It took just 66 years for us to progress from flying the first successful aircraft (the Wright Flyer, 1903) to putting man on the moon. In fact, there were only seven years between President Kennedy declaring “we choose to go to the moon” in 1962 and Neil Armstrong stepping onto its surface. When we need to, people can make technology move at an astonishing pace.
In contrast, the evolution of taxation has been pedestrian. Tax as a concept has been around since around 3,000 BC and the first income tax was introduced in the UK in 1799. But the tax system we have today doesn’t match the world as it is. In the main, it is resolutely pre-digital. As governments and multilateral organisations grapple with the economic fallout of the coronavirus pandemic, changes to taxation are now a priority.
I believe this is our “we choose to go to the moon” moment.
Why are our existing tax systems so challenged?
Tax systems work less well within a digital economy where physical location becomes a lot less important. Those of you who follow my colleague Matthew Herrington will know that whilst the nature of taxes has been changing to reflect this (notably with the BEPS project and also the Digital Service Taxes), these changes are fraught with political difficulties -- which nations ‘win’ and which nations ‘lose’?
The pandemic has highlighted this further. As people have started working remotely from different countries, and board meetings happen over video conferencing - sometimes in many countries at once - the question of which nation a business is operating in has become ever murkier.
Digitisation will revolutionise taxation. The destination is easy to predict: eventually, the amount of tax you owe will be calculated for you in real time and it will be paid over largely at source. However, the road to that destination isn’t always clear to see.
But KPMG isn’t standing still. We’re innovating now in exciting ways:
- In this video published by my colleague Allister Weir for corporate compliance, we can pull data directly from a client’s ERP system, using Artificial Intelligence (AI) that improves with every interaction.
- We’re using technology to innovate our approach to Transfer Pricing documentation
- By the end of this year, we expect that a third of our Global Mobility Services returns will be completed by a robot.
- And it isn’t just tax – our Legal Services practice is also leading the way on technology.
The journey ahead
Almost all taxes are currently transactional in nature, whether it be your labour, services, goods or a specific asset. A few taxes are more “event” based such as inheritance tax. There are significantly fewer taxes that are “dry” – that is a tax without an underlying source of liquidity – e.g. a wealth tax.
But UK tax legislation is vast and fiendishly complex. When the UK tax legislation was recently weighed, it came in at only slightly less than Buzz Aldrin. No one person in the UK could ever understand all of it.
The tax profession is at the start of this digitisation journey. We have taken our first important steps. We have learned to fly, built a jet and broken the sound barrier. However, we are still looking at the moon in wonder.
How to get to the moon
Here are where I see the biggest opportunities for progress:
- Firstly, the tax profession, government and businesses will need to work together on the journey.
- Secondly, how the tax system operates will need to change. It will need to be simpler. And it will need to be linked to either the financial accounts (for corporate taxes) or the underlying transactions – e.g. purchases made or salaries paid.
- Thirdly, the tax base needs to be refreshed. Digitisation means business can be conducted without borders. It also means that we might be looking at a “world without work”. As such, the tax base will need to evolve – hence the discussions about “robot taxes” – to match the nature of the economic and therefore taxable activity.
I believe the destination of seamless, real-time taxation is at least ten years away. Completely automated Corporate Interest Restriction calculations or advice on a complex M&A transaction provided by a tax chatbot seems a long way off.
But we’re already innovating. The common theme of the innovations above? Putting data at the heart of our journey – as my colleague Paul Heywood says, “Without well-structured data, even the best software is like having a Ferrari without petrol”.
Change in the tax landscape is inescapable. Buckle up for an exciting ride ahead.