Tuesday, April 25, 2023
The digitalisation of modern economies creates new opportunities to evolve tax collection.

Blog Author: Andy Heys, Principal Account Technical Leader, Australian Taxation Office, IBM Technology, Australia. Andy has over 40 years experience working with Public Sector clients in Australia, the UK, and the rest of the world. Andy is based in Canberra and currently focuses on Australian Commonwealth Government clients.

In late 2022, we kicked off a series of blogs focused on the role of technology in modernizing tax agencies around the world. Leaders recognize that technology is critical to improving taxpayer service, closing tax gaps, and addressing workforce challenges. Those executives share many ideas with their peers across governments and the commercial world.

What Governments do matters but how they do it should enable the citizen to meet their obligations or address their needs with the minimum of friction and complexity. Technology has a big role to play in enabling Government to serve the citizen and the citizen to meet their obligations; Andy is interested how technology can be applied to achieve that effectively and efficiently.

"… nothing is certain except death and taxes," said Benjamin Franklin, and there is written evidence of tax collection dating back 5,000 years to the earliest human civilisations in Egypt. The earliest forms of tax collection were tithes on produce, typically collected at harvest time, and since then, as civilisations have evolved and developed, so have the ways and means of taxation and tax collection. As the means of applying, collecting, recording, and enforcing tax collection became more sophisticated import and export taxes were applied to trade across societal borders; sales taxes applied to a widening range of goods and services, and income taxes replaced tithes on produce.

The digitalisation of modern economies creates new opportunities to evolve tax collection; to collect tax due and issue refunds in real time and make these processes more accurate and timely.

What do we mean by 'real-time tax processing’? Quite simply, tax collection and/or refund processing at the time a taxable transaction is digitally processed. This can be at the time of the transaction, when sales tax is collected at a point of sale terminal, after the actual transaction has taken place, when an invoice is paid by the buyer, or even before the transaction has taken place, when a payroll system initiates payment to an employee. Real-time tax processing is the move from periodic to event-based tax reporting and collection. It is the digitialisation rather than the digitisation of the process.

Why digitalisation? Collecting and refunding tax in real time has benefits for both the government and the taxpayer. Collecting taxes as they arise, rather than in arrears, simplifies the tax system, improves government cash flow and reduces the potential for tax debts to become tax write-offs as a result of insolvency or fraud. From a broader government perspective, real-time tax collection can provide greater and more timely insight into the performance of the economy and better inform economic decision-making in government.

By tightly integrating tax collection and refunds into business processes and systems, tax 'just happens', simplifying the back office and associated costs. No taxpayer wants to pay tax, but the vast majority recognise that this activity is an obligation that comes with living, working and doing business in this society, and is their contribution to the societal benefits they receive. Minimising the administrative burden of participating in the tax collection process reduces the friction, which in turn leads to higher levels of compliance (reduced fraud and error) and more efficient economic activity.

Real-time tax collection is effectively a partnership between the government tax collection agency and a community of taxpaying entities within the economy. The partnership requires the taxpayer to modify its business process to generate the [digital] tax transaction at the appropriate point in the lifecycle of a business transaction, and for the government to define and implement the mechanisms to receive and process that tax transaction as it is generated by the taxpaying entity.

Digitalisation of tax collection requires a flow of digital messages between the taxpayer and the tax authority.  The key building blocks for successful implementation are

  • well-designed standards that define how information is exchanged,
  • robust APIs (as discussed in our 3rd blog in this series) that allow both standards and interfaces to evolve over time and absorb change without disruption, and
  • an ecosystem of software vendors of taxpayer business applications - the 'natural' systems described by the OECD - that leverage the standards and APIs to reduce the application development burden on individual businesses.

Tax authorities will need robust, scalable infrastructure and tax processing applications that can cope with peaks and troughs in demand; nothing is more likely to slow adoption than a tax authority outage at a critical time for taxpaying businesses.

The financial benefits to both business and government can be significant in reducing administrative and compliance burdens, and associated costs. While not all forms of taxation lend themselves to real-time processing, common forms of taxation such as employment, payroll, sales and other transaction taxes - a result of typically highly digitised and standardised business processes - represent the greatest opportunity for both taxpayers and governments in terms of volume and value.

This is not a new idea; the Australian Taxation Office recently completed the implementation of its Single Touch Payroll (STP) initiative to reduce employers' reporting burden to Australian government agencies.  It streamlines the reporting and collection of personal income and superannuation taxes by integrating employers' payroll processing with government payroll and superannuation processing. Following an initial implementation in 2018-19, STP has been expanded to include data that employers are required to report to other government agencies, which, while not directly related to tax collection, demonstrates that further business and government efficiencies can be built on the foundation of real-time tax collection.

The digitalisation introduced by Australia's STP programme means that the ATO can maintain a 'current account' for the taxpayer, income-related benefits can be adjusted as the taxpayer's income fluctuates, and at the end of the financial year the taxpayer's income and tax position is immediately available; the taxpayer can check income received and tax paid, amend if necessary, submit and receive their tax refund (or claim) within a few days of the end of the financial year.

Real-time tax collection should not be seen as a revolutionary concept, but rather as the next evolutionary development in taxation and tax collection, from digitisation to digitalisation. As the global economy evolves, the relative volume and value of physical goods and services is declining and that of digital goods and services is increasing. Governments will need to evolve what they tax and how they collect that tax revenue to mitigate the risk of the tax burden falling on a smaller proportion of the economy, which inevitably leads to increased tax avoidance and reduced compliance.

Benjamin Franklin supported the principle of taxation, writing in 1783, "He can have no right to the benefits of society, who will not pay his club to support it", and lamenting the unwillingness and neglect of people to pay their taxes. He would surely be an enthusiast for real-time tax collection - provided the taxes were set and collected by elected representatives of the taxpayers.


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