Nowadays, any discussion on the future of indirect taxes is almost bound to include the terms “robotic process automation” (RPA), “artificial intelligence” (IA), “the Internet of Things” (IoT), “machine learning” and “blockchain.” Relatively obscure concepts only a few years ago, these technologies are increasingly providing solutions to a range of challenges facing governments and global businesses. They have the potential to streamline and accelerate business processes, increase cybersecurity and reduce or eliminate the roles of trusted intermediaries and centralized authorities.
What will be the impact for indirect tax refunds?
As these technologies become a reality, they will influence a whole range of taxes, including VAT/GST, customs duties, environmental levies and excise taxes that are closely linked to business transactions. Developments that alter how goods and services are manufactured, traded, delivered and paid for will also transform how and where indirect taxes are applied, reported and collected. Will your VAT returns be prepared and audited by robots? Will smart contracts decide where insurance taxes are due — and remit them automatically? Will distributed ledgers remove the need for invoices? Will governments impose cryptocurrencies to collect and refund cross-border VAT? Will customs declarations be filed automatically by container ships and not by customs brokers?
Most of these changes may still be in the future, but increasingly, in the digital economy, the future is now. Applications are already being explored and are likely to be adopted in the near future. As they prove their worth, the rate of adoption is only likely to increase, and new and surprising uses will emerge.
Robotic processing and artificial intelligence
In recent years, industrial robots have transformed manufacturing by increasing production and improving quality. RPA software is now doing the same for business processes and back-office work.
What is RPA?
- Can RPA transform indirect tax refunds?
RPA technology has the potential for widespread use, and is being applied not only in a range of industries but also in all parts of the organization. Any process where people perform high-volume, highly transactional functions could be a contender for RPA software, including finance, procurement and supply chain management. Not surprisingly, this new technology is fast finding its way into tax and accounting functions and revolutionizing many aspects of indirect tax compliance, including identifying and processing refunds, credits and rebates.
Using trained robots to prepare VAT/GST returns and refund applications or to identify accurate commodity codes for customs declarations is likely to cut costs by reducing processing times. It may also allow staff to be deployed more effectively across the tax return cycle or to dedicate time and resources to “value-added” functions, such as supply chain, that maximize free trade opportunities.
Equally important, RPA can also greatly improve the accuracy of reports, even if entries depend on complex decisions (e.g., about the VAT/GST recoverable on a foreign invoice). Robots do not make mistakes, and they can be programmed to become smarter and learn from past decisions.
- Robots — the tax advisors of the future?
Robots may move from being the “doers” to being the “informers” or “research assistants” of the tax function, enhancing the quality of tax planning decisions made by their human colleagues. Developments in how machines process natural language, retrieve information and structure basic content mean that RPA could provide answers to employees on a range of indirect tax topics. This capacity to retain and retrieve information and to answer human questions could be particularly beneficial for shared services center staff who must prepare, submit and review declarations and filings for multiple jurisdictions.
- Challenging where refunds are processed and by whom
RPA will challenge decisions about how and where indirect tax refund claims are prepared and by whom. The cost-benefit analysis for any claim is likely to change, putting new opportunities on the table to improve refunds and reduce recovery times. Should you outsource or should you bring these processes back onshore? Can heightened accuracy remove concerns that a centralized shared services center may not be able to cover multiple jurisdictions? Can intelligent robots programmed with specialist knowledge identify part numbers to allow more accurate commodity codes that reduce duty bills?
Undoubtedly, as RPA brings more advanced solutions to businesses around the world, tax functions that adopt automation, whether in-house or offshored, will cut costs, drive efficiency and improve quality.
What is blockchain?
Tax and customs administrations demand high levels of accuracy for accounting and reporting to support indirect tax filings and customs declarations, especially where credits, rebates and refunds come into play. These demands can create significant compliance obligations for taxpayers and cross-border traders, and the need for detailed audits can lead to significant delays. The speed, accuracy, and transparency of blockchains could alleviate these burdens for taxpayers seeking refunds by decreasing the risk of fraud for tax and customs administrations.
The idea behind blockchain is not new, but decentralized, distributed ledgers have become possible only recently, thanks to advances in technology, computing capacity and connectivity. As computing power and connectivity increase exponentially, the applications for blockchain are likely to increase and the costs will decrease. Many blockchain applications will go from being a good idea for the future to being a practical daily reality. Although these applications are not yet available in the world of indirect tax, it seems likely that using blockchain technology may one day be common — even mandatory — for accounting for and collecting indirect taxes.
Possible applications include:
- Blockchain indirect tax regimes
Tax and customs administrations could create blockchains to transmit indirect tax data and payments to and from taxpayers and importers to government portals. Tax administrations around the globe are already demanding real-time information from businesses to assess and support their VAT/GST liabilities, for example. Blockchains could greatly facilitate the speed, accuracy and ease of collecting indirect tax data, improving compliance while reducing the cost of enforcement.
