In an age when we can order food, hail a ride, track
our fitness, book a flight, and perform multiple
banking activities from our smartphones, technology
is shifting citizen expectations across the globe.
These higher expectations directly translate
to higher expectations for government services—but many public-sector institutions lag behind
these expectations.
Tax authorities are in the eye of the storm of these
global forces; digital payments are growing in
scale and significance, and data are becoming the
currency of tomorrow. These and other changes
are raising security and privacy questions and
challenging the conventional role of tax authorities.
These agencies, alongside the rest of the public
sector as well as private businesses, are also facing
structural changes as global growth is shifting east,
global trade is coming under increased scrutiny, and
employment patterns are being reshaped (Exhibit 1).
Exhibit 1
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McKinsey_Website_Accessibility@mckinsey.comIn every economy, these forces are requiring
organizations to innovate rapidly, and tax
authorities have a lot to gain or lose from these
changes. Tax authorities make decisions based on
their unique situation to provide high-quality citizen
services, improve revenue collection, and deliver
operational excellence—but all face similar forces.
To understand how tax authorities are adapting
to operational changes and adhering to best
practices—or failing to do so—we gathered a
new set of qualitative and quantitative insights.
Our research, primarily derived from our
Tax Administration Performance Benchmark
(see sidebar, “Survey methodology,” for more
information), includes data from 21 national and
state tax authorities around the world. The research
highlights four areas of divergence where the
practices of leading tax authorities are significantly
more advanced than others: digitizing interactions
with taxpayers, advanced analytics, process
automation, and talent management. Our research
shows that most tax authorities have made some
progress in at least one of these areas—however, no
institution is leading in all dimensions, and even
those in the lead are continuing to innovate and
capture significant gains. Much can be learned,
therefore, from the different choices made by tax
authorities on what to accelerate.
1. Digitizing interactions with taxpayers
Tax authorities are currently at varying levels of
maturity by measure of digitizing interactions
to offer more efficient and customized service to
taxpayers.
While many tax authorities are making progress
in digitizing interactions with taxpayers, few are
performing on par with leading public organizations
or private-sector businesses. Our research looked at
two key indicators to assess the extent to which tax
authorities are embracing digital transformations:
service differentiation, which is essential to effective
digitization of taxpayer service, and an integrated
view of the taxpayer, which involves implementing
an integrated account-management system required
to digitize large volumes of taxpayer interactions
(Exhibit 2).
Exhibit 2
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McKinsey_Website_Accessibility@mckinsey.comService differentiation. As taxpayers come
to expect that their digital footprint can bring
them more customized service, the impact on
tax authorities will be significant. In the case of
service differentiation, the most sophisticated
tax authorities, which represent just 5 percent
of our sample, have moved beyond measuring
services by channel to mapping taxpayers’ service
journeys across channels and applying analytics
to identify the most frustrating and time-consuming
interactions. With this knowledge,
the tax authorities devise more customized
and differentiated digital channels to address
customer wants and needs, including providing
easy access to tax services. They quickly identify
the root cause of customer dissatisfaction and
resolve the issue much more efficiently than
previously possible.
Integrated view of the taxpayer. By measure of
building an integrated view of the taxpayer, the
leading tax authorities, which account for just
11 percent of our sample, have created central,
digital workflows across departments involved
in taxpayer contact such as processing, audit,
and collections. This integration results in a
substantially improved taxpayer experience, as
representatives can see and resolve multiple issues
at once—even ones the taxpayer may not have
raised. Integration also provides tax authorities
with significant efficiency gains, as administrative
workers who were previously assigned to a single
function (for example, customer service) can also
resolve other issues (for example, debt payment),
either in the same customer interaction or through
flexing to manage peaks at different times of
the year.
For more examples of cutting-edge digitization
efforts, see sidebar “Example approaches to digitizing
interactions with taxpayers.”
