The costs of tax compliance of SMEs, and a new management model.

Recently, the Tax Administration Forum has published a remarkably interesting document entitled “Towards Seamless Taxation”[1], which invites us to rethink about a new Tax Administration (TA) model that surpasses the current approach based on voluntary compliance.

Given the importance of SMEs for the economy in general, it is vital to reduce administrative burdens such as tax compliance, in order to free up more of their capital for entrepreneurship and development of countries.

The newly published report examines how the Tax Administrations (TAs) are currently working to integrate their tax processes with the systems used by SME taxpayers and identifies the key benefits and considerations by exposing concrete use cases.

We will comment on the main points and then present a final reflection.

  1. LIMITATIONS TO THE CURRENT MODEL OF ELECTRONIC TAX ADMINISTRATION BASED ON VOLUNTARY COMPLIANCE. PROPOSAL OF AN OVERCOMING MODEL.

The current E-TA model still relies heavily on voluntary compliance for a significant proportion of the tax base, including SMEs.

“Voluntary compliance” recognizes that taxpayers make decisions regarding the declaration, calculation and payment of tax. These options are not only whether to comply or not to comply, but also include options regarding the effort made to be able to comply correctly within which the costs of tax compliance are included.

Many of the problems related to tax compliance and compliance costs arise from the need for SMEs to use different systems or processes to comply with tax obligations than those that they use for their own business purposes.

In this sense, although electronic administration services have undoubtedly helped to alleviate some of the costs of complying with tax obligations, most of the services they currently offer are generic in nature and are still presented as an “independent” service provided through the TA’s website, rather than integrated into the systems that taxpayers usually use.

Due to all these limitations, the report proposes that the next stage on the path of digitalization is to further integrate the TA’s tax processes with the systems that taxpayers use to conduct their business, manage their finances and interact with their customers and employees.

In this regard, there is a familiar and long-standing example of this type of process, which is that of employers who calculate and withhold income tax from their dependent employees, known as PAYE (pay as you earn) systems where the results are phenomenally successful for all parties dealing with a tax compliance model by design.

As early as 2014[2], this model of tax compliance by design was cited in an OECD document where two different approaches were analyzed.

The first approach involves the creation of a secure flow of information from the capture of business transactions to the final determination of the correct amount of taxes to be paid, where the TAs would function as facilitators to ensure that information security.

The other approach to compliance by design is that of “centralized data”, which seeks to make sure that the TAs themselves can capture as many business transactions from the source as possible to determine the correct amount of taxes to be paid with minimal taxpayer information.

Here, the role of the TAs is more about managing the entire process, including handling and transforming all the information itself, so the need for the taxpayer to provide information about their own transactions is significantly reduced.

These two strategies are vastly different, but they can also be combined in various ways depending on the context and the desired future environment, which allows tax compliance to be much more automated and reduces costs for both companies and TAs.

Closest in time to the proposed model, called the Tax Administration 3.0, has as its central feature that TAs ‘processes become more integrated with the systems used by taxpayers to conduct their operations, which will enable the automatization of many aspects of the TA and will bring potentially significant reductions in both cost of compliance and administration.[3]

  1. MAIN TOPICS COVERED IN THE REPORT.

Chapter 2 discusses how the TAs are creating new systems for SMEs, by using application programming interfaces (APIs), which allow taxpayers to interact more seamlessly with the TA systems. These range from applications limited to particular processes to more holistic systems that taxpayers can use to conduct all taxation.

An API is a set of software functions and procedures that allow applications to access the functions and/or data of another software solution; applications can send requests to this interface and receive responses.

Digitalization opens up to interaction between taxpayers’ ICT systems and the TA’s ICT systems and a proven successful method of such interaction is through APIs.

Therefore, the report presents the multiple advantages of APIs, the strategic considerations for their implementation, as well as concrete cases where they are already used.

It cites the cases of Argentina for electronic invoicing with an application called “My mobile invoice”, Australia with Single Touch Payroll (STP) where data are reported for the employees to state agencies, Finland where the API is intended to facilitate software developers to the interaction with the TA (VERO), Hungary where a mobile application is created to allow for the issuance of invoices, Mexico with mobile applications to facilitate the compliance of taxpayers, Peru, where applications were developed specific to SMEs and entrepreneurs, and Singapore where they are working to facilitate compliance with the corporate income tax by integrating the systems of taxpayers with the ECI.

Chapter 3 looks at how TAs are currently working on co-creating systems with SMEs and their service providers.

Collaboration between companies and the TAs is essential, as well as with software providers and all organizations that interact with SMEs such as Banks, Chambers of Commerce, etc.

The main goal is to achieve mutually accepted data quality standards and formats, both to provide security and to minimize the burdens of all parties involved. For this, changes in legal norms such as accounting standards may be required since the heart of the new approach is based on the exchange of dependable and verified data between SMEs and TAs.

