Tax Agency boundaries – Digital transformation on data capture
Will traditional self-declaration approach on taxes like VAT/GST die soon?
In a digital age where everyone and everything is connected and information is shared on almost all our interactions and decisions, how can this be used by tax agencies, aiming for a better taxpayer’s service and at same time improve accuracy, transparency, accountability and compliance rates?
Achievement of these goals requires collection and access to the relevant sets of taxpayer’s data, from a static to their detailed operations targeting increase of compliance. This is not an easy task for some tax types, such is the case of VAT, which is a typical self-declaratory tax type. Here Tax Agencies need to rely on taxpayers to provide information about the volumes of Purchases and Sales within the respective tax period (normally monthly or quarterly according with the business volumes) under a Tax Form format approach.
With this traditional approach the compliance and accuracy of the provided information could be validated afterwards through expensive and time consuming audit processes, or trust the provided taxpayer returns.
Over time, Tax agencies tried to bring some intelligence to this process, incorporating rules over the VAT forms, doing segmentation based on risk profiles using past behaviours. Even if this is a positive step in controlling further, consequently, one narrows the target audience for audits leaving space for lack of compliance.
In parallel, a good step was promoted by reference organizations, such as OECD, who proposed standardization of data format to be made available out of ERP systems called SAF-T (Standard Audit File – Tax). The adoption of this guidance allows auditors to run their testings over business operations data of Taxpayers systems, and at same time, provides a valuable source of detailed information to Tax Agencies allowing data cross checking over VAT declarations, as an example.
Even when this is a good direction aiming for best practices, the country’s adoption has been growing on a slow path.
Progressing on the road to increase taxpayer’s compliance, we can find some other interesting examples on how Tax Agencies tried to close the loop increasing accuracy and capture proper data.
I am speaking about incentive programs, addressing final consumers. Main goal is to reward consumers whenever they ask for an invoice on every transaction when purchasing goods or services. Rewards can be given under different formats, such as, lottery draws.
We do have good examples of this in Brazil, Japan and more recently in some European countries. In the Brazilian case (Nota Fiscal Paulista), they went a bit further, creating a process where the final consumer’s account is credited a fee for each invoice declared, allowing later the usage of those amounts to reduce their own tax liabilities. This is creating the sense of justice and making each single citizen a “Tax inspector”, “forcing” the registration of all commercial transactions.
Having these good examples as a way of obtaining the right information closing the loop of compliance, yet they, lack on the mandatory support, leaving their adoption at the discretion of each country or each citizen.
More recent initiatives are profiting from new existing technology capabilities to handle big data and in-memory processing. Following my example of the VAT tax type, this is a typical situation where the volume of commercial transactions subject to VAT can generate a huge amount of data which is summarized under each tax rate: purchases and sales, leaving space for lack of compliance.
Policies have been introduced by several countries becoming mandatory, where all point of sales (POS) provide capabilities to capture relevant information, such as the purchasers’ Fiscal ID number and producing a special encrypted code in the invoice beside the goods or services details.
This detailed information at item level within each single invoice, is submitted to the Tax Agency periodically and in some countries, fully online when the transaction occurs, for example, at Slovenian Tax Agency.
This last option requires a full telecommunications platform supported on API technology. The great benefit of this approach is that Tax Agencies will own full detailed information allowing cross-data facilitating VAT tax returns validation. More importantly, this allows a possible pre-fill of VAT returns. With this approach, we can foresee that, in the near future, the VAT returns, as we know them today will die, converting this form from a self-declaration tax return to a full pre-fill push from the Tax Agency.
We are now opening a world of opportunities for the usage of analytics and mobile, providing a better experience to Taxpayers in terms of services, improving compliance and reduce cost of operations.
This road of change is only beginning, would like to hear about other good stories and vision on how to achieve the best usage of data within the tax world. Feel free to comment and share your ideas.
On my next blog, I will be speaking about another Tax Agency boundary, the extended responsibility to support small businesses with solutions to reduce the lack of compliance and the shadow economy.