December 2018 Issue
Historic tax laws may not be fit for purpose in the modern economy. Given today’s regulatory, social, political and technological changes, tax authorities, regulations and legislation are struggling to keep up.
In recent decades, organisations have employed a multitude of complex tax arrangements which have deprived governments of revenue. According to a report from the European Commission, the total ‘VAT Gap’ for 26 EU countries amounted to around €193bn in 2011, blamed on a combination of tax evasion, fraud and intentional misrepresentation of tax obligations, either through deliberate omission or falsification of income or revenue.
However, the tide is slowly turning. Governments are attempting to recoup some of the revenue they have missed due to avoidance, non-collection and fraud. The level of scrutiny being applied to tax collection has been amplified. As a result, companies are being forced to increase transparency and pursue new avenues for cost savings.
To assist their efforts, tax authorities have embraced digital technology. They are using it to interpret taxpayer trends and ensure companies are able to achieve better compliance with local legislation. Furthermore, tax authorities are able to digitalise taxpayer data and share it across multiple jurisdictions. As more solutions become available and costs decline, tax authorities are seizing the opportunity to prevent and detect crime, improving their revenue collections and boosting operational efficiency.
On the other side, technology is helping companies to cope with increased demands for transparency from regulators. It is also improving efficiencies which will have an impact on how tax authorities collect revenue in the future.
Drivers of change
Over the course of the last decade or so, calls for greater transparency in the corporate world have increased. The global financial crisis, the Panama Papers and other taxation scandals have tested the patience of tax authorities and the general public alike. As a result, there is little room for complacency on beneficial ownership, profiting shifting, transfer pricing and other taxation issues.
Regulatory steps have been taken to crack down. Measures such as the Organisation for Economic Co-operation and Development’s (OECD’s) base erosion and profit shifting (BEPS) project have had a dramatic impact. No longer will tax minimisation be acceptable; instead, tax liability in each country should be a fair representation of the economic activities in that country. This paradigm shift is designed to harmonise the legal framework across countries and enhance audit capabilities. Furthermore, the BEPS project is granting tax authorities access to additional standardised data which will enable them to better understand the global tax landscape. As more data is made available under BEPS, tax risks will rise for companies that previously sought to avoid taxation.
Greater coordination between tax authorities, the OECD, the United Nations, the World Bank and others is yielding results. The Tax Inspectors Without Borders project, launched in July 2015 by the OECD and the United Nations Development Programme (UNDP), produced more than $260m in additional tax revenues through eight pilot audits in Africa, Asia and Latin America up to November 2016.
In the US, the recent Tax Cuts and Jobs Act included a number of significant initiatives for US corporate taxpayers, including the Base Erosion and Anti-Abuse Tax, interest deduction limitations, the Participation Exemption and Transition Tax and global intangible low-taxed income. “With the recent Federal Tax Act changes, as well as major developments in the sales and use tax judicial area, drastic change is near,” says Alyssa Marchand, senior manager at Tax Technology Group, Inc. “Not only will tax departments be expected to meet typical deadlines, but to do so with very little agency materials, such as regulations – for example, no case law to reference and very little time to comply. Also, they will be expected to provide future tax planning advisory services in an ever changing legislative and judicial climate.”
Technology will be vital as businesses and tax authorities try to acclimatise. The digitalisation of processes, including data gathering and analysis, data matching and tax audits, allow companies to optimise tax across the breadth of their operations and speed up planning, reporting and compliance processes.
Digital tax administration
In many jurisdictions, tax authorities have invested in Big Data platforms, developed analytics tools to enhance compliance and limit fraud, and are increasingly cooperating with one another.
“In the UK, Her Majesty’s Revenue and Customs (HMRC) already makes extensive use of technology in data processing and in its compliance operations,” explains Sam Mitha, former deputy director of HMRC’s central tax policy group. “HMRC’s innovative ‘Connect’ analytical software data mining computer system has transformed how it undertakes tax compliance. Connect systematically collates and analyses data that has to be made available to the department on a statutory basis, publicly available information and social networks.” The collaborative opportunities offered by the Connect system – which can interface with over 60 other OECD countries globally – demonstrates the transformational nature of technology on tax. Connect also interacts with internet data, including blogs, social media networks and other ‘open source’ internet sources to create a fuller image of an individual or company’s taxation history. During its first four years of use, Connect enabled HMRC to collect an extra £4bn in tax from suspected tax avoidance detected by the system.
