Specifics of IT Projects in Tax Administrations

Table of Contents

Challenges in Implementing Digital Tax Administration Projects

The tax administration is a government agency, so it must follow public procurement rules when choosing contractors. Tax authorities must justify their choice, plan the scope of the work, prepare tender documentation, hold a tender for selecting contractors, monitor the implementation, and accept the work in a timely manner. This leads to long planning and implementation cycles for projects involving complex information technologies (IT).

The fundamental challenge here is that tax administrations plan IT budgets long in advance based on estimates. Terms of references, despite their details, still leave room for the new interpretations, complications and additional requirements raised by the tax administration during the system implementation.

Because payment for the project depends on the work, which tax administration must fully accept, the contractor has no room for arguing and cannot do anything about this. As a result, almost any IT project with tax authorities turns out to be unprofitable for the contractor, and only a great optimist would assume that such a system for planning and implementing projects will be better, easier, and more profitable in the future.

Government and large commercial customers often fix the budget even before writing the tender documentation, let alone a detailed technical design. That gives another challenge for a realistic estimation of the costs of such complex projects. But the law regulates this procedure, and tax administrations cannot deviate from it.

An alternative would be to split the project into design and implementation phases, but this would significantly affect the project’s timing and still run into the fixed budget that the customer allocated to the project.

The Contractor’s Experience

Thus, participation in these IT projects is possible only if the contractor deeply understands the specifics of tax administration. This understanding allows the contractor to manage customers’ requirements in terms of the project’s eventual outcomes and deliverables. If the contractor does not have an understanding and experience in creating tax solutions, as well as the ability or desire to manage the customer’s expectations, then the project is likely to end either as a failure or with deep losses for the contractor.

Let us define the first rule of implementing IT projects related to tax administration:

Rule #1: Avoid engaging in tax projects unless you have relevant experience and in-depth tax administration knowledge.

Financing of IT projects

It is obvious that funding is essential to any IT and digitization efforts, since without it, nothing would be possible. Unfortunately, tax officials do not always understand this basic point.

Innovation is difficult if the tax administration cannot give a clear definition of the strategy, goals, and objectives; identify potential benefits for the state and taxpayers; and sign off on the outcomes to get sufficient funding on the regular basis. Unfortunately, in these situations, there is often a fragmented search for funding, a lack of regular payments, or a fear of committing to the project’s outcomes.

Rule #2. Don’t work with tax authorities that do not have a strategy, do not understand what the outcome should be, and cannot ensure uninterrupted funding.

Implementation of IT Projects

The state regulation governs how tax authorities collaborate with suppliers. Project implementation usually manages through the central office (headquarter). Within the central office, there are so-called core divisions, which are the customers of a particular project, and auxiliary or supporting departments, such as the IT department, which help the core divisions to implement IT projects.

The major problem with such an organizational structure is that the employees of the core departments are tax professionals, but there are no competent IT customers among them. Unfortunately, a common belief in this area is that doing IT is easy, and commissioning IT projects is even easier.

To be an effective IT customer and not become a victim of an unscrupulous contractor, it is necessary to:

Be capable of defining the goals and objectives of a project.
Understand the IT architecture and the importance of using certain technical solutions.
Be qualified to assess the importance of a particular functionality.
Understand the contractor’s estimates for implementing each stage of work.
Understand infrastructure solutions, information security solutions and other things related to information technologies.

Otherwise, tax professionals order what they need in person, not what the entire tax administration needs. For example, accepting the completed task of automating exports into Excel and not understanding the cost of the work and the contractor’s expenses, incompetent customers may devise new functionality on the fly and drive the contractor into losses, extorting him by not signing the acts of acceptance.

To avoid this situation, contractors should take an active voice and independently establish the scope of work, set its own tasks, and prepare a general documentation. It means doing most things that customers need to do themselves, including making key project development decisions.

Rule #3. Never work with the standard organizational structure of a customer in the tax authorities if you cannot fulfill the role of the customer.

Legal Issues and Information Security

Two auxiliary divisions in the tax administration stand out in particular: the legal department and the information security department. These divisions can obstruct any project during implementation or deployment, with no opposition from other departments.

Their only aim is to reduce hazards. They just say “no” and provide no solution if a project raises even the tiniest uncertainty, or they provide solutions that render the initiative completely useless. This implies that no one from the customer’s side will support the contractor unless the contractor itself has a deeper understanding of risk management and the regulatory environment than these departments do.

Rule #4. Never take on projects with the tax administrations if you are not ready to dive into legal issues and the intricacies of information security.

Managing Chaos

Any tax project implemented by one of the core departments will still interact with other departments for consultations regarding methodological questions, clarifications, and approvals. But the participants in these processes are not extremely interested in providing help, since they have their own projects and assignments. Therefore, the organization of this work and getting the information will require considerable effort.

Often, the customer shifts this task to one of the core departments, and then he will get an unpleasant surprise. First, somebody must explain the importance of such communication to the principal customer. Then you will be continuously engaged in the monitoring of his attempts to organize the work with related departments.

It is much more efficient for the contractor to organize communication directly between participants to avoid shifting responsibilities and inaction. The contractor must take the initiative and insist on forming effective working groups to resolve emerging issues in a brief time.

Rule #5. Never do tax projects unless you understand how to collaborate with the customer’s multiple departments.

Restructuring the Tax Administration is the Key to Successful Digital Transformation

To digitalize the tax administration system, the tax agency will inevitably have to adjust its organizational structure. If the current organizational structure somehow allows the implementation of internal IT projects that automate provisioning of the tax code and affect internal information systems, the situation is depressing for external projects if they create products and services for millions of taxpayers. Building popular and successful taxpayer services requires completely unique knowledge, skills, and experience than reciting the tax code from memory.

That is why organizational development is critical to the success of digital tax administration. The following methods will help us achieve that:

Create the position of IT Business Partner[1] in the core departments of the tax administration headquarter. Large enterprises have long used this approach, in which someone acts as a “translator” between business, IT, and external contractors within the core departments.
Create specialized core departments that oversee the implementation of external services and products. There may be a problem that such departments will only bring in employees with tax experience but without the skills to launch successful products, and with a corresponding mentality that simply blocks innovation and innovative ideas. If the tax organization cannot revamp the standard personnel policy and everything remains as it is, this path will lead to the addition of their new equivalents to the old core divisions.
Create a special department with the responsibility of modernizing the organizational structure. If they create a department for managing other departments, it means that the tax administration is at a standstill and its head is trying to replace himself with an entire structure.

Only the head of the tax administration must change the organizational structure. Do not delegate this function to a subordinate or an external entity.

The head is the one who must select strong personnel with experience in successfully implementing digital projects so that they advance the modernization of the entire system, effectively implement digital tax transformation projects, and create new products and services.

Rule #6. Only work with a tax agency that has a vigorous leader who is willing and able to hire strong IT professionals.

Where is the Inspiration in This?

We discussed six reasons IT providers should not start working with tax authorities. Now the question arises, why work with them at all with such an introduction? If you focus only on internal IT projects, then we have no satisfactory answer for you.

Internal automation of the tax system does not differ from the internal automation of any commercial enterprise. Only the country has one tax administration, and there are many enterprises. If something wrong happens with the only customer or the quality of your work, then all the investments, domain knowledge, and understanding of processes and how to collaborate with the customer will go to waste.

External projects make it possible to create solutions and products for taxpayers that can seriously improve life in the country and provide an opportunity to see in real time the results of applying information technologies. This is truly inspiring.