Digitising taxation secures Estonia’s #1 position in Tax Competitiveness Index

According to the Tax Competitiveness Index 2022 Estonian tax system is the most competitive among OECD countries for the ninth year in a row. This is largely due to the digitalisation of the tax system, which significantly reduces the administrative burden for the state, businesses as well as individuals.

Why do Estonians love paying taxes?

The most visible aspect of digitalisation for the end user is the single access “window” for e-services created by the Estonian Tax and Customs Board (ETCB) already at the beginning of this millennium. This, plus the fact that 98% of all data sent to the Tax Board is in digital form, ensures that when a user opens their tax forms, they are already at least partially filled in. As a result, 96% of private individuals and 99% of companies use digital services for paying their taxes.

While these numbers are telling already, the most significant outcome of transparent, simple and functional digitalisation of paying taxes is the high trust in tax administration. According to Jevgeni Shoron, International Relations Specialist at ETCB, their annual public survey shows that 91% of Estonians agree that paying taxes is every citizen’s duty, and 88% know when and how taxes should be paid. Public trust in the Estonian Tax and Customs Board is one of the highest among public offices in Estonia. Thanks to these advances, people generally correct any potential mistakes in their tax declaration themselves and tax administrators can focus only on problematic cases.

One of the first tax administrations with an AI strategy

„We realised that by developing AI utilities through fragmented projects, we would soon run into difficulties. Harnessing AI requires a lot of work in the back office, including creating new roles for our employees,” says Ms Pille Muni. “Now, instead, we have mapped 43 instances where AI could be of use, prioritised them and created a roadmap for achieving our goals.”

Ms Muni elaborates that while it is widely recognised that additional benefits for any digital services come from interoperability, adding more databases into the system creates challenges. As an example, while there were about 90 open data databases in Estonia just a few years ago, now there are more than 170 databases that could potentially be used by the ETCB. To use them, however, a rule-based risk model is required that takes about 2 years to complete manually. With the help of AI, a model can be completed in 6 months, creating additional opportunities for cross-checking, automated data flows and ease of declaring taxes.

AI fights tax evasio

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Several AI-based pilot projects have already been put into action, for example, in the problematic field of “envelope wages” (that is, unofficially paid wages that avoid taxes) and VAT. These experimental pilots have incorporated private sector partners such as MindTitan for injecting digital know-how into ETCB. Together they have trained AI to recognise tax patterns and anomalies in those patterns indicating potential tax evasions with 97% accuracy. For example, ETCB models of VAT risk scoring have helped to detect a large-scale VAT fraud in Saaremaa, a municipality worth hundreds of thousands of euros. These encouraging results boost organisations’ readiness to implement AI more widely.

The future of paying tax is in real-time

The developing economic environment and digitalisation of society require the continuous development of the tax administrator. In tax collection, digitisation of services is not the ultimate goal but a prerequisite for the quality of services and for ensuring a reliable and transparent business environment. A real-time economy is a future that ETCB is aiming for. This would change the tax system from declaration-based reporting to data-based reporting, thus eradicating the need to declare the data separately. The data would flow from the company’s accounting system directly to ETCB. The transition to data-based reporting would create opportunities to present the same data simultaneously to several different state institutions and thereby further reduce the administrative burden on the company. Already fully functional digital invoicing used widely by Estonian companies is among the first steps in this direction.

Supporting smaller businesses and creating common good

Also, a significant development is the business account for small and medium-sized companies. In 2017, in cooperation with LHV Bank, the Estonian Tax and Customs Board opened this innovative payment service for small and medium-sized companies. For them, a simple and convenient tax service is especially needed because keeping a professional accountant would be burdensome. The business account creates a simple and affordable form of conducting tax-related transactions. The bank, in cooperation with the tax administration, allows entrepreneurs to pay for goods, pay salaries, and taxes in the same digital environment. Tax liability for the users of the account is automatic, and no additional financial reporting is required. Follow-up surveys by ETCB show that the business account has been warmly welcomed by starting entrepreneurs.

By considering the benefits of digitalisation, one should not only think of the savings on administration. The state is potentially losing hundreds of millions in tax evasions annually. Therefore, a real-time economy, along with AI, can significantly increase the delivery of public goods.