Exploring the global digitisation of taxes

Tax authorities all over the world are working on the digital agenda. The motivation for this is always twofold. First, to reduce the cost of government tax administration, but also, perhaps more importantly (quoting the ATO’s Chris Jordan in the 2019 OECD paper Unlocking the Digital Economy), to make it “easier for citizens to comply and harder for them not to”. Evidence from countries such as Brazil shows that the tax gap is closed by digitising tax.

Progress on the digital journey

The logical flow of this journey is from face-to-face interaction and paper filings, through online connection and electronic forms, to digital filings and the use of data analytics to support tax audit activity towards full digitalisation of tax and ‘compliance by design’ – a world in which ‘tax just happens’. This journey is not linear: tax authorities are moving at different paces and not all have followed the same stages of the journey at the same speed.

What can be observed internationally too is that the progress is different for different types of taxes. As in the UK, most progress has been made on VAT/GST with digitalisation and e-invoicing, like in Italy. Some progress has been made on pre-population of income tax returns and on small businesses, but less has been made on corporate income tax and larger businesses. The greatest progress has been made in countries where the digitisation of tax is part of a broader strategy to digitise government – often with single user login and sharing of data across government departments. Examples often given of this are Australia and Estonia.

Benefits and challenges

The first step of digitisation is the move to digital filings and online communication. This has significant benefits for all. Business and tax administrations trying to deal with compliance activity during the COVID-19 pandemic have learned the hard way that reliance on paper does not make for a robust tax system. Countries such as Canada are now scrambling to move to digital platforms.

For international businesses this is not a one off. It is increasingly the case that businesses need to file returns in countries where they have little infrastructure or no physical presence at all. However, even this creates challenges for international businesses. As each country develops its own system, businesses have to build multiple connections to tax authorities and manage multiple digital identities. Problems can occur in international processes such as treaty relief, where the digital evidence provided from one country is incompatible with the system in another. In the absence of face-to-face contact and with real-time filings, keeping up to date with law changes in multiple jurisdictions becomes a risk.

The challenges increase as we move towards compliance by design. As HMRC moves forward on its digital roadmap and consultation starts on digitising corporate tax, there are several things that need to be thought through. Some of these are obvious. Others are less so and receive less attention.

Clearly the most obvious point is technology. What generally happens now is that data is extracted from accounting systems and manipulated in standalone tax engines before being pushed into country-specific tax authority interfaces. For large businesses this requires a lot of technology build and maintenance, the cost of which is enormous.

This is part of why we are currently seeing a trend of multinationals outsourcing or co-sourcing their compliance activities to a provider that can afford to build the technology suite once to service many users. As tax compliance moves upstream, tax logic must be built into underlying accounting systems. This is a huge practical challenge, especially if that tax logic has to support different rules in different countries.

The second challenge is data. Most multinationals are now thinking less about which technology they use and more about how they manage data. Data often comes from multiple accounting systems. For corporation tax, the raw accounting data is often not enough.

Changing manual adjustments to automated calculation based on unstructured data is again a very significant challenge. If tax authorities are going to reach into accounting systems to make tax ‘just happen’, a lot of work is still needed to make sure that the data has integrity and reports what is needed for tax assessment.

Wider questions

Other issues that remain to be discussed are data privacy and security. Tax authorities are taking more and more data from taxpayers with little promise in return that the data will only be used for the purposes of tax assessment and will not be lost or compromised. Maybe a system of secure, segregated sites needs to be developed?

The next issue that requires further discussion is how digitisation drives tax policy. The first point here goes to the nature of the tax itself. As I have mentioned, VAT/GST is the area where digitisation has progressed the furthest. This is, of course, because these taxes are levied on transactions that are increasingly digital and easy to automate, even if it involves the need to introduce online cash registers as they have in Russia.

This is more difficult for income taxes and even harder for profit taxes. The question therefore is whether tax policy needs to change to facilitate digitisation. For example, small businesses in Ukraine that were taxed on profits are now taxed on turnover in a digitised manner. For larger business, every departure of tax policy from accounting profits creates a book-to-tax adjustment, which can be difficult to automate and track.

The other policy point that should be considered is whether digitisation changes the burden of proof. Instead of the tax authority challenging the taxpayer’s self assessment, does the onus fall on the taxpayer to prove that the assessment produced by the digitised process is incorrect?

And finally, in my experience, in the rush to introduce technology it is the impact on people that is often forgotten or underestimated. If processes are being automated, the hope is that the overall workforce will reduce and generate savings. Often this doesn’t happen quite as people expect it to. In any case, managing the workforce down in a responsible way is a challenge on its own.

However, an even bigger challenge is that the retained workforce will need new skills and have different working practices. Tax inspectors will need different audit skills, more focused on processes and controls much like statutory auditors. If compliance moves upstream, contentious issues will need to be identified and resolved – not once the return is submitted but when a transaction is coded into an accounting system perhaps before it occurs.

Similarly, tax teams in businesses will be focused on keeping tax rules in technology up to date, and on data and process integrity and assurance. The skills to do this on both sides are, in my experience, in short supply and are not currently taught as part of standard professional development.

Final thoughts

In summary, the objectives of digitisation to reduce the cost of tax administration while making it easier for citizens to comply and harder for them not to are very worthwhile aims. The current economic challenges posed by COVID-19 make these objectives even more important. Getting to a world where tax ‘just happens’ won’t be easy.

As with other areas of tax policy, what will be needed is constructive dialogue between tax authorities to try to ensure as much global consistency as possible, and between government and taxpayers to ensure that changes happen at a pace and cost that businesses can actually absorb. These discussions should not be restricted to technology but also need to cover some of the fundamental issues of data management, tax policy, taxpayer rights, the duties of government and the need to develop skills.

About the author

Jane McCormick is the former Global Head of Tax at KPMG