By Elliot Wilson
David Gauke, UK Chief Secretary to the Treasury, in March 2015 outlined ambitious plans to modernize Britain’s tax system.
By 2020, all individuals and small firms would have their own digital tax accounts that stated how much tax they owed, he revealed in a report from Her Majesty’s Revenue and Customs (HMRC).
Within a few years, Gauke added, “millions of people” would no longer have to file annual or quarterly tax returns.
And in time, no one would.
“Authorities are motivated by the need to make themselves more efficient than ever before.“
Aidan O’Carroll, Global Compliance and Reporting Leader, EY
Only a few governments in the world are not investigating the incalculable benefits of digitalizing their tax systems.
That includes investing in software that automatically calculates the tax obligation, whether it’s a small-business owner or the CFO of a Fortune 500 company.
Reasons to invest in the creation of a fully automated tax system vary from country to country.
- China’s focus on simplification and digitalization is a reaction to the rapid and variable growth of its economy.
- The US Internal Revenue Service (IRS) lags in the race to automate, according to Elda A. Di Re, EY Area Leader, Personal Financial Services Department, Financial Services Organization (FSO), in New York. It sees digitalizing its tax system as an ideal way to cut costs.
- Brazil sees digitalization as the best way to eliminate tax fraud by cutting out the need for human interaction or contact during the entire tax process, according to Carolyn Bailey, the Houston-based EY Americas Digital Government Tax Transformation Leader.
Indeed, Bailey believes that automatic tax filing, signaling the end of the tax return, could become the norm for tax authorities around the world.
“This is going to happen,” Bailey says. “It’s going to be easier for a tax authority to administer tax policies if they go down this path. Everyone is embracing automation, so why not tax authorities, too?”
“In certain countries, it’s the ‘new normal’ already,” Bailey says. “Some countries will get there very fast, while others will take a few years.”
Latin America leads
The drive to digitalize and automate national taxation systems is being led by countries as far-flung as Brazil, Oman, Russia and Estonia.
The authorities in these jurisdictions have not traditionally been at the forefront of tax innovation.
But this is clearly changing.
Take Brazil, which in 2006 rolled out a simple public digital bookkeeping system called SPED that it has systematically honed and perfected.
SPED now trawls digitally through a company’s bank accounts, financial filings, daily invoices and sales slips.
At the end of each financial year, it issues an automatically generated income tax report tailored to each domestic individual, corporate and institution.
Brazil’s tax authorities “can literally see the innards of a company,” Bailey says.
This revolution hasn’t always been popular in Brazil.
But its value to the nation’s treasury cannot be refuted.
According to data collected by the EY Center for Tax Policy in the US, the amount of federal taxes collected rose by an annual average of 12.46% in the five years to the end of 2015, helping the government boost its revenue take without raising the tax rate.
Automation to the rescue
In countries where tax structures are either incomplete or chaotically jumbled, there is a clear incentive to embrace the death of the manually filed tax return.
The US tax code, notes Di Re, has become “horrendously and incredibly inefficient. Many US firms have to commit resources they don’t have each year, hiring extra help to fill out hundreds of pages of the tax code.”
Automation should solve that problem at a stroke, allowing governments to burrow into a taxpayer’s finances and apply their analytics to that data.
Proponents of a fully digital future rarely see the downside of allowing government to assess their tax bill.
In his March 2015 report, the UK’s Gauke highlighted the benefits of seamless tax digitalization, from the ability of individuals to view their pension contributions, to companies being able to view their tax data on a day-to-day basis.
“Authorities are motivated by the need to make themselves more efficient than ever before,” says Aidan O’Carroll, Global Compliance and Reporting Leader at EY in London. “This is creating a race to the top, with firms investing in artificial intelligence and analytics in order to be well placed to respond to automated tax demands.”
Not so fast
Yet this future isn’t written in stone.
Many businesses are uncomfortable with being told how much tax they owe.
Others worry about placing too much information in the hands of government.
Chief among their concerns is the rising prevalence of data theft incidents.
In February 2016, IRS servers were the target of a hacker attack in which 101,000 stolen Social Security Numbers were used to generate e-file PINs — personal identification numbers used by taxpayers digitally to file their annual tax returns.
‘Opens the door to fraud’
Identity theft is another rising threat, leading to American taxpayers being issued with erroneous tax bills.
“Filing tax returns electronically saves money and speeds up the tax filing process,” notes EY’s Di Re. “But it opens the door to fraud, and the IRS has paid out billions in fraudulent tax refunds.”
She also points to the danger of being issued a tax bill that is plain wrong.
“Imagine the average uneducated taxpayer getting a tax bill with a government letterhead on it that states in clear letters: ‘This is what you owe.’ When my clients get a letter like that, I tell them to hang tight until I’ve read the tax bill, as in some cases, the government’s estimates are wrong.”
Authorities are working hard to solve these problems as they occur.
In Brazil, any taxpayer has a narrow window to protest an automated bill.
In the US, the IRS is seeking ways to make it easier for taxpayers to get transcripts of their own accounts.
But as tax systems around the world become increasingly automated — run by machines and overseen by humans — taxpayers, whether individuals, small-business owners or global corporations, face a daunting challenge: to educate themselves about the ongoing digital tax revolution, or risk a fine, or worse.
Taxpayers in countries with e-returns, for example, must be prepared to respond quickly when controversy arises.
“If a government examines my accounts and tells me that I owe them more money, I need to be ready with a response,” says EY’s Bailey.
“Companies will increasingly need to be ready digitally to back up their position.”
Tax changes in the UK: a closer look
The UK’s Her Majesty’s Revenue and Customs (HMRC) is moving to end the time-honored practice of annual tax returns by 2020. The vision is to transform the entire UK tax system “into something that feels completely different” and make it easier and faster to file and pay taxes.
- 2016: Every individual or small business will have access to a digital tax account allowing users to: review their income tax estimate and tax code; fill out and send their personal tax return; view how national insurance contributions impact their pensions; check and update work benefits, such as medical insurance; and make a tax refund claim.
- 2017–19: Taxpayers will be able to view the interest paid by banks and building societies, along with an overview of their tax liabilities via their digital tax account. Users will also be able to report different sources of taxable income and access child benefit services through their digital account.
- Advice and support will be available via web chats and messaging, tailored to a taxpayer’s unique needs, such as a new baby or a change in employment status.
- The transition from annual returns to real-time tax reporting will be phased in through 2020.
- Businesses will use software and apps to collect tax-related data on a daily basis, reviewing it for possible errors or omissions, and then send it digitally to the HMRC.
- Companies will also be able to review information on their tax affairs through their digital account, including a calculation of the tax they owe.
- HMRC will issue targeted guidance and alerts for taxpayers.
Sources: UK Government website; EY Global Tax Alert: “UK Government opens consultations on Making Tax Digital”
This article is included in Tax Insights issue 17 – Transformation and innovation (pdf)