Presentation at a Better Than Cash Alliance learning session. The presentation is based on this DIGITAX working paper: https://bit.ly/41ZWYPZ ----- Hosted by the United Nations Capital Development Fund (UNCDF), Better Than Cash Alliance is a partnership of more than 80 governments, companies and international organizations that accelerates transition from cash to responsible digital payments to help achieve the Sustainable Development Goals. UNCDF is the United Nations' flagship catalytic financing entity for the world's 46 least developed countries (LDCs).

1. PARTNERS
Digital tax payment
systems in low- and
middle-income countries
(LMICs)
Primer
Moyo Arewa and Fabrizio Santoro
Learning session, Better Than Cash Alliance
14th March 2023

2. Outline
1 Introduction
2 Defining digital tax
payments
3 Barriers, limitations
4 Preconditions
5 Future research agenda
6 Q/A

3. Introduction

4. Reduce
admin costs
and
inefficiencies
Reduce tax
compliance
costs and
improve
taxpayer
services
Limit scope for
corruption and
collusion
Increase
transparency
and
accountability
Improve
revenue
performance
Digital Tax
Payments
Digital tax payment systems promise to…

5. However,
Despite the prevalence of digital
payment technologies, and the
sense that they are inevitable,
there are still major gaps in our
understanding of their effects on
public service delivery and
taxation, specifically

6. Defining digital tax payments

7. Characteristics of tax administrations
in LMICs, particularly Africa
Face to face interactions, entrenched
incentives to collude
Cash dependence
Manual processes
High tax compliance costs
Limited data governance
Digital literacy challenges
Nascent tech infrastructure (broadband,
internet, electricity, etc)

8. Focus on P2G and B2G digital
payments
• P2G payments worth $8trillion globally, though less
than $500M in LMICs
• Much room for growth, with RAs in LMICs investing vast
sums to improve P2G and B2G payment capabilities
• Internet penetration increasing: over 106 new users per
second in Africa. Ten-fold increase since 2000
• The ubiquity of mobile phones and mobile technology,
and the prevalence of payment services and fintech
• Review focuses on e-filing, e-payments, and mobile
money: results of burgeoning digital landscape in LMICs,
and Africa specifically

9. E-filing and e-payments:
what we know
E-filing and e-payment services
have become standard fixtures of
revenue authorities’ integrated tax
systems

10. E-filing and e-payments
Diffusion of e-filing and e-payment services in lower- and lower-middle-income
countries 2017
24
28
22
17
0 5 10 15 20 25 30
No. of Countries
E-filing
Status
E-filing and E-payment E-filing for citizens and businesses E-info and forms Not available yet
Sources: Arewa and Davenport 2022, from World Bank Public Financial Management Systems and eServices Global Dataset,
https://datacatalog.worldbank.org/dataset/public-financial-management-systems-and-eservices-global-dataset (last updated
2017).

11. E-filing and e-payments: what we know
• In Kenya: introduction of iTax (including e-
filing and e-payment module) increased
revenue by 31.8% between 2013 and 2015
(Ndung’u)
• Improved VAT efficiency across SSA (IMF
2020)
• Most salient effects have been on tax
compliance and administrative burdens:

12. E-filing and e-payments: tax
compliance and admin burden
 Eswatini: Taxpayers registered for e-services were 60% less likely to file
nil, declared more turnover and income, and 70% more likely to make
payments (Santoro et al, forthcoming)
 Tajikistan: e-filing adoption reduced the frequency of bribes by 18%
among taxpayer groups more prone to evasion and reduced compliance
costs by saving 5 hours each month of taxpayers’ time (amounting to
40% of the time otherwise spent meeting tax obligations) (Okunogbe
and Pouliquen, 2022)
 In Belarus, Costa Rica, Kenya, e-filing and e-payments led to:
 Reduced time for businesses to prepare and file taxes (804, 239,
230 hours) (World Bank 2016)

13. E-filing and e-payments: tax
compliance and admin burden
 Uganda: small business owners’ attitudes about tax compliance
changed positively after URA enabled e-filing and e-payments in 2012
(IMF 2020)
 A cross-country study by Kochanova et al. shows the average time to
file and pay taxes reduced by 16% within three years of introducing e-
filing and e-payments.
 In the same period, the average # of tax payments was reduced
by 39%, suggesting broad efficiency payments. The same study
found that e-filing + e-payments, when paired together, reduced
the probability of tax inspections by 9% and the probability of
paying bribes by 5%.
 Rwanda: the introduction of e-filing and e-payments reduced the time
for businesses to prepare, file, and pay taxes from 119 hours in 2015 to
109 in 2016 (Fischers and Naji 2020)