Specific cases are cited, highlighting the use of electronic invoicing as an instrument to reduce compliance costs, which can be a starting point for the proposed model. The cases of Australia, Chile and Portugal stand out.

Likewise, online cash registers and electronic accounting are presented as elements that can ensure the transition to the new model.

Chapter 4 analyzes the advances in the broader articulation of tax processes with SMEs in general. The SME ecosystem is truly diverse, with relationships between banks, regulators and numerous parts of government. Aspects are described to work together with all these parties in the unification of systems to be used, to exchange information in an agile and secure way among all the agents involved.

Many cases are presented of countries that are collaborating with various intermediaries and service providers on this issue of the unification of the systems to be used.

Chapter 5 offers some final thoughts on the path to more effective taxation with lower tax compliance costs.

Achieving this vision will require the TAs to complete many stages, and possible solutions to facilitate them are proposed. However, each TA begins its own unique journey at different points, depending on its own principles, experiences, systems and goals.

Regardless of the starting point, one of the most critical influences is the state of the Digital Transformation program within the TA. The changes that the Digital Transformation can bring are central to the new opportunities in the process of integrating taxes into the entrepreneurial ecosystem of SMEs.

The OECD Digital Transformation Maturity Model[4] can be a guide to identify future priorities or review existing progress which can then inform the necessary strategic discussions. This model can also help to facilitate the exchange of knowledge and experiences between the TAs.

However, it is not only the technical possibilities that will determine the future and the successful journey. Cooperation between TAs, SMEs and other stakeholders is one of the cornerstones on the way to more effective taxation with lower tax compliance costs.

Finally, there are two case studies in the Annexes that contain more details on how the TAs have implemented some of the ideas contained in the report. The first is the case of the Netherlands where the Standard Business Reporting (SBR) is described, which is the Dutch national standard for the digital exchange of business reports and also the case of Chile, with all the experience of the SII in the subject of pre-filling of tax returns or drafts of VAT declarations.

  1. REFLEXIONES FINALES

Through the present blog article, I wanted to highlight a new report that invites us to rethink how we can move from the tax compliance model to a compliance model by design that exceeds the current one, where the main objective is to reduce compliance costs and also system administration costs, achieving more efficiency and effectiveness for all parties involved.

It seems to me a highly innovative proposal that the TAs systems be adapted to those used by taxpayers, in this case SMEs, and also to those used by various parties such as Banks, Chambers of Commerce, professional organizations, etc.; the main objective being to exchange information in an agile and secure manner among all the agents involved.

I am convinced that technology should simplify taxes even more, not only the tax systems but the way they are managed, and this analyzed document shows a way to do so.

Obviously, not all TAs have the same degree of digitalization, the same human and material resources, nor the same social reality to conduct their management, but one of the most important aspects of the document is to invite us to rethink about a new TA model, which implies a paradigm shift with respect to the current one.

At this point, the most important thing is that if TAs focus on where they want to go and how they can get there, this will help to make better decisions regarding the digitalization processes underway today.

Today, without a doubt, we are facing a unique opportunity to accelerate the step towards digital governments, to rebuild trust by being more transparent and efficient, promoting the smarter use of new technologies and data analysis.

In short, the digital transformation of the TAs must be approached in a holistic way, redefining the processes, orienting the services to the citizen and, of course, establishing a strategy that combines the citizen-centred approach with a model more efficient, interconnected, collaborative and adapted to the social reality.

[1] OECD (2022), Towards Seamless Taxation: Supporting SMEs to Get Tax Right, OECD Forum on Tax Administration, OECD Publishing, Paris, https://doi.org/10.1787/656c89ab-en
[2]  OECD (2014), Tax Compliance by Design: Achieving Improved SME Tax Compliance by Adopting a System Perspective,  https://www.oecd.org/tax/forum-on-taxadministration/publications-and-products/tax-compliance-by-design-9789264223219-en.htm
[3] To Enlarge see Alfredo Collosa. The digital transformation of Tax Administrations. Is a new management model emerging? CIAT Blog 19/01/2021.
[4] OECD (2021), Digital Transformation Maturity Model, OECD, https://www.oecd.org/tax/forum-ontax-administration/publications-and-products/digital-transformation-maturity-model.ht

 

 

Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

2 comments

  1. Carlos André Silva Ramos Reply

    Muy interesante, compañero Alfredo. Muchas gracias por compartir sus conocimietos. Saludos.

  2. Alfredo Collosa Reply

    Estimado Carlos muchas gracias¡ Saludos

Leave a Reply

Your email address will not be published.

CIAT Subscriptions

Browse through the site without restrictions. Consult and download the contents.

Subscribe to our electronic newsletters:

  • Blog
  • Academic offer (Only in spanish)
  • Newsletter
  • Publications
  • News alert

Activate subscription

CIAT Members

Representatives, Correspondent and Authorized staff (TA)