Paperjam, October 2017

The Digitalization of the Tax Administrations

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How many times have you heard that the tax environment is changing? How many presentations have you attended where yet another tax advisor talked about the fundamental shift being lived by Tax Directors?

In presenting the new tax environment, tax advisors tend to make reference to some of the following topics: new tax transparency and reporting requirements; increasing tax and reputational risks; the extent to which BEPS actions, including the Multilateral Agreement, are going to impact your business; the way some tax authorities are quickly moving into the digital space, finishing with a “quick word on robotics and analytics”.

We have heard our clients repeatedly referring to the challenges of keeping up with the pace of change at domestic, European and international level, and to how difficult it is to put in place IT tax systems able to extract data that provides a global understanding of investments and helps them manage comprehensively their tax risks and opportunities.

Interestingly enough, in certain countries, it is not the business world setting the pace of the digital race but government bodies, agencies and, last but not least, the tax authorities. In this article, we will focus on how tax authorities are moving into the digital world, how some are at the front end of making their systems digital and how others are still behind in this race.

 

Going cross border

It is commonly accepted that businesses will continue to become increasingly global; indeed, expansion and growth are the drivers of a profitable business, be it in the financial or in the operating sector. As businesses expand, so must their understanding of the tax rules of each foreign jurisdiction they move into, in order to ensure, amongst other things, compliance with local tax obligations. 

Whilst in past years, some businesses have benefited from the fact that the IT systems of tax authorities and associated government bodies were rudimentary and not connected, nowadays, in many foreign jurisdictions, the IT systems of these bodies (tax authorities, social security, notaries, etc.) are very much interconnected and, due to new exchange of information mechanisms, the authorities have real time access to valuable financial information on taxpayers.

 

Moving to Digital

For those tax authorities that have already stepped into the digital space, the outcome can be rather powerful – accessing real-time taxpayer financial data, running cross checks with data held by other government bodies and agencies, increasing the quality of tax audits - these are benefits that could not have been anticipated ten years ago.

In this respect, in 2016, EY performed a study “Tax administration is going digital: understanding the challenges and opportunities” which concluded that five levels of digitalization exist. These were:

Graph Digitalization

 

While it is true that, for some tax authorities, the immense financial flows and data generated by reporting obligations such as CRS, will be slowed down by the availability of local tax inspectors, the above indicates that other tax authorities, digitally ready, will be in a position to rapidly scrutinize large volumes of data and use it to improve the quality of tax audits, to monitor compliance with tax obligations, to challenge access to double tax treaties or EU directives and also to share it with other tax authorities.

Potentially significant costs incurred in the reconversion and set-up of new IT tax systems is clearly justified due to the substantial increase in tax revenue collection and the improved effectiveness of tax audits.

 

How can the above impact the tax function and the business?

In each of the foreign tax jurisdictions in which their businesses operate or hold investments, Tax Directors and/or CFOs need to understand where the tax authorities stand, in terms of digitalization and to make use of sufficiently equipped monitoring tools for real-time supervision of transactions, deals, trades and investments.  

As each tax administration becomes more digital, requests for information will potentially increase in frequency and in complexity – taxpayers will be granted less time to present their arguments and queries will not be limited to domestic tax issues but will also encompass matters related to foreign jurisdictions, at different levels of the group structure.

 It would be easy to dismiss the impact and importance of digital and robotics but this would not be the best reaction going forward, as more discussions around tax matters will necessarily revolve around public tax systems, up-to-date tax monitoring and reporting tools, internal IT systems, and the need for more comprehensive analytics, in anticipation of challenges from the tax authorities.

Robotics, digital and artificial intelligence can and should be considered as catalysts of opportunities. Examples include:  allowing taxpayers to quickly identify potential tax reclaims , either through  double tax treaties or EU directives, creating efficiencies in the collection of documentation, not to mention the benefits arising from overall time savings.

At EY, we have been successfully assisting our clients in the setup of tax monitoring tools that allow them to track withholding tax reclaims opportunities, but also on IT based capital gains tax tools to compute and monitor foreign risk and to have a coordinated approach into foreign tax agents, only to name a few projects.