Pre-prepared Tax Statements: An Instrument of Facilitation and Control

Improving levels of voluntary (or induced) compliance with tax obligations requires strengthening the fight against tax fraud while making it easier for taxpayers to comply with their tax obligations at the lowest possible cost.

The facilitation implies having good information and assistance services, but also that all areas of the Tax Administration assume that their action has an impact in this area.

One of the ways currently used by many tax administrations (TAs) around the world to improve voluntary compliance is the preparation of pre-prepared tax returns or draft declarations.

Basically, the TA makes available to taxpayers a draft of the tax returns so that they, if they agree, submit them or otherwise rectify them.

For TAs, preventing is much cheaper than correcting. We must make it as easy as possible for taxpayers who wish to comply with their tax obligations in a simple way and without a doubt, draft declarations are a very effective tool.

The objective of this post is to comment on some aspects to consider in the implementation of the drafts with the experience of some countries in the subject, to then share some final ideas.

 

  1. ASPECTS TO CONSIDER.

The draft declarations represent the culmination of the strategy of many TAs that focus on increasing the levels of “voluntary” compliance of taxpayers and rely on the construction of a very comprehensive and very reliable information system. This is a prerequisite for being able to offer citizens proposals for declarations to review and confirm.

Only if TAs have built quality information systems over time that have all the data necessary to prepare the declarations will they be able to offer taxpayers the declaration proposals.

A very important aspect of the draft declaration is that the system of self-assessment is maintained even when the taxpayer confirms the proposal received.

It is advisable to start with groups of taxpayers without many complexities (for example, dependent employees who have to file their annual income tax return) to test the model and not run the risk of sending data and proposals that have many errors to the taxpayers, because that would be a great discredit for the TA.

The TAs that have implemented the pre-prepared declarations for some simple tax cases, mainly that of individuals or employees and salaried workers seeks to simplify the life of taxpayers who normally pay their taxes by way of withholding at source and that at the end of the fiscal year can become subject to refund of the withholdings practiced in excess against the income tax that corresponds to them to pay.

The OECD study “Using Third Party Information Reports to Assist Taxpayers Meet their Return Filing Obligations-Country Experiences with the Use of Pre-populated Personal Tax Returns,” published in 2006, examines the implementation of this mechanism in different Nordic countries, and adds Spain and Chile, in order to show a general view of what has been the development and implementation of pre-prepared returns.

It also sets out the main benefits and costs it represents for TAs. In particular, it highlights the critical success factors in introducing this mechanism, in order to benefit a group of taxpayers whose characteristics warrant that the state provides them with more favorable conditions for the fulfilment of their obligations.

According to the OECD study, among the benefits of implementing pre-prepared declarations are:

  • Reduction in taxpayer compliance costs.

  • Reduction in system administration costs by TA.

  • Reduction of the volume of involuntary errors of the taxpayer.

  • A significant reduction in post-verification programmes.

  • Improving the image of the TA and perception that it is acting on tax obligations in real time, in addition to reducing the time taxpayers spend on the return.

  • Increased collection, which usually occurs especially in the first periods of drafts implementation.

This OECD study highlights as key success factors:

  • Complete third-party information systems to TA.

  • high risk taxpayer identifiers.

  • regulatory framework compatible with prior communication of information.

  • high degree of automation of information providers.

  • large-scale and agile information processing.

A good reference document on the subject is the “pre-prepared tax returns” of the CIAT (May 2019)[1], which details the main aspects to consider when implementing pre-prepared tax return systems and presents the progress of different countries in VAT, income tax and Social Security returns.  (Spain, Mexico, Peru, Chile, Ecuador, Portugal, among others).

From the theoretical point of view and rescuing some good practices of the countries that have provided collaboration, the following issues are addressed:

  • Types of pre-prepared returns and ways to interact with the taxpayer,

  • Annual cycle of the process, information from third parties as input to prepare the draft declaration,

  • E-invoicing as a means to obtain and verify information from declarations and

  • Risks that TAs run, for example, that taxpayers receive a draft with insufficient or incorrect information and think they no longer have responsibility.

It is said that in all countries in which the implementation has been successful, the planning of the previous stages is highlighted, considering at least the following aspects:

  • 1. Adjustment of regulations. Depending on the scope to be given to the project and the legal structure of the taxes involved, rules should be established that allow TAs to receive sufficient information to prepare the draft declaration.

  • 2. Adequacy of computer capabilities and equipment for the reception and processing of data and declarations.

  • 3. Adequacy of audit processes for taxpayers who accept the declaration and also for those who partially modify the information pre-filled by the TA.

