Can technology facilitate tax compliance?
COMPANIES are experimenting with artificial intelligence (AI) and the internet of things (IoT) to take their organization further up the digital maturity curve.
However, in some parts of the world, they still have to make applications and file their taxes using paper forms.
For a long time now, businesses have urged governments to embark on a journey to embrace and incorporate technology into its everyday operations.
An archaic government will inevitably slow down commercial progress and fail businesses in the increasingly digital-first, global marketplace.
One of the areas where technology makes the biggest impact on the relationship between the government and corporate entities is in the tax department.
In fact, the World Bank believes that convenience in tax procedures is an important factor in evaluating the ease of doing business in the country.
Quicker and simpler payments
According to the 2019 edition of the Paying Taxes report by PwC and the World Bank, the average time to comply has fallen by 84 hours and the average number of payments by 10.3 since 2004 — both driven by technology.
The time to comply indicator reflects the number of hours it takes to prepare, file, and pay (or withhold) corporate income tax, value added tax or sales tax, and labor taxes, including payroll tax and mandatory social contributions (in hours per year).
The payments indicator reflects the total number of taxes and contributions paid, the method of paying, and the frequency of payment during the tax year.
In the report, the World Bank reminds people that technology alone isn’t sufficient to improve performance. The simpler a tax system is, the more amenable it is to digitization.
In recent years, the overall rate of change has slowed down indicating that governments are taking more time to think about how they must implement technological upgrades to their tax system in order to benefit their people — which isn’t a bad thing in itself since taking into account computer literacy levels and domestic IT infrastructure is key to success.
However, governments must take swift action if they want to avoid lagging behind.
China and Hong Kong lead the world
According to the report by PwC and the World Bank, China and Hong Kong are among the top performers when it comes to improving on the two metrics — the time to comply and the payments indicator.
It highlights these two countries as technologically advanced economies, outlining that tax processes have been optimized by:
- Pre-populating tax returns by automatically exporting data from accounting software
- Using machine learning and artificial intelligence to identify tax-sensitive transactions
- Using (near) real-time systems to compare information from different counterparties to enable rapid verification of transactions, minimize errors, and protect against fraud
A review of China’s tax system found that the country has experienced a very substantial reduction in both metrics — the time to comply (832 hours to 142 hours) and the payments indicator (37 payments to 7 payments).
According to PwC, the trend has accelerated in recent years with the introduction of new projects and a significant overhaul of the tax system, including the removal of the business tax and the digitization of VAT compliance.
In order to make the new tax procedures a success, the government organized extensive educational programmes for taxpayers. It also transitioned tax authorities to a more customer-focused model.
Hong Kong, on the other hand, has a fairly simple tax structure. Hence, digitization has been easy, although technology has made a significant improvement recently. In 2016, the time to comply was 46 hours and required three payments. The next year, technological innovations cut down time to comply by another 10 hours.
Serving as models for the rest of the world, China and Hong Kong make compliance with tax laws easy. Digitization not only helps taxpayers better plan their payments but also allow them to stay better informed about their duties and obligations — via websites, e-learning, and virtual assistants.
At the end of the day, countries that have a digital tax payment system benefit not just companies seeking more digitally integrated solutions but also the government bodies themselves since post-collection tax processes such as verification and audit can be made more efficient.