April 16, 2015

Guest blog post: The benefits of real-time economy - Estonian perspective

Taavi Kotka

Government CIO, Ministry of Economic Affairs and Communications for Estonia

Fredrik Jansson, the real-time economy professional from Finland, invited me to tell about the benefits of real-time-economy that we have gained in Estonia. In this blog post I will shortly focus on the VAT related benefits and approach it with a concrete example.

Two years ago, I was given a chance to help Estonian Tax & Custom authority to reduce Estonian grey economy and create a fair competition in the market. This task was certainly a big one, but after 18 months we could see results.

The solution was subset of real-time economy. Thanks to Estonian enterprises we managed to automate VAT-tax control. So instead of giving overall numbers, companies sent all B2B transactions over 1000 EUR to Estonian Tax&Custom Authority. This is a concrete example of real time economy; what it is and how it can benefit societies, businesses and people. The end result was that we actually managed to get more than 10% growth in the VAT income (VAT is one of the largest contributors to Estonian government budget).

In addition to all VAT related transactions being automated, there is now transparency in all Estonians transactions. Transparency helps computers see if something is wrong with VATs with much better scrutiny than humans. This automation also frees entrepreneurs to focus on other things than for example filing VAT forms to the tax office. This was another goal in the project, to actually help the entrepreneurs to focus on their products and services and the business itself rather than VAT related paper shuffling.

How did we manage to pull off VAT-control automation in Estonia?

One thing to keep in mind is that Estonia has been developing heavily in the past 20 years. So people actually have trust on government IT related initiatives as they have seen the benefits of e-prescription, e-voting, e-tax, e-justice etc. If you want to do such a radical reform, you need total support from the society. If there is even a small information leak in the government system, it is clear that the project will be closed. The real champion of the project in Estonia is the Tax and Customs Administration. Companies wanted to remove the grey economy by collaborating which resulted in remarkable results for them.

My advice to Finland and other countries

I can recommend the approach we took. The real-time economy for VAT-control is working, and Estonia is a good proof of it. My biggest piece of advice is not to be afraid of mistakes. Innovation comes through pain. Was everyone happy when we pulled this change through? Of course not. Even the president vetoed the first version of legislation.

One additional benefit we got with this VAT-control tool, we now have a better understanding of what is happening in the economy in Estonia, real-time (actually monthly bases). It is a change of thinking, culture, and also of human behavior. And I'm sure that one day I will look back on this era, wondering how we ever managed without the real-time approach to VATs.

Taavi Kotka is the European CIO of the year 2014, entrepreneur of the year in Estonia 2011. Currently he works as government CIO for the Ministry of Economic Affairs and Communications for Estonia. You can find him on Twitter and LinkedIn.

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