14. Mobile money: what we
know
• Astronomical growth across LMICs, particularly in
SSA
• More MoMo accounts than traditional deposit
bank accounts in many countries
• Spread beyond early adopters (Kenya, Uganda,
Tanzania) to frontier countries (Ghana, CIV, etc)
• Mobile penetration deep in Africa: more Africans
connected via mobile than through the Internet
• 21% of adults continent-wide in Africa have a
MoMo account
• MoMo seen to be more accessible than web-
based e-filing and e-payments

15. Mobile money: effects
on taxation less clear
Less is known about the effects on taxation than on
broader public services—much more room for
disaggregated analysis.
MoMo is used for various P2G and B2G payments
(utilities, civil registration, etc.). More understanding of
MoMo’s effects on broader government revenue
generation
Across LMICs, up to 46 countries have enabled B2G/P2G
MoMo payments for at least one gov’t service, though 29
enabled MoMo payments for taxes (Fichers and Naji)
Over 90% of digital payments via Kenya’s eCitizen in 2020
were made using MoMo.

16. Mobile money and taxation
• Similar effects on taxation as e-filing and e-payments
• In Mauritius, after the introduction of mobile money payments for PIT, MRA
recorded a YoY increase of 12% in filed tax returns and payments.
• In Guinea, after enabling MoMo payments for vehicle taxes, payments
increased by 70% and the number of vehicle licenses issued by 65%. (Fichers
and Naji 2020)
• In Rwanda, the M-declaration tool, a MoMo-based service for paying
presumptive taxes, yielded positive impacts among those who adopted it.
• Reduced compliance costs for taxpayers; the tool enabled them to pay
anywhere across the country rather than having to travel to a physical
location

17. Barriers and limitations of P2G and
B2G digital tax payments:
Demand-side constraints

18. Low rates of broad user acceptance
 Slow uptake, lack of awareness, lack of access to
computers and the Internet despite slowly increasing
access, and payment interfaces that are not user-
friendly (Okunogbe and Pouliquen 2022)
 Costs of adoption greater for businesses that are not
well established, or that operate informally without the
capital or expertise to migrate to digital solutions
 Low uptake observed even in contexts where adoption
was mandatory (Eswatini). Only 41% of taxpayers took
up digital payments even up to one year after a
mandatory order was instituted. Many missed payments
or continued with paper-based practices. Similar
patterns in Rwanda
 Low uptake has also been observed amongst female
taxpayers and those with less formal education
(Rwanda).

19. Low trust in digital solutions
 Low trust directly correlated with low uptake
 Low trust is costly: high transaction costs, suppresses penetration,
hampers innovation
 In Tajikistan, low trust in the digital solutions, and tax officials incentives
to maintain face-to-face contact and collusive networks, hindered the
success of digitizing payments.
 Consequently, digitization had counter-productive effects: tax
inspections increased, and collusive networks persevered despite
introduction of e-filing and e-payments
 In Rwanda, lack of trust in effectiveness of the digital solutions affected
uptake.
 More evidence needed to understand how existing dynamics of trust in
gov’t affect adoption
 Early evidence suggests investments in data governance, privacy
protection, and cyber-security mechanisms can improve perceptions of
trust in digital solutions.
 However, long way to go, of the 107 countries with enacted
privacy laws, only 51 are in LMICs – and even in those 51
countries, enforcement and implementation are often after-
thoughts.

