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FEB 23, 2022

The Future of Taxes in a Digital World

The digital transformation of tax administrations is among the most significant development taking place in the global economy today. Business markets, governments and companies are embracing digital technologies to improve the interaction between them. 

 

The digital transformation in tax administration provides a more transparent, flexible and fluid global environment with an impact well beyond public administration. To better prepare for and understand the current and coming transformation, it’s important to understand today’s tax administration systems and their downsides and get a clearer picture of how the future of tax administration will play out. 

The Evolution of Tax Administration Frameworks 

On December 2020, the Organization for Co-operation and Development (OECD) published the “Tax Administration 3.0: The Digital Transformation of Tax Administration” report. Tax Administration 3.0 offers a new perspective on how tax administrations can serve taxpayers, using technology in much more sophisticated ways to improve the administration of tax.  

Using technology, in particular data and analytics, will result in an efficient, easier and transparent tax processes both for the authority and for taxpayers.  

As described in detail by the OECD, the tax world shall become more digital and increasingly aligned across agencies, using data held by different parts of government, the private sector and internationally. 

 

In recent years, the OECD has published two more reports, Tax Administration 1.0, which is thought of as a traditional one, and describing somewhat outdated tax system. Tax Administration 1.0 environment is mainly paper-based and utilizes a lot of manual and tedious processes. Tax Administration 2.0, also called “e-administration”, is considered as the beginning of tax processes change in the era of the internet and the proliferation of other digital technologies throughout multiple business sectors. 

 

As technology continues to improve and becomes more accessible, so as the tax administration processes evolve in tandem to become a more streamlined, interconnected system.  

Limitations of Current Tax Systems 

Tax administrations, whether at the local, regional, national or international level, are confronted with a growing need to improve current systems and processes. This is particularly true as they face pressures stemming from globalization, which generates new types of risks and a greater value at stake. There is also an aspiration amongst some tax administrations to deliver more e-government services to support economic growth and digital transformation.  

The tax administration evolvement from version 1.0 to 2.0 was a big step into the digital world, however, there are still significant structural transformations in the current systems that are taking place to mitigate compliance risks.  

 

For instance, the term “voluntary compliance” is widely used within the tax administration community. It reflects the fact that taxpayers bear primary responsibility for paying their taxes, and that they make choices as to how they comply with their obligations. While this can be as simple as filling out a form correctly, keeping records, or meeting reporting requirements and deadlines, it is important to note that new systems should be put into place in areas where some compliance choices may result in taxes not being correctly paid. 

In tax areas such as payroll tax, the compliance complexity may be much lower, as the taxation is built into the system. However, in cases such as capital gains and rental income, taxpayers must take additional active steps to avoid tax liabilities and keep up to date on their tax payments and what they owe. 

 

Another key consideration pressuring the current tax ecosystem resulted by the way we calculate tax, submit filings and pay what we owe. It is often end-of-year reporting, which creates a complexity to resolve non-compliance and mismatches, which often may lead to major tax exposures or significant tax opportunities, that eventually may affect both the tax authority and the taxpayer cashflow. 

The Need for Digital Transformation 

The rapid digitalization of technology in the world around us presents a unique challenge to quickly adjust our finance and tax departments’ day-to-day processes, redesign and adapt our financial systems to this ever-changing world. Among others, it worth to consider the ability of accessing and using information in light of changing work patterns, changing business models, and the use of complex financial instruments, changing societal expectations about joined-up government process and the growing importance of privacy, security and transparency around the use and control of data. 

 

Tax administrations face a huge challenge today in their need to rationalize the compliance relationship and in their enforcement approach. Taxpayers expect more timely, efficient, and personalized service, but are frequently confronted with tedious procedures, multiple contact attempts, and additional information requests.

How Tax Administration 3.0 affecting your business 

In recent years, governments are constantly improving their technological capabilities, as such, all companies, including software providers, must keep up to date with changing tax requirements and with tax administrations analysis capabilities.  

To get a better idea of what Tax Administration 3.0 really is, and how it affects the course of business, taxpayers may need to move out of their comfort zone and adjust to the current and upcoming changes. 

 

The base of all ‘building blocks’ of tax administrations transformation relay on the interaction between the authority and the taxpayer. From improvement of tax registration to the way taxes are being collected and paid, tax administrations around the world provide taxpayers with an easier and more convenient platforms to comply with tax regulation. Having said that, taxpayer needs to integrate and align their financial data with the administrations standards and ensure compliance in real-time. As part of Rubitax Platform, clients equipped with cloud real-time tax engine, which integrate to their accounting source data, tax data and authority data, while ensuring maximum compliance with tax regulations. 

 

Government around the world are moving into a holistic e-government model, where data from different agencies is shared and consolidated to a digital profile - tax administrations aspire to use this information and manage a digital database of taxpayers. Moreover, tax administrations today are aspired to connect directly to taxpayer source data, which allow them to focus on managing the availability, quality, and accuracy of the tax data. Using different types of taxpayers’ information allow tax administrations to obtain a unique linked connection matrix, which then may move tax processes to the background and makes it seamless, thus it may create an increased compliance burden on taxpayers. Good examples can be found in countries like, Singapore and Australia, where corporates are required to issue a digital company ID, which enable the execution of daily business transactions with an ability of seamless real-time filing. Here at Rubitax, we believe that all data sources and output should be measured and aligned in real-time - To make that happened we provide clients with an ability to integrate to different data source and an online analysis engine to flag any misalignments or errors between sources and outputs.  

 

In addition, the digital era, especially post COVID-19, has taught us those manual processes, which used to require human touch, can be managed through digital means. Despite the built-in complexity within tax processes, the current and upcoming technology enablers can increase efficiency for taxpayers and facilitates the engagement of taxpayers with administration processes only if necessary - tax reporting can be done with little to no human touch. 

 

Whether the tax administration in your country is in preliminary or in advanced stage on the maturity curve of digital transformation, it is important to start building the framework for an advanced finance and tax operation, from acquiring new skill sets, using supporting platform and make sure you are up to date with regulatory updates. 

Next Steps. . . 

While most taxpayers still use manual and paper-based reporting processes, today progressive companies manage their tax filing processes digitally. Finance leaders combine more automation and analytics in their tax processes to save time and cost, reduce compliance burden, mitigate tax exposure and highlight opportunities. 

Tax has been experiencing a huge disruption and changes over recent years. However, this change has not always kept up with the changes in technology.  

Join RubiTax Today! 

RubiTax brings the most recent technology seamlessly and continuously into tax operations. RubiTax helps its clients to stay compliant with the increasing demand for transparency and data requirements from regulators, while providing full visibility and insights to leverage data and knowledge. Now you can also have a streamlined tax process with updated and more accurate tax data ready for real-time reporting.