There are a number of best practices available to tax authorities when introducing new technology solutions. Firstly, they must clearly define the objective of the project. What is the problem being addressed? What are the available options? Next, they should design a clear plan for implementation. Taxpayers should be consulted prior to implementation. A pilot scheme may also be worthwhile, to test a particular sector or region. This will give companies the opportunity to understand the authorities’ intentions prior to full roll-out and identify potential problems with the new solution.
Tax technology can impact many aspects of a company’s operations. Big Data, analytics, artificial intelligence (AI), machine learning, the Internet of Things (IoT), mobility and cloud computing are all in play. In order to fully reap the benefits of these technological advancements, corporate tax departments must have a compliance strategy in place which prioritises oversight activities and coordinates staff efforts. There must also be a legislative framework and a clear strategy governing the uses of tax technology.
Technology helps companies to achieve compliance, as well as increases transparency and cooperation. It can also improve efficiency, freeing members of the tax team to focus on other tasks. From an operational perspective, technology saves time and costs. But when it comes to tax, companies have been slow to adopt technology compared to many other departments or processes. “Tax processes, being back office functions, are done after transactions have processed or booked, in most cases, and therefore the technology that spurs the process is considered back-office as well, and does not get funding or resources that are availed to sales-based technology,” points out Ms Marchand.
However, it may have an impact on the wider job market, as well as the collection of tax, according to Mr Mitha. “Technology is one of the most important forces shaping jobs and wages in the economy. The imminent diffusion of AI-infused robotic technology throughout the economy, in the so-called Fourth Industrial Revolution, could lead to the loss of up to 15 million jobs in the UK, and the substantial personal tax paid by these workers. The increased yield from taxes on corporate profits from the use of robotic technology will be much smaller than the decline in its revenues from personal taxation,” he says.
Tax technology is a top investment area for many tax departments, second only to people investment according to KPMG. But more investment is needed. Eighty-one percent of tax departments surveyed by KPMG did not have any full-time resources focused on tax technology. That will likely change in the years to come, however it will likely require the input of senior management. “The C-suite and the board are both heavily involved in the drive to increase tax automation,” says Ms Marchand, “But typically this is because what drives the need for tax automation has driven a major change in the revenue area, meaning tax is being automated because revenue is being automated. C-suite executives are truly making the best decisions for their business needs, however what is in the tax market today is far inferior to revenue-based systems and automation options.”
Chief tax officers (CTOs) have a key role to play in shaping the future direction of the tax department. As companies deal with stricter and more aligned tax regulations, as well as the influence of technology, the CTO must be attuned to the overall business strategy. Companies seeking operational efficiency, improved risk management and greater alignment between business and strategy alignment will rely on their CTOs to deliver.
Future of tax tech
Blockchain technology could be influential in the taxation industry. Though still in a formative state, it is set to facilitate real-time commerce, without the need for middlemen at every stage. Total trust in the integrity of the system could radically simplify tax compliance and administration. Blockchain can deliver reliable real-time information from many layers on an international scale. Furthermore, its ability to offer greater security, transparency and control over data will be of significant benefit to tax authorities. “Total trust in the integrity of the system could radically simplify tax compliance and administration. They could, for example, simply plug directly into the blockchain and automatically collect tax without argument,” says Mr Mitha.
Blockchain also offers financial incentives for tax authorities. It could reduce the administrative burden and the cost of collecting tax. It has the potential to add value within a business, between businesses, between businesses and consumers, and between businesses and governments. Blockchain may reduce some of the complexity surrounding transfer pricing by providing accounting for intercompany tangible-goods transactions and automating price setting and adjustments for tangible goods.
For multinational organisations, the tax landscape is changing. New measures, such as the OECD’s BEPS project and its country-by-country (CbC) reporting initiative, are driving increased transparency and cross-border information sharing. With more sophisticated enforcement methods and burdensome compliance requirements, increased automation, better data and processes, augmented analytics and better internal controls must be utilised. With new technology solutions capable of managing entire processes – including data collection, analysis, compliance and audit activities – technology may hold the key to the future of tax.
© Financier Worldwide