  • 4. Conversations and meetings with relevant actors or stakeholders such as accountants, statement preparers or legislators, among others.

  • 5. Schedule or plan of incorporation of groups of taxpayers considering pilot groups with similar legal characterizations.

 

  1. EXPERIENCES OF SOME COUNTRIES.

Pre-prepared tax returns or draft tax returns were first developed in Sweden in the early 90s of the last century for a very small number of incomes tax taxpayers.

In 1997, the Spanish Agency began to provide tax data to taxpayers and to prepare draft declarations to millions of taxpayers; initially it was done at the request of the taxpayers themselves and later in a generalized way at the initiative of the AEAT.

Currently, there are already many TAs that have implemented the draft declaration for the income tax of individuals, and some, led by Chile, have extended it to VAT with very good results.

In addition, several TAs are beginning to offer a draft income tax return for legal entities, albeit with limited information.

In 2020 the Spanish tax agency completed the first phase to provide a pre-filled VAT return to a limited number of VAT taxpayers. This year, the second phase of the project was launched by extending the thematic scope to all VAT taxpayers. this means that 3.5 million taxpayers will obtain a pre-filled declaration that includes census data and some economic data. Of these, 41,000 immediate information system (SII) taxpayers and 600,000 real estate landlords will obtain a fully pre-filled return[2].

In Chile, the Chilean Internal Revenue Service (SII) makes the pre-filled VAT return. Chile has more than 600 million invoices issued by 1,032,797 companies.[3]

This volume of invoices made it possible for Chile to be the first country to implement the online VAT declaration proposal that has been a success in terms of facilitating compliance with tax obligations: 92.9% of taxpayers declare VAT using the proposal prepared by the SII.

To obtain this level of acceptance, the proposed declaration contains all the information received in the SII until the end of the period, such as:

  • A) registration of purchase and sales, fee and service receipts.

  • B) information provided by the taxpayer relating to paper tax documents and the classification of purchase types.

  • C) calculation assistants necessary to facilitate the taxpayer’s operation, such as the assistant for registration of paper ballots and calculation.

For its part, an ambitious new VAT collection program has been launched in Italy, under which the Tax Agency will pre-complete VAT returns on behalf of taxpayers. Data collected from transactional information provided from electronic invoices, cross-border transactions, as well as data collected on tariffs electronically will be used.[4]

In Finland[5], pre-filled income tax returns are delivered by email to all taxpayers for their review by taxpayers.

 

  1. FINAL IDEAS.

TAs must work continuously to improve voluntary compliance, and reducing taxpayer compliance costs is vital, today more than ever.

With the incorporation of modern technology, TAs are being digitalized in many of their functions by leaps and bounds and one of the points they must work on is to make tax returns simpler and in this regard, pre-prepared tax returns are an excellent example.

In addition to reducing compliance costs, they reduce evasion and delinquency as confirmed by a recent study of the subject.[6]

This path was started thanks to the large amount of data available to TAs and advances in technology. The implementation of the electronic invoice obviously allows to speed up the process, which was then followed by the digital VAT books in the offices of the TAs.

Obviously, to implement pre-prepared tax returns, TAs must work hard on the quality of information as a step, for which it always seems better to start with a small group of taxpayers and not with its generalization.

Facilitating compliance with tax obligations is essential to achieving the TAs strategy of raising voluntary compliance levels. Draft declarations (as well as the sending of alerts or tax data to taxpayers) are a first frontier of tax control and an essential complement.

Therefore, we believe that pre-filled drafts should be expanded, especially in countries with high levels of tax non-compliance.

[1] https://biblioteca.ciat.org/opac/book/5651
[2] https://www.vatupdate.com/2021/03/01/the-spanish-tax-agency-aeat-takes-a-step-forward-to-the-pre-filled-vat-return/
[3] https://blogs.iadb.org/gestion-fiscal/es/usos-practicos-de-la-factura-electronica-para-el-control-tributario-experiencias-de-las-administraciones-tributarias/?j=467809&sfmc_sub=10183770&l=295_HTML&u=9275984&mid=100028582&jb=49&s=03
[4] https://www.fiscooggi.it/tax-pills/articolo/italy-will-fully-enact-prepopulated-vat-returns-by-january-2023
[5] https://www.vero.fi/en/individuals/tax-cards-and-tax-returns/your_tax_return_and_tax_assessment_deci/
[6]Combating over-reporting of deductions in tax returns: prefilling and restricting the deductibility of expenditures. https://link.springer.com/article/10.1007/s11573-020-01024-7

 

 

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.

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