2. Advanced analytics
While most authorities have started using advanced
analytics, we see a range of sophistication in
how research and analytics are used to segment
taxpayers, prioritize examinations, and choose
the appropriate examination approach, including
the use of “light touch” approaches rather than
full audits (Exhibit 3). Several tax authorities have
embraced analytics to transform how they conduct
examinations and debt collections, using analytics
to create early warning systems and practice
extreme modeling, while others are still working to
get beyond the basics.
Exhibit 3
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McKinsey_Website_Accessibility@mckinsey.comEarly warning systems. Early warning systems
can address taxpayer insolvency, a source of major
tax revenue losses. By better understanding when
taxpayers are at risk of insolvency, tax authorities
can take actions to avoid increases in tax debt over
time or reduce costs of debt collection efforts by
focusing on debt with the best chance of recovery.
A European tax authority that was losing a significant
amount to insolvency cases implemented
an advanced model using value-added tax (VAT),
income tax, payroll, and other data sets to create
a 360-degree view of taxpayers. This better
understanding of taxpayers enabled the authority
to robustly identify taxpayers at high risk of
insolvency and proactively address these situations.
As a result, the agency is on track to deliver targets
of approximately $8 million in operating cost
reductions and $800 million in reduced tax losses
in debt collection.
Extreme modeling. In most countries, less than
5 percent of taxpayers are audited annually, so it is
critical to maximize the value of these audits. By
using an advanced model for case selection, tax
authorities can deliver value by choosing the right
cases and avoiding unproductive cases; for one
authority, unproductive cases made up more than
50 percent of audits.
Some tax authorities now identify taxpayers for
audit using extreme modeling, which involves
using machine learning to build a sophisticated
algorithm to identify the best predicting factors of a
successful audit. One OECD country’s tax authority
built such an algorithm integrating more than
ten databases, using two independent modeling
techniques, and automatically scanning more than
1,500 variables. The algorithm looks at changes in
different ratios of expenses and revenues over time,
opening up new insights compared with “static”
features. The improved case selection avoided the
more than 50 percent of unproductive audits and
meant the cases selected returned up to two times
more revenue than the baseline.
For an example of an approach to advanced
analytics being taken by one tax authority, see
sidebar “Example approach to advanced analytics.”
3. Process automation
Tax authorities have been investing in automation
for decades; for example, with e-filing, automatic
data checks, automatic reminders, call center
interactive voice response, and so forth. However,
the combination of new analytics and machine
learning with robotic process automation is
enabling a whole new wave of capabilities that
increase productivity dramatically. While many tax authorities are quick to automate internal processes,
they are not moving as quickly with their externally
facing service offerings (Exhibit 4). This trend
probably reflects a desire to gain familiarity with the
tools before rolling out to an external audience.
Exhibit 4
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McKinsey_Website_Accessibility@mckinsey.comSome tax authorities stand out from the rest in
how they have applied IT and digital technology to
automate key stages of their operations, including
compliance processes. Those organizations that
have invested more heavily have more automated
processes, offer prepopulated and self-corrected
returns, and integrate taxpayers’ accounts across
various products and situations.
We have also seen tremendous innovation in the
use of automation to mine inbound inquiries from
taxpayers—from large OECD tax authorities to
smaller, subnational tax agencies. The inquiries
can be captured in the form of emails, web chats, or
even notes from customer service representatives.
Using automation, inbound service inquiries
are automatically processed and tagged by
issue. Typically, the algorithms can cleanse and
normalize free text into data, which in turn helps
analyze trends, prioritize communications efforts,
and identify training needed for customer service
representatives. These algorithms provide a
much higher degree of rigor and consistency in
managing and improving the flow of information
to and from taxpayers. We think this type of
automation will continue to expand in its uses; for
example, through automated processing of tips and
complaints to make sure that potentially valuable
information from the public does not fall through
the cracks.
We expect the current focus on experiments and
pilots to increasingly turn to at-scale implementation
with a whole new digitally skilled workforce
working alongside machines and algorithms. The
private sector is already investing heavily in the
area; corporate call centers increasingly use
interactive robots with machine-learning capabilities
to reduce call-center waiting time for customers.
