Taxes have been a part of human life from the earliest recorded historical times – the Rosetta Stone, a stone slab that dates from 196 BC and which proved key to the deciphering of Egyptian hieroglyphs, is in fact a tax decree. Just as much a part of human life has been the battle to find an efficient and fair way of collecting those taxes.
The advent of digital technology is seen as the ultimate opportunity for societies to transform the tax system for the better, making both calculation and collection of taxes simple, accurate and (relatively) painless. A new report from ACCA, Technology tools and the future of tax administration, looks closely at the practical implications for the tax system worldwide, discussing the main issues that policymakers and decisionmakers need to keep in mind.
The character of information is changing – its cost and, perhaps, its value too are in a state of flux
The use of innovation and technology in tax is by no means new. Our attempts throughout history to calculate and collect tax have triggered many innovations. Trigonometry, for example, has its roots in the techniques ancient Egyptian tax inspectors used to measure irregular areas of land.
The modern world, though, brings one crucial difference. ‘One thing all the historic tax tools had in common was that they had originated in an environment where information was recorded in physical form, and duplication was a comparatively expensive process,’ says the report. Over the past 20 years, the emphasis has shifted to electronic storage of information. ‘The character of information is changing – its cost and, perhaps, its value too are in a state of flux.’
The difference, from the point of view of a tax administration, is that digital records are infinitely reproducible. Many users can access a single, centrally held record and when it is updated for one user, it is updated for them all. Thousands of items of data can be shared at a click, and vast volumes of data can be interrogated automatically by software almost instantaneously. ‘Tax administration is just starting to grasp some of the potential of this development,’ says the report. ‘The future is already here; it’s just not very evenly distributed.’
Shape of the future
Digitisation, of course, is not just transforming business and the way information is stored and accessed; it is also changing the very goods and services we produce and consume. That, argues the report, also has profound implications for the shape of the tax systems of the future.
Today, taxes fall into one of three broad categories: taxes on income or profit; taxes on transactions; and taxes on static wealth. ‘The implementation of digital tools has the potential to draw the three together,’ says the report, ‘or crystallise the differences between them.’
The reasoning behind this is that the benefits of digitisation vary according to the different types of tax. For taxes on profits, the benefits are mostly around calculation and analysis. As long as profits continue to be assessed on an aggregate of transactions over a set period of time, the existing model of tax administration (the taxpayer collates, analyses and adjusts the relevant entries, and then transmits them in one package to the tax authorities) will survive.
The impact of digitisation on transactions is more fundamental. A number of jurisdictions have already introduced ‘smart tills’ (see box), which record sales taxes and VAT automatically and transmit the data to tax authorities. Ultimately, as the infrastructure develops, we are heading for a model where the sales tax element of a transaction payment is transmitted directly to the tax authority’s account, bypassing the merchant entirely.
Tax innovation in action
Aerial imagery in the US
Aerial mapping technology was introduced in Ascension Parish, Louisiana, to help identify property improvements that were liable for tax. The technology produced detailed images of parish properties, which were then combined with property tax records to help an assessment team review changes to properties and prioritise field inspections. More than 6,000 property improvements that were not detailed on the tax rolls were identified, resulting in US$18.1m in new annual tax revenue. A similar exercise in Anne Arundel County, Maryland, expanded the county’s tax base by almost US$32m.
Electronic billing in Rwanda
Electronic billing machines (EBMs) were introduced by the Rwandan government in 2013 in order to address vulnerabilities in the domestic VAT system. The paper-based system was vulnerable to fraud and manipulation, with the tax authorities routinely uncovering suppressed sales figures and false refunds. Traders were required to buy and use EBMs in a phased introduction beginning in 2013. By 2015, VAT collection rates had increased by 20% a year and VAT compliance times had fallen from 45 hours to five hours a year. In 2018, the government announced plans to replace the physical EBM hardware with a free, officially sanctioned software-based equivalent which could be used on smartphones and computers. As a direct result of this innovation, Rwanda is the only low-income economy to be ranked in the top 50 of the World Bank’s 2019 Doing Business report.
E-payments in Afghanistan
An e-payments system for the payment of customs duties was introduced into Afghanistan as part of the US-led programme to develop the country’s economy. Customs duty accounts for up to 30% of the country’s total tax revenue, but before the electronic system was introduced, a significant proportion was stolen before reaching the public purse.
The project proved to be challenging, with less than 1% of customs duties paid through the e-system three years after it was first implemented. A lack of infrastructure to support the full chain of payments was identified as a major factor in discouraging traders from using the system. Commercial banks, for instance, were not able to access the central bank’s electronic customer clearance system, forcing them to scan and transmit supporting paperwork manually. With little incentive for traders to adopt the system, the technology was largely unused for a number of years.
For wealth and capital gains taxes, the benefits of digital filing are less obvious, although the report argues that there are advantages that can be exploited. The use of distributed ledger technology, for example, in land and property transactions ‘offers opportunities not just for streamlining the operation of land registries, but also for eliminating the scope for errors or delays in the operation of stamp duties and similar taxes’.
The report points out that in the digital economy it is increasingly difficult to point to the stage in the supply chain at which value is created. ‘So,’ it adds, ‘perhaps the current models of profit taxation will retreat and be replaced with a broader reliance on consumption taxes… which is the area where digital tools may perhaps have the biggest impact on our daily experience.’
While tax administrations are, unsurprisingly, keen to explore the use of technology, one of the biggest barriers identified in the report is the fact that the adoption of technology varies widely between countries and within them – even when the technology in question is available.
‘The range of individual experience and capability is probably the most diverse it has ever been in many workplaces,’ says the report. The success or otherwise of a digitally driven tax solution depends entirely on the willingness of individuals and businesses to adopt integrated solutions – something that is by no means guaranteed.
‘One of the key things about technology is that its adoption is rarely universal or instant – and it does not follow the same linear path of progression everywhere it appears,’ concludes the report. ‘Approaches that work well in one market might not work at all in another, and external factors can completely change the dynamic within which the tax system operates. Tax administrations need to be sensitive to the local environment, and to other factors in the local economy, before seeking to implement costly measures which may not repay the investment.’
Read ACCA’s report Technology tools and the future of tax administration.