Taxation in the technology era and what the future holds

Josphat Karanja, Tax Consulting Senior, RSM Eastern Africa

The world has experienced a rapid wave of technological advancements in recent decades. This has contributed to a significant shift  in operations across most, if not all, industries in modern economies. These advancements have proven to be beneficial, not only to the corporate business world, but also to revenue authorities globally, who are now leveraging modern technologies as  tools that are changing the norm in tax administration.

The adoption of new, advanced technology in taxation has seen global tax administrations streamline their operations accordingly; consequently, this has increased tax collection through the expansion of the tax bases, and reduced tax evasion in addition to minimising administrative costs.

With these new technologies, most tax authorities have made a significant shift towards e-administration. This has increased the options for filing tax returns online. The canons of taxation, which were outlined by Adam Smith in the  book “The Wealth of Nations.”, define numerous rules and principles upon which a good taxation system should be built. These canons of taxation are still used today as the foundation of discussion on the principles of taxation. With reference to these, the benefits that technology provides, fall in-line with the canons of convenience and economy. 

Furthermore, in an attempt to recoup lost revenue due to tax avoidance, non-collection, and fraudulent activities, most governments have embraced technology as the most convenient and powerful resource.  The hightened level of scrutiny in tax collection has compelled companies to increase the transparency in their financial dealings, and pursue new avenues for cost savings - other than tax avoidance, evasion and fraud.

Technological methods adopted in the analysis and interpretation of taxpayer trends have ensured that taxpayers are more compliant with local tax legislation. The tax authorities have digitalised taxpayer data within their jurisdictions, facilitating the exchange of information across multiple jurisdictions. This is a key factor in achieving global tax cooperation through the implementation of international tax standards, as well as in tackling financial  information secrecy and tax-evasion schemes.

In addition to the benefits for tax authorities, technology has become vital in helping companies cope with the increased demand for corporate transparency from regulators within their jurisdictions. This has encouraged more efficiencies that will positively impact how tax authorities collect tax revenues in the future. The digitalisation and automation of manual processes, such as data gathering, matching, analysis and tax audits, are now enabling companies to optimise taxation across the breadth of their operations, thus speeding up planning, reporting, and compliance processes.

Why the sudden shift to technology?

Over the last decade, there have been increased calls for corporate transparency amid the increase in taxation scandals that have tested the resilience of most tax authorities globally. In a bid to counter such occurrences, tax authorities have cracked down on the beneficial ownership of corporates, transfer pricing, and profit shifting, among other taxation issues. We have seen additional measures being embraced, such as the Organisation for Economic Co-operation and Development's (OECD's) Base Erosion and Profit Shifting (BEPS) project, which has proven to be impactful. In the future, tax minimisation will no longer be acceptable but instead, tax revenue collection in the different jurisdictions will be a fair representation of the economic activities within such areas.

The need for greater coordination between tax authorities globally, the OECD, and other economic stakeholders has necessitated the adoption of technology as an efficiency tool. This shift has seen the harmonisation of legal frameworks across various tax jurisdictions as well as enhanced revenue authority audit capabilities, with more data being made available under the international tax information exchange programme.

What the future holds for tax technology

One of the recent evolutions in economic technology that is yet to be fully explored on a mainstream level is blockchain technology. This is a decentralised, distributed, ledger database that enables select participants to share data securely, transparently, and without the risk of alteration.  This might just be what the taxation world is waiting for, where both taxpayers, and tax authorities, have equal confidence in the accuracy of the taxation data collected.

With the increased demand from global tax authorities for data, a key focus of the discussion is how blockchain could help organisations cope with the scale of the data required. With this technology, organisations can collate large amounts of accurate data, and such information is reliable because it is all verified by its users.

Blockchain also offers financial incentives for tax authorities since it could reduce the administrative burden and the cost of collecting taxes. This technology has the potential to improve the trust between businesses and their consumers, as well as between businesses and revenue authorities.

Its adoption may reduce some of the complexity surrounding transfer pricing by automating price-setting and adjustments for tangible goods traded within intercompany transactions.

Moreover, the continued adoption of cryptocurrency in global trade  has necessitated the adoption of new techniques to monitor certain transactions to keep up with the advancing technology. That said, we have seen revenue authorities investing in new technological tools in a bid to seal loopholes that would allow for tax leakages. This ensure that revenues gained from  trading in cryptocurrency are also subjected to tax regulations.

Our Take

In the future, tax technology is as fascinating as it is promising. For multinational organisations, the tax landscape is changing with new measures, such as the OECD's BEPS project, and the country-by-country (CBC) reporting initiative being adopted by most governments. It is our considered view that corporate tax departments must develop a compliance strategy that will prioritise the inclusion of new, advanced technology in oversight of activities and coordinating staff efforts. As businesses and tax authorities try to acclimatise, there is the need to have a proper legislative framework, and a clear strategy governing the uses of new tax technologies.

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Josphat Karanja
Tax Consulting Senior
RSM Eastern Africa