Robots are trained to recognize meaning, interact
with customers to clarify requests, and apply
knowledge to solve problems, and this has proven
to be very successful.
The public sector is also increasingly looking into
innovative use of automation. An Asian country
recently launched its first online court for speedy
justice, where a judge presides over two computer
panels at a workstation. A voice-identification
computer program transcribes the proceedings,
eliminating the need for a court clerk. For more
examples of efforts to automate both internal and
external processes, see sidebar “Example approach
to process automation.”
4. Talent management
Solid talent-management practices are crucial
regardless of the maturity of a tax authority’s digital
footprint. The appeal of working for a tax authority
partly rests in a sense of purpose and the inherent
reward of public service, as professionals are invited
to work on high-value challenges on behalf of society.
However, as the operations of tax authorities change
with the advent of advanced analytics, digital
techniques, and process automation, questions of
talent management, recruitment, re-skilling, and
retention are real issues for many authorities.
Our benchmark found that just 10 percent of tax
authorities take extraordinary measures to retain
top talent, and only 5 percent offer very high-quality
training and link evaluations to personal
development (Exhibit 5).
Exhibit 5
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at:
McKinsey_Website_Accessibility@mckinsey.comIn many leading organizations, we see the human
resources function taking a more active role
as a strategic business leader, linking talent to
service quality and citizen satisfaction. Several
developments have led to this trend, including
the increasingly competitive talent market,
the emergence of people analytics and digital
technologies that can unlock better talent decision
making, and increasing pressure to deliver
productivity and better user experience.
One bank uses regression models on employee
performance and other organizational data to identify the top 15 percent of talent who qualify
as high performers as candidates for promotion,
training, or transfer. In the public sector, a major
state-owned telecom company uses advanced
analytics to understand key drivers of employee
motivation and tailor the new motivation program
accordingly. It identified an opportunity to double
employee motivation and improve overall company
health. Across the spectrum, agencies expect
HR to harness new capabilities and technology to
consistently attract, retain, and develop talent as
well as increase efficiency of operations.
Many tax authorities still have limited
sophistication in their talent strategies, bringing
less rigor and discipline to their organizational
health than their organizational performance. Less
sophisticated agencies prioritize organizational
dashboards that capture key performance indicators around compliance, service, and processing
over measures of organizational health such as
investments in talent and the approach to retention.
For an example of an effort to imbue talent
management with technology, see sidebar “Example
approach to talent management.”
To make progress in the digital age, tax authorities
must examine their current strengths and
weaknesses and ask what is holding them back
from progress. In our experience, 60 percent of
government transformations fail—usually due
to a lack of direction, delivery, and/or drive.
To overcome the odds in typically large, complex,
and cautious organizations, agencies must create
a compelling vision for change, build a consistent
process that ensures coordination and continued
progress, and sustain momentum by building
organizational capabilities, providing clear
and influential leadership, and communicating
effectively. For tax authorities looking to take
advantage of the four innovation trends driving the
future of citizen services, candid discussions around
four questions can help begin the conversation and
build alignment around the way forward:
- Are the administration’s digitization efforts
matching taxpayer expectations? How can these
tools improve customer service and give back
time to businesses and workers in the economy?
- How effectively is the administration unlocking
value, improving tax revenues, and lowering
costs through advanced analytics?
- How mature are tax authorities’ automation
efforts? What cost savings and productivity
can be gained by running a digital workforce
alongside a human force?
- How are tax administrations innovating in
their approach to attracting and retaining talent
and ensuring the right digital and analytical
skills mix?
The tax administration of tomorrow will be radically
different from that of today; data will be used in a
highly relevant manner, allowing systematic filing
and payment in a risk- and error-free environment,
and back-end operations will be so smooth that
taxpayers may not even need to be in contact with
tax administrations anymore. To get there, tax
authorities must go beyond incremental changes
using existing tools and begin revising their
approach to a whole host of operational tasks.