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Why the future of tax is taxing as it happens

Photographic portrait of Amarjeet Singh
Amarjeet Singh

EY Asean Tax Leader; Partner, Ernst & Young Tax Consultants Sdn. Bhd.

5 minute read 25 Nov 2021
Related topics
Tax
Tax leaders’ agenda
Tax compliance
Technology
Government and Public Sector

The digital revolution, powered by new technologies and the Internet of Things, is transforming tax administrations around the world.

In brief

  • There is a chance for tax authorities to rethink and redesign tax administration systems as an alternative to introducing new taxes.
  • The use of digital tax administration systems that embed compliance by design outcomes is a key part of this initiative.
  • Potential benefits include the recovery of lost tax revenue from the shadow economy, improved taxpayer morale and greater trust in the system.

Since the start of the COVID-19 pandemic, many countries have had to spend billions on stimulus measures to save lives and livelihoods. There is now a need to bolster coffers and revenue to fund these measures — and one option is through tax collection. 

There are many views on the appropriate ways to increase tax revenue, including raising indirect taxes, wealth taxes or excise taxes, just to name a few. Each of these options has its pros and cons, and must be weighed carefully against wider socio-economic implications. The key option though is not so much in introducing new taxes but in rethinking and redesigning tax administration systems. 

Today, tax administration systems place a heavy reliance on voluntary compliance. While tax is not voluntary, the term “voluntary compliance” recognizes that in many aspects of the current tax system, taxpayers make their own choices on the reporting, calculation and payment of tax. As long as these voluntary compliance choices remain, some choices made will inevitably result in certain amounts of unpaid tax. This might be deliberate, due to a lack of reasonable care or a result of genuine mistakes made by the taxpayer.

In addition, shadow economies in countries, largely comprising non-registered businesses, the under-reporting of business income, unreported sources of income and illicit trafficking, also present significant missed tax revenues. 

How EY can help

A vision powered by technology

With the digital revolution, there are now technologies that provide occasions for the authorities to integrate taxation processes into the systems used by taxpayers as part of their daily lives and businesses. In other words, there is potential to make tax happen. 
 

To use an analogy from the OECD Tax Administration 3.0 report, this will be akin to the development of automated, self-driving cars. Today, car safety is a combination of set requirements, such as vision standards, driving tests, traffic rules and speed limits, coupled with enforcement processes like the installation of speed cameras, patrolling by the traffic police and the imposition of fines. Despite these set conditions and controls, in essence, there is still an expectation that drivers will voluntarily exhibit responsible behavior and comply with the relevant rules.
 

In a world of driverless cars, however, the vehicle is an integral part of a wider system that embeds safety through the use of algorithms and features for the vehicle to make complex decisions, such as having sensors to pick up information on road conditions and other cars. Driving will therefore be largely based on compliance by design systems, freeing up the drivers’ attention to undertake other activities. 
 

Similarly, the future in tax administration systems is in increasingly embedding compliance by design outcomes as well as possible step-change reductions in compliance costs for taxpayers.
 

The following are core features of digital tax administration systems: 

  • First, tax will be embedded within taxpayer-natural systems, such that paying taxes will become a more seamless and automated experience over time, and be integrated into daily life and business activities.
  • Second, many digital platforms within the ecosystem will become “agents” of the tax authorities carrying out tax administration processes within their systems.
  • Third, tax authorities will no longer be the single point of data processing and tax assessment. Instead, tax administration will be conducted within a resilient network of seamlessly interacting trusted actors without one single point of reliance. The tax administration processes will therefore increasingly be in real time or close to real time. 
     

The use of technology has the potential to address various gaps and identify players within the shadow economy, therefore creating the opportunity to recover lost tax revenue, improve taxpayer morale and restore trust in the system. At full capacity, technology solutions can significantly drive down the level of informal activity and revolutionize the operations and organization of tax authorities as well as their interaction and relationships with taxpayers. Mandatory e-invoicing and the increase in the use of electronic payments are just two digitization options that can help to curb the loss of tax revenue arising from the shadow economy.

Tax administration technology can potentially recover lost tax revenue, improve taxpayer morale and restore trust in the system by addressing gaps and identifying shadow economy players.

Change is already happening

What has been described above is not an imaginary future state. It is already taking place. The digital revolution, particularly with the Internet of Things, is already transforming tax administrations around the world.

In Russia, data from many checkout terminals feed directly into the country’s federal tax service. The Russian tax authorities have a comprehensive view of the entire Russian economy. With minimal human involvement, their system tracks and matches transaction data from buyers and sellers across the country, and receives the receipts of every transaction in Russia within 90 seconds.

Russia is just one example, and perhaps the most advanced. Many other jurisdictions like Mexico, India and Brazil have also gone digital. These countries have all introduced some form of digital tax administration, such as e-invoicing, which results in transactional data being sent to the tax authorities almost in real time. Such is the future of tax administration — digital, in real time and with probably no need for the submission of tax returns. 

Summary

Tax authorities have the chance to rethink and redesign tax administration systems to help fund stimulus measures during the COVID-19 pandemic. By increasingly embedding compliance by design outcomes and leveraging digital tax administration systems that help address gaps and identify shadow economy players, they can potentially recover lost tax revenue, improve taxpayer morale and restore trust in the system.

About this article

Photographic portrait of Amarjeet Singh
Amarjeet Singh
EY Asean Tax Leader; Partner, Ernst & Young Tax Consultants Sdn. Bhd.
Advocate of tax as a strategic function. Champions using technology to transform tax functions and administration. Believes in driving innovation and growth through diversity and inclusivity.
Related topics
Tax
Tax leaders’ agenda
Tax compliance
Technology
Government and Public Sector

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.