20. Preference for in-person interactions
 Taxpayers across Africa still prefer some in-person
support, even when they have access to electronic
solutions
 RAs therefore often have to maintain in-person services,
even though this itself could limit uptake of digital
solutions. Evidence shows that taxpayers opt for the
non-digital option where parallel services are operated.
 Sometimes, digital options are still too complex, driving
would-be digital taxpayers to in-person alternatives

21. Cash is still King
 In Nigeria, only 10-20% of tax payments are made
through digital payment systems despite high
penetration of commercial digital payment solutions
 Immense fidelity to cash, ingrained incentives and
interests
 Taxpayers still prefer cash even when costs of paying
with cash are greater
 Attempts to restrict cash access and use have often been
disastrous (India’s demonetization, Nigeria, Uruguay,
Mexico etc), with modest benefits for digital forms of
transactions

22. Insufficient transaction limits
 Small transaction limits for MoMo transactions hinders
adoption, especially for medium to large enterprises
 In Senegal and CIV, limit is US$4,430, and in DRC only
$500
 MoMo solutions often explicitly tailored for small
enterprises and taxpayers, who are already less likely to
be compliant (Rwanda)

23. High costs of adoption and unequal
access
 Electronic and digital solutions come with new or
enhanced costs for taxpayers and tax officials. These
costs can be prohibitive
 Digital adopters tend to be male, university educated,
young, married, and urban

24. Barriers and limitations of P2G and
B2G digital tax payments:
Infrastructural constraints

25. Interoperability and technical
compatibility
 Interoperability refers to the ability of payment instruments to
support many payment instruments or providers
 Integration is necessary between payment providers, the
government and regarding different modes of delivery
 The culprit: competition, rigid legal or regulatory doctrines,
inadequate technical standards
 Lack of harmonization between various P2G options
 Integration between filing and payments platforms also
challenging:
 In Eswatini, after e-filing, taxpayers then had to migrate to
a different e-service to pay.

26. Underlying ICT infrastructure
 Digital payments rely on established ICT infrastructure.
 Cellular, broadband, wifi, affordability of smartphones,
computers, electricity supply
 Weak ICT infrastructure has material effects: system
failures, slow systems, interrupted services.

27. Barriers and limitations of P2G and
B2G digital tax payments: Political,
regulatory, and institutional
constraints

28. Political, regulatory, and institutional
constraints
o Whole-of-government coordination is often required for
government digital P2G and B2G systems to be
effective.
o Such coordination is rare, resulting in fragmentation and
incoherence
o Rwanda and Kenya have made strides in fixing this. Both
countries have developed a centralized government-
wide digital services platform to provide citizen services,
including payments
o Other barriers: limited political will, budget shortfalls,
corruption, etc.
o More evidence is needed to understand the impacts.

29. Preconditions for successful
adoption of digital payment
solutions

30. Political will and institutional
investments
- Institutional commitment and political will
o Necessary for effective integration and interoperability
o Necessary for data-sharing
- Legal and regulatory frameworks
o Necessary for the simplification of tax procedures to
enable digital payments
o Necessary for advancing newer tech (e.g., digital ID,
digital signatures, data encryption, etc)

31. Investments in human capital
o Investments to sensitize taxpayers, especially in low
digital literacy contexts
o Investments to upskill tax officials
o Those with more foundational IT skills are more likely to
use e-filing and e-payment systems.
o Education materials disseminated across digital and
non-digital mediums, helpdesks and customer service,
change management

32. Payment system infrastructures
o Adequate systems for processing, clearing, and recording
payments
o Data storage and management, payment verification and
validation, reporting, accessibility of APIs
o User-friendly payment portals, meeting taxpayers where they
are at
 In Nigeria, taxpayers were more likely to adopt e-filing and
e-payments when they found the software easy to use.
Other taxpayers found the reliability and speed of the
system to determine their willingness to use it

33. Looking forward

34. Areas of future research
o Examining exclusivity of digital payment systems
o Understanding technical limitations better (outages, reconciliation and
confirmation delays, etc)
o Assessing role of third-party actors
 Payment aggregators, commercial payment providers (e.g., Remita,
Maxcom), tax agents
o Relationship between digital tax payments and broader PFM
 How does PFM structure (e.g., centralized or decentralized) affect
performance of P2G and B2G systems
o Understanding digital divide and its effects
o Examining institutional and political underpinnings of successful
implementation
 Are commercial solutions more appropriate than government
solutions? In what contexts?
 How entrenched are challenges to intra-governmental/horizontal
collaboration and third-party data sharing
o Mapping out system outcomes
 Understanding who is left behind when digital solutions become
more prevalent
 Effects on tax compliance
 Effects on enforcement, auditing, etc

35. PARTNERS
Thank you for listening
Moyo Arewa and Fabrizio Santoro