Top 5 Tax Disruptors: Digital Government
In my first mini-series article, I explored how businesses may increasingly rely on rapidly evolving artificial intelligence tools to effectively manage the tax burden and prepare employees for a new work environment. The same can be applied to governments adopting digital technologies. In the second installment of this five-part tax disruptors mini-series, I examine how governments are adopting digital technologies to make the tax administration function more efficient.
As governments across the globe incorporate digital technologies into tax administration, it creates a dynamic compliance challenge for companies to navigate. It begs the question, digital government will surely be disruptive, but will it be a threat or an opportunity?
More countries are mandating the transfer of enterprise resource planning (ERP) data directly to government agencies — namely, the tax administrators. Certain Latin American countries, such as Brazil and Mexico, are leaders in the employ of digital technologies to facilitate tax administration.
How are governments digitizing their tax administration?
Governments first started the shift to tax digitization with mandatory e-filing requirements in numerous jurisdictions worldwide. E-filing is now the norm throughout the majority of taxing jurisdictions, easing the compliance burden for taxpayers and administrators alike. E-filing has led to e-accounting, which requires corporations to submit accounting or other source data to support tax return filings in a defined electronic format at a specific, secure frequency. Most notably, Latin America (Chile, Mexico, Brazil and Argentina in particular) has emerged over the past decade as a leader in tax digitization by implementing e-accounting as a device to combat tax fraud.
Once e-accounting becomes more prolific for corporate taxpayers, these principles will likely extend to individual taxpayers. In addition, tax authorities will rely on e-matching to compare data submissions across tax types, taxpayers and jurisdictions. These digital e-matching tools have proven successful in the detection of fraud by discovering irregularities in data submissions. Canada, for example, already employs data matching extensively. Similarly, individual taxpayers are increasingly being required to submit additional accounting and source data to governments, such that the government is enabled to analyze the data electronically to discover irregularities.
Another trend in the digitization of tax administration is the conduct of an e-audit. In an e-audit, governments analyze corporate entities’ data and it is cross-checked in filings in real time (or near real time) to prevent fraud, unintended errors and to map the geographic economic ecosystem. With an e-audit, governments issue taxpayers electronic audit assessments and taxpayers have a limited window to respond.
Some tax administrators are utilizing e-assessments, where the administrators review electronically submitted financial data from companies to compute and assess tax liability without the need for cumbersome tax assessment forms and paper filings.
While these examples of the digitization of tax administration are quite extensive, they pale in comparison to the eventual disruption of corporate income tax compliance. Ultimately, certain aspects of the tax filing process that are commonplace today may be fully automated or obsolete. Notably, the transfer of data to a prescribed governmental form is ripe for disruption.
As mentioned above, I imagine a day in the future where most tax administrators have direct access to ERP data, and then use this data to compute the tax burden. This will effectively shift the initial tax calculation burden to the tax administrator, necessitating that corporate taxpayers protest these tax determinations if considered unfair.
For example, municipalities in the US impose real property (ad valorem) taxes. These local governments, armed with property valuations, determine the property taxes due from the property owner and directly compute the tax. Real property tax computations are, of course, a grossly simplified tax compared to a complicated corporate income tax calculation. But, the point is that with rapidly advancing technologies, tax administrators will soon routinely analyze complicated ERP data feeds and directly compute the tax.
To adjust to the extensive digital advances by tax administrators, the corporate tax function must become more agile and digitally savvy. Like much of the working world, we need to hire, train and assemble a team of data scientists for a seamless transition to these new digital technologies.
This all sounds like a tax administrator’s dream, right? Components of this digitization toolkit are already a reality and happening in Mexico, Brazil, Russia, Poland, and other jurisdictions. Literally hundreds of governmental tax administration reforms to enable more efficient tax payments have occurred in the past decade, mainly involving e-file and e-payment. How do you think an increasingly digital government will disrupt the corporate tax space? In what way could this be a threat? In what way could it be an opportunity?
Stay tuned for the next installment of this disruptive tax threats mini-series.