The OECD Forum on Tax Administration recently issued its Future of Taxation discussion paper. It’s a strong report, offering a challenging vision of a digital future for tax agencies around the world—a paradigm shift on a scale comparable to transport’s move to driverless electric vehicles.
Many of the OECD’s recommendations chime with Accenture’s research on the future of tax, especially in areas like ecosystem enhancement, real-time transaction level taxation, skills changes and the adoption of AI.
To understand how business leaders see real-time taxation evolving, we recently sat down with 40 finance experts from a diverse group of industries in 16 different countries. What they told us confirms real-time tax as the future of tax systems.
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The future vision
The long-term vision is for a tax system in which compliance is built into the fabric of transactions, with tax calculated and collected automatically, in real time, as soon as transactions take place, payments made, or income received.
As a director of financial services for a professional services company told us, “The more real-time the payment is the more real-time the taxation can be. A real-time tax process makes a lot of sense, where transactions are automatically integrated into the tax agency’s system and the tax liability will show on a second-by-second basis”.
In such a world, tax returns would be obsolete, and tax errors rare (and immediately self-corrected), while taxpayers would always be tax compliant—without having to lift a finger. The idea is that tax effectively becomes “invisible” to the taxpayer. As the director of digital payments for an international bank explained, “From a customer perspective, banking and tax should become indistinguishable and tax should happen in the background to the extent that it is almost invisible to the citizen”.
Getting to real-time tax
But is real-time tax a realistic ambition for today’s tax authorities? Yes and no. The full vision outlined by the OECD is undeniably some years away from being a practicable reality. There are lots of moving parts to coordinate to make it happen.
However, as economies continue toward rapid digitalization, especially as real-time payment becomes more ubiquitous, real-time tax will become not only more possible, but increasingly necessary. It’s time therefore for administrations to move away from today’s focus on compliance opportunities presented by individual digital initiatives and instead reimagine how tax fits into a future digital economy.
The good news is that by coordinating a series of key building blocks—some of which are already happening—and bringing the tax and payments ecosystem closer together, tax agencies can start creating the infrastructure on which real-time tax systems will be built.
Building the infrastructure piece by piece
Let’s consider some of the most important of these building blocks.
First, e-invoicing. With accessible e-invoice data, VAT can be assessed as transactions happen. This flips the role of the tax agency from passive recipient of VAT data to actively pulling it from companies’ transaction records. Open accounting is part of the same picture, although this is more event-based than real-time.
Also key, open banking initiatives. By providing access to banking data through secure digital interfaces, these enable multiple benefits for a digital economy—from faster transfers to massively improved efficiency for small businesses. This also raises the possibility of more effectively integrating gig-economy workers into the tax system—with individual income tax assessed and collected directly from their bank accounts.
As one respondent noted, open banking enables many systemic benefits in its own right: “[it] is less about an opportunity for private individuals, but more for the tax agencies and small business in terms of massively improving efficiency. Tax is a huge operational burden for business. Eliminating this will result in a major cost and time saving.”.
Payments standards are another part of the puzzle. Combined with open banking, a new payments infrastructure would mean that individual bank accounts could be supplemented with “request to pay” capabilities. Similar to an advanced form of direct debit, these enable secure and streamlined arrangements under which the biller requests a payment directly from the payer’s bank account, who can authorize or decline the payment immediately via their banking app.
Even more potentially transformational is the adoption of payments standards that support the inclusion of data with the payment. ISO20022 includes provision for personal identifiers, tax rates and tax amounts as part of data transmitted with payment. The availability of such data will enable real-time payment of tax as part of the payment transaction itself.
A long way to go
Despite encouraging intentions from several governments and agencies, there are still few practical examples of progress toward real-time tax. Exceptions include the Nordic Smart Government initiative, whose aims include reducing the administrative burden on small business through “automatic VAT”.
Generally speaking, however, there’s still too much focus by agencies on individual digital programs. And attempting to transition to the future in this way may well prove to be more challenging than adopting a new, joined-up approach.
To make “compliance by design” and real-time tax a reality, we urgently need more end-to-end thinking, with the whole tax, payments and banking ecosystem collaborating more effectively to agree standards, change mindsets, and expand the data ecosystem.
In future blogs, I’ll deep-dive into the building blocks outlined above. In the meantime, please do get in touch to discuss any of the ideas discussed here.