Digitized tax collection is impacting tax departments. Tax departments are embracing technology for digitized tax collection.
Within the broader theme of digitization of tax, a key area of focus is the influence that technological advances has had on the slow but inexorable global shift in tax policy over the past thirty years.
The early 1990s saw the world’s average corporate income tax rate top out at over 40 percent. From then to now, the average top corporate rate inched down to about 22 percent.
Over the same time, from payroll taxes to transfer pricing and withholding taxes, corporate income tax bases have broadened to the point where they are more akin to indirect taxes, and indirect taxes themselves have become widespread. Except for the United States, the vast majority of countries have or plan to establish indirect tax systems, while current indirect tax bases have continued to expand. Now that India, China and the Gulf states have or will soon implement their value-added taxes/goods and services taxes (VAT/GST), centrally administered indirect tax systems are in place in over 160 countries.
We could soon see more types of indirect taxes supplant corporate income taxes as tax policy makers seek solutions for taxing cross-border digital businesses. The European Union and Australia have both proposed to tax some digital economy businesses on the basis of gross advertising revenues from user views – again shifting tax away from corporate net income and toward income from discrete events.
For income and indirect taxes alike, incremental advances have allowed tax policy makers to tighten the object of taxation to the level of individual transactions. Once you are at that level, everything hinges on the data. Ongoing digitization has moved the tax world to the point where the visibility, quality and ability to analyze transactional data is now paramount.
Tax authorities are gaining clear benefits. Access to transactional data increases transparency, providing a much more detailed picture of taxpayers’ accounts and dealings. They can employ data analytics to check the quality of taxpayer data and benchmark it against industry norms. They can also combine data analytics with other tools to review data across taxpayers to identify broad patterns and detect areas of non-compliance risk. They can then use this information to select cases for audit, optimize debt management processes and design taxpayer communications to encourage compliance.
As tax authorities focus their digitization toward data and analysis, companies are increasingly looking for technology solutions that can ensure the quality of the compliance data. For many tax functions, the quality and visibility of tax data is dramatically improving their accuracy and efficiency.
But better tax compliance is only the beginning. This aspect of tax digitization is one of the key factors reshaping the tax operating models of the future.
What will tax operating models look like 5 or 10 years out? While predicting the future is difficult, the way that tax functions are structured and operate is likely to shift in response to three key areas:
- Automated compliance: As advances like artificial intelligence and robotics are increasingly applied to tax,process automation is allowing tax functions to automate and augment highly standardized activities, freeing tax teams from routine compliance tasks. The future will see the involvement of people in the compliance process increasingly limited to high-level review and strategic analysis functions.
- Broader skills for tax people: In-house tax professionals may do less routine tax compliance work, but will face new demands to improve data collection processes across the finance organization and to work with data and analytic tools to turn financial information into actionable insight. Organizations of the future will seek a new type of tax professional with expansive knowledge of technology, tax and accounting, and how they can interact to improve their organization’s data quality and decision making.
- More centralization: As the centralization of finance and tax functions continues, organizations of the future will likely realize more of the traditional benefits that centralization brings, including standardization, efficiency and lower costs. However, the advent of fully digitalized tax systems will likely raise complex new operational risks. Companies will be compelled to respond with structures that promote connectivity across the organization and allow the implementation of systems and processes that ensure the quality of tax-relevant data.
For international companies, new country-by-country reporting rules and the rising exchange of information among tax authorities underscore the need to invest in centralized sourcing models, such as shared service centers, that can serve multiple jurisdictions and ensure filings across countries and business units are consistent.