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Tax administration redefined for the digital era

We’re headed for a paperless future, and governments worldwide are embracing the change by going digital with their tax administration systems.

At the Russian Federal Tax Service’s Moscow headquarters, Commissioner Mikhail Mishustin surveys his operations from a wall of screens that display the past, present and future of taxation. A map of the city projected on them pulses with blinking circles, flashing and beeping according to real-time data, showing tax office locations and warning when lineups for service are stretching too long.

Mishustin or his deputies can dispatch service workers to where the waits are longest. Tax collectors know if they make it easier for taxpayers to file their returns, they’ll collect more money and perhaps create a little goodwill.

But taxpayers lining up to file their returns may soon be a thing of the past. In Russia and across the globe, the tax process is going paperless. The future of tax collection is electronic, online and automated.

That’s in part because young people would rather download an app than line up in a government building, but also because tax administrations want it that way.

“The concern is how we can keep pace, how fast we can implement new systems and how we can respond to the inevitable increase in information requests from tax authorities.“

Steve Foster, Dell Inc. Executive Tax Director

Banishing paper means taking in returns, receipts and other supporting documents in formats that can easily be absorbed into databases, making it easier for tax offices to identify wrongdoings and collect more. Commissioner Mishustin can project another map on his wall of screens that makes this clear as well.

This time it’s a map of the whole country, and clicking on any region brings up a database of its tax returns. The far left column is a dot, in either green, yellow or red. It’s the latter group he’s most interested in: red-dot returns are the best candidates for an audit.

Thanks to this system, the tax office boosted VAT collection by more than 20% in the most recent tax year, and it couldn’t have done it without digitizing everything and using newly crafted data analytics tools to search for risks in the data. “Electronic communication is not a fashion statement but an essential requirement,” says Mishustin.

Going digital is a big investment for a tax authority, but one highly likely to be made in conjunction with two other important developments: a new wave of transparency requirements for taxpayers and an unprecedented commitment between countries to share information.

Tax commissioners around the world will be waiting for the opportunity to access company country-by-country reporting data, for example, with the Organisation for Economic Co-operation and Development (OECD) recently estimating that it believes base erosion and profit shifting (BEPS) costs governments between US$100 billion to US$240 billion annually.

Global picture of taxes paid

The early success of the US Government in forcing American taxpayers to disclose assets held outside the country through the Foreign Account Tax Compliance Act (FATCA) – enforced in part by access to third-party information – has emboldened governments that are concerned about global tax evasion or avoidance by individuals and corporations. Indeed, the OECD’s two-year project on assessing BEPS made it a major outcome that multinationals share much more information with tax authorities.

With reporting beginning in 2017, according to the OECD’s timetable for the national implementation of these recommendations, multinational companies will be required to produce and share with tax administrators a complete, global picture of their taxes paid. This will give tax administrations access to unprecedented amounts of detailed information.

While the business community has voiced concerns about both the compliance burden and commercial sensitivity of the data, it has been muted in part by the ability of financial firms to provide more data on their American customers via FATCA, says Michael Udell, founder of the Washington, DC-based tax consultancy District Economics Group: “It made it more difficult for multinational corporations to maintain that country-by-country reporting was too burdensome.”

Out of sync with new digital tax world

The move from paper to digital will be a profound investment of both time and money for revenue authorities. For all types of taxpayers, this means electronic filing of returns, documents and other correspondence, often through websites or online portals in which returns can be submitted, viewed or amended.

But tax administration digitization does not simply mean e-filing of tax returns or reporting of taxes paid. The new digital reality for business is far more complex. The leading countries, through their leverage of such vast amounts of data, are developing real-time audit and assessment capabilities.

They are reviewing 100% of the operations in a company’s supply chain. And their intervention processes are becoming highly tailored and segmented, based on risk, value and complexity. All this means that for many companies, current compliance and dispute management processes and delivery models may be out of sync with the new digital tax reality.

Personal taxes have already been entirely digitized in a handful of countries, including Scandinavia, and the process has enabled tax authorities to make it faster and cheaper.

Ramifications of digital transformation

A fully digitized process has several consequences in addition to the expectation that more taxes will be paid. One is that tax administrations will employ data analytics more prevalently, and use the results to be more proactive throughout the tax life cycle.

So-called “e-audits” are another, with an increasing number of countries asking companies to provide them with data files from their accounting systems that align to a pre-defined format. And at the very leading edge, many countries are exploring the possibility of agreements with companies that the tax administration can have authorized access to the company’s accounting systems. Tax administrators extol the virtues for companies that wish to be compliant.

Taxpayers in compliance with Russia’s tax laws can expect fewer audits. Mishustin says: “A risk-oriented approach means that audits are fewer in number and better targeted, which ultimately leads to a reduction of the administrative burden on those businesses that comply with the tax law.”

Social media-based public relations is also an opportunity to send out a broader message – a low-cost “nudge” to warn taxpayers against using an avoidance technique. “It’s a very cost-effective way for revenue authorities to tell people that they are aware of any avoidance techniques that might be tried,” says Rob Thomas, a director in EY’s Tax Policy & Controversy group.

In EY’s recent survey, every single country surveyed reported using at least one – and typically more – social media channel to support their compliance strategies.

For corporate taxpayers, the practical ramifications of this digital evolution fall into two categories: meeting new compliance burdens, and managing the new risks they present. While many worry about the sudden injection of transparency and what that might mean for proprietary and strategic information, Dell Inc. Executive Tax Director Steve Foster sees impacts in day-to-day operational areas.

“Not a week goes by without a tax law change,” he says. “The concern is how we can keep pace, how fast we can implement new systems and how we can respond to the inevitable increase in information requests from tax authorities.”

What’s next after the information is digested? Certainly, tax offices are expecting to boost revenue, and companies with significant levels of intellectual property or a high proportion of profits in a low-tax jurisdiction can expect extra scrutiny. And those with transfer pricing arrangements that the tax authorities feel are elaborate should be able to explain them succinctly.

“If the data is not interpreted correctly, then it can lead to misunderstanding and eventually to dispute processes,” says Foster. “No one wants to get to that point, but if there is an explosion of data it’s hard to see how that won’t happen.”

Read more: Innovations in e-services around the world

This article is included in Tax Insights issue 14

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EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

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