The impacts of change are many, but one really stands out. As countries move data gathering (i.e., compliance) closer to the point where a transaction originally occurred (i.e., “moving upstream”), they must understand that the data they are submitting may well be less “polished” than data that has been tax-sensitized, checked for errors and generally prepared for final submission.
One can foresee new friction between taxpayers and taxing authorities, centered on the testing of data that hasn’t been quality checked as closely as it should be. The results? Audit notices might increase; companies will have to respond to incoming inquiries in an efficient and timely manner, creating a range of penalties if they fail to keep up; and disagreements may arise over the amount of tax assessed. In some cases, requests for refunds may be rejected as the taxpayer is deemed to be noncompliant in other areas.
2. Tax administration goes digital. As more tax administrations go digital, there are clear parallels with the base erosion and profit shifting (BEPS) project. Tax authority digitalization seeks to crack down on evasion and fraud. All governments have essentially the same set of overarching goals: to collect more tax and to collect it more efficiently.
Some standards — such as the Standard Audit File for Tax (SAF-T) requirements from the Organisation for Economic Co-operation and Development (OECD) — are gaining traction in Europe. But design and implementation generally occur at the national level, resulting in numerous differences.
3. Digital tax administration is developing — now. One of the strongest indicators of the speed at which tax administration is digitizing comes in the form of how tax authorities will use data analysis to assess risks within Country-by-Country Reporting (CbCR) data. As tax administrations around the world prepare to start exchanging CBC reports in June 2018, the OECD has released tax risk recommendations it hopes will lead to greater transparency — not increased controversy — in the future.
The first CbC data will provide tax authorities for the first time with a full breakdown of a multinational enterprise (MNE) revenue, profits, tax and other attributes by tax jurisdiction, significantly increasing the volume and scope of information available to them. An OECD publication in September 2017 sets out recommendations for national tax authorities to consider when introducing CbC reports into their existing tax risk assessment frameworks, detailing 19 specific risk indicators that could be extracted from CbC data and used with other information to determine an MNE’s overall level of risk.
Tax administration going digital doesn’t just mean the paradigm shift of “the end of the tax return” arriving. It means gradually increasing data submission requirements, enhanced data analytics routines and more routine sharing of electronic files — between taxpayer and tax authority and between tax authorities themselves.
How did we get here?
The drivers that brought tax administration digitalization to this point are recognizable to anyone operating a business. More must be done with less — fewer people and lower budgets.
Tax authorities also want to remove as much human interaction as possible, leveraging automation and analytics to drive decision-making. And they want to glean more insight from growing volumes of data, focusing their scarce resources on the most serious cases of evasion, fraud and aggressive tax avoidance.
But tax administrations must also address other catalysts. They must react to pressure to perform — from the public, political circles, the media, and charities and nongovernmental organizations. In effect, they have a “moral obligation” to do something with all the data they have sourced.