From cash to tax: By introducing common data standards, governments can facilitate the process of tax assessment and collection while reducing administrative costs for businesses. Illustration by Katy Smith
By digitally transforming financial data collection, governments can streamline and automate the process of assessing and collecting corporate taxes. But to see the reforms through, the panelists warned during a GGF webinar, officials need to make sure they are as attractive to businesses as they are to tax collectors. Adam Green Reports
When Sami Koskinen of the Finnish Tax Administration began to develop plans for the digital transformation of his country’s revenue collection system, he did not start with reforming government business processes or online services. Instead, he outlined a plan to standardize all business invoices and receipts into a machine-readable format, making it possible to share and compare each company’s financial data.
Finland’s three-year program, called Real Time Economy, sees the state as one of many entities with access to this vast mine of data: as part of this plan, the government acquires the ability to calculate automatically corporate tax and payroll taxes, while businesses benefit from real-time information on their financial health and relative performance. And it’s these benefits for business users, Koskinen explained, that explain why the program is likely to be successful.
During a Global Government Forum webinar held in September, all participants agreed on this point: the digitization of taxation will not be primarily a government initiative, but a by-product of a broader digital transformation of the economic activity. The bottom line, as Amanda Green – an IBM partner, who supported the webinar – said is “a frictionless tax to accompany frictionless business.” One must proceed at the same pace as the other.
The attractions for governments of efficient digital tax collection are clear. For most states, income taxes and Social Security payroll deductions are the largest source of income. Facilitating and automating the collection process could therefore increase the amount of tax assessed, while reducing collection costs.
To illustrate the leap in thought required to achieve this, Andja Komso – a former Slovenian civil servant who now advises governments on tax reform for the International Monetary Fund (IMF) – made a distinction between the digitization of tax collection and the digital transformation.
In digitization – a concern of many governments in recent decades – existing processes are moved online, but their underlying logic remains unchanged. In the transformation, she said, the processes themselves are rebuilt from scratch for the sake of simplicity. During this process, Komso explained, new systems are built around the needs of clients – whether individual taxpayers or businesses – so that compliance becomes easier and data is treated as a asset that must be collected once, then recycled and reused.
Given that most of the data involved in taxation – from receipts to payslips – is generated by companies, it is clear that their commitment and support are necessary to accompany a real transformation. âIt is not possible to have a digitally transformed tax environment without the cooperation of all interested stakeholders,â Komso said.
Support for businesses
But given that, as IBM’s Green pointed out, âmost companies don’t run their day-to-day environment with a view of taxation at the center of their world,â how do you ensure this cooperation?
In the Finnish real-time economy system explained by Koskinen, the goal is to embed data standardization and easy sharing into the foundations of every company’s operations – minimizing the investment or extra work required to pull it off. from faster and simpler tax services.
As part of the government initiative, the business creation process is being reconstructed. Once a business is registered, its digital ID will be embedded as metadata attached to any financial document it subsequently generates. Thus, the government will be able to link all the data it holds on individual businesses and easily assemble the information needed to assess tax obligations.
Of course, not all states will choose to start from scratch. For those looking for other options, an alternative will be to collaborate with FinTech companies capable of capturing and aggregating the transaction data required by the government.
The green highlighted payment processors such as Square, which many small businesses use to make contactless card payments. Tap into Square’s data, she noted, and you have access to the full non-cash transaction history of many companies, often accounting for most or all of their trades.
Again, this means governments are finding ways to allow businesses to comply with tax regimes, rather than requiring data to be submitted to them. And that means the state accepts a role as part of a larger tech ecosystem, rather than as the chief architect.
âI think we recognize that we really need to encourage ourselves to think beyond what is already well known to us, to take on new partners,â Green said.
The new role that governments assume will have to be very different from state to state.
The most famous example of effective digital transformation is, of course, Estonia, where 95% of tax returns now only take five minutes to complete. Essentially, a user simply needs to confirm the accuracy of the data automatically extracted in their return from existing public and private sources, which are accessed by the state on behalf of the user.
Such transparent data sharing was made possible in large part because the Estonian state was rebuilt from scratch on a digital first basis in the 1990s, following the collapse of the USSR. It also requires enormous public trust in government systems – something not all states can count on.
It is no coincidence that when the public was invited to ask questions, the first – addressed to Koskinen – asked if the government had faced resistance from people who oppose the government collecting. so much data. “I would say that confidence in [Finnish] government agencies is unusually high compared to most countries, âhe replied,â so I don’t see a problem there. “
It’s rare, the IMF’s Komso noted, adding that when his home country Slovenia switched to digital tax collection, public skepticism was significant. And Hishamudin Mohamed, director of business services at Malaysia’s Inland Revenue Board, said winning public trust is the biggest hurdle his organization faces as it tries to move to a digital tax collection model. .
âOur biggest challenge is to make the taxpayer conform to the system that we have built,â he said. “Although we have moved all systems and services online, if you don’t have the taxpayer’s buy-in, they will frustrate us.”
To date, Mohamed and his team have focused on what Komso would call digitization rather than digital transformation initiatives: automated emails to remind people to complete their tax returns, for example. But in agreement with other participants, Mohamed’s ultimate goal is some form of transformation, enabling automatic data collection rather than manual submissions.
The timeliness of the pandemic
In fast growing economies like Malaysia, the dividends from easier tax compliance are huge. The country has a giant informal economy, which currently sits outside the tax system. But the growing penetration of smartphones and the proliferation of digital payment methods means that huge amounts of previously unreported transaction data could become visible if the state can form effective partnerships. For Malaysia, says Mohamed, the success of the digital transformation will ultimately be judged by increasing tax levies.
Several participants highlighted the opportunity offered by the pandemic to accelerate digital transformation. Finland’s real-time economy system is likely to capture a larger share of transactions, as the economic changes fostered by the pandemic lead to more online sales, while Mohamed called the pandemic a “blessing in disguise” for the Malaysian tax administration, noting that the government has had to suspend physical filing of tax returns.
IBM’s Green, however, suggested that a more subtle change is happening – creating a unique moment in which individuals, recognizing their obligations to society, show an increased willingness to pay taxes. If governments can meet them halfway and facilitate their task, citizens and the state could benefit enormously.