Digitalization and Data-Sharing Are Helping Kosovo Boost Tax Compliance and Reduce Informality

Many businesses in Kosovo's taxpayer registry have missing or invalid address information, and a significant share of individual businesses do not file tax returns in any given year, despite being registered as active enterprises. That level of noncompliance has serious costs for the country. It not only disrupts the government's ability to plan and produce accurate budget estimates, but also results in less revenue to fund much-needed investments in health, education, social protection, and infrastructure.

But without reliable taxpayer data, the Tax Administration of Kosovo (TAK) cannot verify if these businesses are inactive and neglected to deregister or simply ignore their tax filing obligations. And missing or incorrect addresses or other critical details for follow-up lead to inefficiencies in tax enforcement, audits, and investigations that tie up TAK's limited resources and staff and increase the administrative burdens on businesses.

Improving the quality of Kosovo's taxpayer registry is therefore essential to reducing informality and ensuring greater tax compliance. The World Bank is helping TAK in those efforts by providing technical assistance through the ongoing Enhancing the Quality and Scope of Taxpayer Registration (EQSTR) project.

In consultation with TAK and a wide range of government agencies, the EQSTR project has helped identify two major obstacles to improving the quality of TAK's taxpayer register: (1) limited motivation from businesses to voluntarily and timely update their information and (2) insufficient data sharing arrangements to allow more seamless information flows from other public registry agencies to TAK.

The World Bank, with the support of the Global Tax Program (GTP), is helping Kosovo to address these challenges, recommending and financing technical assistance related to digitalization and data sharing.

Digitalization: A Way Forward on Taxpayer Data

Existing processes to register, deregister, or update information in the business and taxpayer registers have placed a high compliance burden on businesses. Even minor updates of registration data require in-person visits to a Kosovo Business Registration Agency (KBRA) office. And businesses must initiate two separate processes to deregister, one with TAK and another with KBRA. But under current legislation, there are no penalties for failing to deregister or update taxpayer information in a timely fashion, so many businesses just ignore these obligations.

As identified through the EQSTR project, a key reform objective for TAK and KBRA is the creation of a fully digital, one-stop process for businesses registration, information updates, and deregistration. Moreover, the project has recommended a fully paperless certification process and imposing fines for violating requirements to update tax information. To underpin these recommendations, Kosovo has adopted the legal basis for the implementation of e-signature.

But the issue here is not just digitizing TAK's records. The integrity of data supplied to TAK by partner agencies-initially by KBRA and the State Address Register, but eventually by municipal agencies operating address registers-must also be ensured. The EQSTR project will assess over the coming months KBRA's requirements and capacity needs to introduce more proactive data management to verify and update business data. Likewise, with support from the World Bank, the State Address Register is establishing critical online links allowing for real-time verification of address information provided by a business.

Data Sharing Forum for Better Inter-Agency Cooperation

Digitalization involves more than just websites and servers. Kosovo's government agencies need to also develop a culture of openness and partnership to best manage and make use of digitized records. One key lesson from the EQSTR project is that a tax authority needs to cooperate with other government agencies to improve and sustain the quality of the taxpayer register. In June 2020, Kosovo established the Data Sharing Forum, which brings together general directors from TAK and other key public registries, to strengthen data exchange and inter-agency cooperation. The EQSTR project supported the establishment of the Forum by providing advice on governance arrangements and facilitating meetings and workshops.

While government agencies must do a better job communicating with each other, more emphasis and resources must also be placed on ensuring the business community understands and buys in to TAK's digitalization efforts. "Fostering a common understanding and acceptance of new business processes is important in digitalizing business and taxpayer registration," says Ilir Murtezaj, General Director of TAK. "An ongoing dialogue with counterparts facilitated through workshops and expert meetings as well as high level stakeholder consultations, is the key to create such understanding."

TAK will continue to build upon the lessons learned through the EQSTR project and work toward improving its taxpayer register. With continued support from the World Bank's Global Tax Program, TAK is working to expand the country's taxpayer net and further enhance its capacity to register informal businesses with non-negligible revenue potential-ensuring Kosovo has the fiscal resources to build a sustainable, inclusive future for its people.

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