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Leveraging global standards and market innovation may enable tax administrations to increase return on modernization investments.
In brief
- Tax authorities continue to adopt to taxpayers’ needs — from automated returns to digital reporting, finding new paths to boost efficiency and effectiveness.
- Many tax authorities now face the challenge of modernizing a complex portfolio of interdependent legacy systems.
- This article explores different modernization approaches, and how tax authorities can leverage the market and global standards to optimize service delivery.
Tax authorities are under increasing pressure to modernize and streamline their operations, while meeting an increasing number of international regulations. Global initiatives such as Global Anti-Base Erosion (GloBE) and EU-level directives like VAT in the Digital Age (ViDA) and Directive on Administrative Cooperation (DAC) demand new data-sharing protocols, real-time reporting and sophisticated compliance measures. Meanwhile, an aging technology backbone — often dating back to the 1980s — challenges the adoption of new standards and modern tax practices.
In this article, we explore how public tax administrations can balance efficiency gains with innovative transformation. We compare the use of commercial off-the-shelf (COTS) solutions and custom development, illustrating the challenges and opportunities with real-world examples of how different modernization paths can address both local requirements and global obligations. We present our observations on how to create a robust foundation for a successful modernization journey.
Trends in public tax administration
New regulations require interoperability and flexibility — systems must seamlessly handle complex multi-jurisdictional data exchange and adapt to frequent policy changes.
1. The rise of digital transactions
The digital economy is reshaping tax administration. Increasingly, taxpayers transact online —reducing paper-based workflows and necessitating the embedding of tax functions into so-called “natural systems” (e.g., e-invoicing, payroll and accounting platforms). This integration simplifies compliance and lessens the burden on both taxpayers and the tax authority.
2. Real-time tax certainty
As digital data capture accelerates, authorities can provide near-immediate feedback to taxpayers on their obligations. This real-time approach not only reduces compliance errors but also supports proactive detection of evasion and fraud.
3. AI-enabled tax services
Advanced analytics and artificial intelligence (AI) are helping tax administrations process large volumes of data to detect fraud, improve compliance modeling and deliver personalized taxpayer guidance. The goal is to augment — not replace — human expertise, focusing resources on higher-value tasks.
4. Transparency and public trust
Adoption of new technologies (e.g., AI-driven decision-making) must be transparent, fair and explainable to maintain public trust. This is especially critical in cross-border tax matters where multiple jurisdictions may share sensitive data under DAC or GloBE guidelines. Collaboration across different government agencies can further strengthen trust and facilitate more holistic public services.
5. Global and European regulations
The modernization push
Tax administrations were pioneers in digitizing government services, yet many legacy systems still mirror paper-based, sequential processes. Maintaining these aging platforms is costly; modernization efforts are often delayed due to complexities in migrating data, ensuring ongoing operations and meeting political or budgetary constraints.
ViDA - harmonizes digital reporting requirements for VAT across EU Member States, mandating near real-time transactional information exchange.
GloBE - addresses profit-shifting and ensures a global minimum level of taxation, impacting national legislative processes and cross-border tax governance.
DAC - establishes frameworks for information sharing between EU tax authorities, encompassing areas like income, financial accounts, digital platform transactions and more.
Evolving global and EU landscape
- Regulatory pressures: Initiatives like ViDA, GloBE and DAC impose new data standards and real-time information exchange requirements. Even partial shifts in global or EU policy can compel rapid system updates.
- Need for resilience: Authorities must design processes and IT architectures to cope with uncertainty — if political support for reforms changes or if new global mandates emerge, the underlying systems must adapt quickly.
Imperative for change
In this environment, resilient, scalable and future-proof IT is no longer a luxury but a necessity. Forward-thinking tax administrations see modernization not just as a compliance exercise but as an opportunity to improve taxpayer services, enhance compliance and manage resources more effectively.
The case for COTS
Commercial off-the-shelf (COTS) software offers several benefits for tax administrations. It is generally more cost-effective than custom solutions, as development costs are spread among many users, allowing for efficient resource allocation.
Deployment is quicker due to the pre-built nature, often with a proven track record of performance and reliability, having been tested by multiple organizations. Comprehensive vendor support, including updates, patches, technical assistance and hosting, alleviate the burden on internal IT teams and ensure smooth functioning. Additionally, COTS software often incorporates best practices and regulatory compliance.
However, there are challenges. Initial investments can be substantial, both in terms of licensing and implementation costs. Standardizing processes to fit the software's capabilities can be difficult for organizations with unique workflows. Tax is an important part of any authority’s policy toolbox, continuously subject to change. Any software product must be able to keep pace and be adapted accordingly.
Relying on external vendors also introduces risks related to stability and responsiveness, and integration with existing systems can be complex.
In deciding on COTS, tax authorities must ask themselves:
- Do we want our technology to support differentiation or align against best practices?
- Can we find ways to meet local, regulatory requirements in a standard product?
- Can we mitigate vendor dependency and lock-in?
Successful COTS implementation requires balancing advantages and challenges through thorough needs assessments, gap analyses and alignment with strategic goals. Effective change management and stakeholder engagement are crucial.
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Benefits |
Risks |
|---|---|
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Cost efficiency |
Upfront licensing and implementation costs |
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Faster deployment |
Fit and flexibility |
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Proven performance |
Proven performance |
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Vendor support |
Complex integration |
Case study: Finnish tax completed a historic transformation on time and budget in just seven years
The Valmis project (2013-2020) was the largest transformation in the history of the Finnish tax administration. Over 70 legacy systems were replaced with a standard, commercial-off-the-shelf (COTS) software. The modernization was completed in seven years with an implementation cost of €130m.