Indirect tax blockchains could involve taxpayers in a single jurisdiction, or they could cross multiple jurisdictions (such as the European Union or Gulf Cooperation Council). For the blockchain regime to be most effective, participation should be compulsory for all businesses. As a first step, however, participation could be imposed on businesses of a certain size, or businesses could be incentivized to sign up because of reduced compliance obligations or improved refund times. The blockchain’s transparency would allow businesses to verify the authenticity of others in the supply chain, mitigating the risk of suffering blocked input tax or additional tax payments. However, it could also raise concerns about privacy and commercial sensitivity.
- Improving accuracy, countering fraud
Collecting the right amount of indirect tax depends on the honest reporting of accurate information, often in real time. Taxpayer errors, lack of data, negligent accounting and fraud can all have a significant impact.
Fraud is particularly common in systems where supply recipients have the right to deduct VAT/GST on their purchases and costs from the VAT payable. The purchaser may even be entitled to a refund if the tax receivable exceeds the tax payable. A valid VAT invoice serves like a check on the tax office. This mechanism can attract fraudsters. The large sums lost in the Missing Trader Intra-Community fraud in the European Union are just one manifestation of the danger that bad-faith traders can pose to an entire system, with VAT loss through fraud in the EU amounting to an estimated EUR100 billion per year. Customs fraud also takes a toll. Masking the true origin of goods could prove very profitable, for example, because they might benefit from unjustified preferential import duties or free trade agreements.
Governments could require all taxpayers to pay indirect taxes and receive indirect tax credits or refunds using a government-backed cryptocurrency (such as VATCoin1) based on blockchain technology.
- Verified documentation
Indirect tax declarations depend on accurate and reliable documentation. These documents play a vital role in supporting entitlement to rebates, credits and refunds, such as free trade agreement duty reliefs and refunds for input tax. Customs declarations and export controls, for example, depend on a range of commercial and transport documents to prove the origin and destination of goods, their end use, and their composition or classification. The amounts reported as payable (or claimable) on VAT/GST returns must be backed by valid tax invoices that clearly identify the goods or services supplied, the parties to the transaction, the value of the sale, and when and where it took place.
A blockchain regime could require every tax document to have a digital fingerprint (derived through the indirect tax blockchain regime). The fingerprint would immediately identify that the block under scrutiny is permanently linked to the previous and subsequent blocks. The entire history of the commercial chain, forward and backward from this transaction, could be followed. This scrutiny could be done by a tax official in an office, by a robot or by a customs officer at a border. Anyone connected to an approved tax-auditing program could immediately pull up the entire commercial chain for an item from a valid invoice or other commercial document.
- Automatic offset of output tax and input tax
The use of immediately verifiable information could allow taxpayers to support claims for VAT and GST deductions and customs rebates and reliefs in real time.
As we have seen, fraudulent and incorrect claims for input tax deductions pose a severe threat to many VAT/GST systems. Currently, a VAT payer who has a valid tax invoice or customs declaration (or what appears to be a valid document) is entitled to offset the VAT shown on the document as input tax against VAT charged on sales (output tax). Or the payer can claim a refund if there is no output tax to offset. This applies even if the supplier has not paid the tax due. The tax administration may permanently be out of pocket if the document is false or if the supplier who issued it acts in bad faith and does not pay the output tax shown. Using a blockchain to automatically collect and offset tax in the chain could remove this risk entirely. The output tax could be taken by the tax administration when the transaction took place, and the right to offset input tax could be verified immediately but only once the tax was paid.
Features of blockchain
A major source of cash flow delays in receiving refunds and benefiting from rebates arises from the time needed to verify taxpayers’ claims. The digital revolution is transforming how tax administrations collect and exchange data and how they perform audits, reducing the risk of fraudulent claims and shortening the time that good-faith taxpayers must wait for refunds.
Data analytics already helps tax and customs administrations to scrutinize taxpayer data in real time and identify incorrect or anomalous transactions. As this technology becomes cheaper, indirect tax administrations are likely to increase their use of artificial intelligence and RPA to facilitate their risk analysis. These technologies will allow them to audit more transactions and carry out more effective audits with fewer trained auditors and in a fraction of the time needed previously, even as transactions take place. Any indirect tax blockchain regime would provide high levels of transparency and would likely be linked to other government sources. Auditors would have immediate access to large numbers of public and private databases, including information about the parties to the transaction and other comparative data. Statistical anomalies could be identified in real time, and the relevant authorities (including in other countries) could be alerted.
In this environment, taxpayers may not even be aware that an audit is happening until they receive an assessment or an authorization for their claim. Therefore, they must assume that all refund claims will be subject to scrutiny.
1 The term “VATCoin” was first used by researchers Richard T. Ainsworth, Musaad Alwohaibi and Mike Cheetham in several publications in 2016 and 2017.