being managed, but also how it is being managed. Comprising a massive amount of information requires advanced computers running highly structured algorithms to turn raw data into valuable insights. Both traditional and modern tax compliance are still backward. When it comes to administration, primary mechanism used is mainly audits. This time-consuming investigation is focused on forensic reviews of tax reports and individual’s or organization’s financial records to look for inconsistencies, errors, or criminal tax avoidance. This cost the government a great deal of money.


Big data can improve tax collection, it refers to the methods governments use to collect information of individuals and business entities’ information. Slow data collection and processing time is one of the biggest issues any government has, it could lead to a slow down of tax rate and dues distributed. Big data can effortlessly solve this issue, allowing faster and effective data collection for tax purposes. Since unifying all the available data is the basic step to utilize big data, it could also reduce data silo and uneven data distribution in government. By putting all the data in one single place, the government can maximize data sharing between departments and encourage collaboration within organizations. Sharing data leads to several benefits like a better chance of figuring out ineffective activities, faster processing, and reduce waste.


How government use big data to improve taxation system?
How government use big data to improve taxation system?

Here’s the example on how these government use big data to better taxation


United States

Preventing tax fraud is also possible with the implementation of big data. One of the biggest problems for state organizations is to differentiate well-meaning taxpayers and those who try to cheat the system to either lower their tax payments or to get larger rebates. A couple of years ago, United States Internal Revenue Services admitted that they are using big data to stop tax cheats. One of the strategies that were employed, social media data mining was used, to prove that people are living a more affluent lifestyle than their tax records, this successfully saves $300 billion tax lost every year Big data solve this problem by utilizing data classification and trail-based pattern recognition separate fraudsters and genuine taxpayer.


United Kingdom

UK tax authorities were also following the step as tax evasion and avoidance cost UK 6.9 billion pounds every year. This result in public pressure over large companies tax avoidance, as government spending on public services is being cut, this triggered the initiative to better taxation system. Therefore, the authorities were seeking data on citizen to generate predictive analytics for better audits. The tax authorities increased the amount of data Her Majesty Revenue and Custom (HMRC) can hold and analyze, by extending the legal right to collect data from merchant service providers and data aggregators, including overseas. This step is very crucial as many tax avoidance schemes use businesses based overseas. The authorities also have the right to hold the marketplace if the online traders don’t pay tax on it.


For those tax avoidance offenders, they will be marked as high-risk individuals for certain period of time after being convicted, there will be data gathering and monitoring on them to avoid them repeating the same crime. Other than data collecting and monitoring, HMRC is also changing their status on handling tax from reactive organization to a pro-active organization. By using insight into human behavior to encourage individuals to fill their tax documents with honesty at the filling process.


Big data is the perfect solution to improve country’s taxation system, its helps government to begin sharing tax information between departments, store the data, process the data into valuable insights, creating single view compliance, prevent tax fraud, improve accuracy, and last but not least perform predictive analytics. Utilizing big data helps tax authorities to a higher degree of automation, allowing them to reduce manual data operations and avoid costly reconciliation - thus reducing audit costs. This also enables them to focus on strategic planning for a better taxation system. Learn more about big data for tax by consulting with us for free

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