The project followed structural changes in the Finnish tax administration, including the introduction of e-services, the creation of a single nationwide administration and more standardized ways of working. This paved the way for the administration to address the growing IT costs, continuity risks and slow development speed.
The project included extensive market research, enterprise architecture study, product evaluation, procurement strategy and sequential rollouts across all tax types, including income, corporate, property, capital gains, vehicle, gift and excise.
The project involved revising tax legislation and streamlining internal processes, which freed up the equivalent of 100 full-time employees' (FTEs) worth of work. The phased approach adopted by the Finnish tax administration highlights how a COTS-centric replacement can streamline processes and reduce complexity, especially where standard functionality aligns with national and EU requirements, such as automated VAT collection or cross-border reporting.
Read more about Modernization of Finnish taxation with the support of EY
The case for custom
Custom development in public tax modernization offers tailored solutions that meet specific administrative needs, providing unique features and flexibility. It allows for leveraging existing assets and ensures in-house ownership of the solution architecture. However, it comes with high initial costs, longer implementation times and a reliance on skilled IT staff. Ongoing maintenance and the risk of obsolescence are significant challenges.
Custom development can be advantageous for implementing core tax capabilities such as taxpayer communication, registration and assessment. These functions are integral to tax administration operations and often require tailored solutions that can adapt to the specificities of national tax systems.
Custom development allows tax administrations to design and implement solutions that precisely meet their unique requirements, ensuring alignment with national tax laws and regulations. Custom solutions can be easily scaled and modified to accommodate legislative changes and evolving business needs, which is crucial for maintaining the system's relevance and effectiveness over time.
By developing unique features and functionalities, tax administrations can differentiate themselves and enhance operational efficiency, a competitive edge not typically achievable with generic COTS solutions.
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Benefits |
Risks |
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Tailored to national legislation |
High initial costs and complexity |
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Full architectural control |
Maintenance burden |
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Scalability and differentiation |
Longer time to value |
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Risk of obsolescence |
Case study: A tax administration freed up 1,000 FTE with a custom approach
Another tax administration modernizing its entire application portfolio used a hybrid approach, mainly using custom development for tax specific functionality, after determining that no standard solutions could meet the requirements of its tax system.
Differentiating (core) capabilities like communication, registration and assessment are implemented through a custom approach, while COTS was leveraged for market standard or supporting functions like collection, compliance and analytics.
An 18-year program was commenced in 2012, consisting of five waves covering the entire tax value chain: collection and distribution, risk assessment, tax returns, tax collection and refunds, guidance, and compliance, and analysis.
Each wave was executed on time and budget, totaling €860m, and the last wave is expected to conclude in 2030. Each wave is tied to a business case, freeing up a total of 1,000 FTEs through increased efficiency and automation, as well as increased technology coverage, a modern, composable architecture, increased digitalization and a redesigned operating model that mirrors the taxpayer value chain.
Conclusion
Market evidence supports that COTS can be used to gain significant benefits within tax administrations and drive best practices with shorter implementation time and lower cost, both in the implementation and for ongoing regulatory changes, once the solution is in place.
Gathering the necessary support however — including senior administrative and political leadership — is challenging, as COTS can also increase dependency on specific vendors, require compromises and changes to the current operating model to fit the standard solution.
Custom development, on the other hand, gives tax administrations the freedom and flexibility to fit the technology to administrative needs. The organization will fully retain ownership and knowledge of the architecture, meaning that vendors can be on or offboarded at the tax administration’s discretion.
However, custom build can be costly and time-consuming, putting a lot of risk on the tax administration in terms of resourcing, funding, staffing, complex solution and integration management, maintenance and continuous modernization.
Getting it right
Modernizing tax administration is a complex challenge. Getting it right requires meticulous planning and a robust delivery model. The following steps will increase the likelihood of success:
1) Position tax modernization as a strategic priority
Tax systems are cornerstones of societies, managing public finances and ensuring stability in an uncertain world. Positioning tax modernization as a top government initiative will ensure focus and executive sponsorship, secure long-term commitment and funding, and ensure modernization efforts are resilient to shifts in government priorities.
2) Establish a strategic market engagement program
Understanding cost drivers and innovation potential within the market is critical for ensuring that modernization efforts are cost effective and forward thinking. Market players —ranging from software vendors to consulting firms — possess valuable insights into emerging technologies, regulatory compliance solutions and best practices from other jurisdictions.
Engaging with the market proactively will help the tax authority identify hidden cost levers, avoid pitfalls, and uncover opportunities for innovative partnerships. This approach also ensures competitive pricing, reduces vendor lock-in risks and aligns procurement strategies with broader modernization goals.
3) Use global regulation as an opportunity
Global trade initiatives require tax administrations to address frequent regulatory updates and share data across multiple jurisdictions. International frameworks like ViDA and DAC increase the ability to leverage market innovation, creating a shared language between tax administrations, solution and service providers. Using these standards as templates allows tax administrators to differentiate where it matters and avoid paying a premium for common functionality.
Summary
Modernizing tax administration offers opportunities and challenges. Commercial off-the-shelf (COTS) solutions provide cost-effectiveness and rapid deployment but risk vendor lock-in. Custom development ensures tailored flexibility and control but incurs higher costs and risks. Success depends on strategic focus, market engagement, and utilizing global regulations for improved compliance and service. Focusing on these elements enables tax authorities to effectively manage modernization complexities.