Does technology simplify taxes?

In the tax administration field (TA), when we talk about the function of assistance to taxpayers, we are generally referring to all the help that is offered so that they can comply with their tax obligations, either presentation of the tax returns, compliance with information regimes, adherence to a regime of small taxpayers, request for a payment facilities plan, etc. We also understand that this is a comprehensive concept of the assistance that taxpayers may need to exercise their rights effectively.

The fourth industrialist revolution that we are living, regarding constant advances in technology, is obviously changing permanently this function of assistance to the taxpayer. It takes advantage of all the benefits provided by this technology to improve the efficiency and effectiveness in the basic objective of the TA, which is the correct application of the tax system through the strategic objective of raising voluntary compliance through the two lines of action, which are providing facilities to those who want to comply and engaging a radical fight against tax fraud.

When we refer to the advances in taxpayer assistance, we refer, among others, to the fact that increasingly TAS make more information available to taxpayers, so that they are somehow compelled to declare the goods or transactions they are informed of.

A step further is the system of prefilled tax returns, such as here, where the TA makes propose to the taxpayers a draft of the returns that they agree to submit them or otherwise let them to rectify it. In general, this usually start with certain groups of taxpayers, such as the employees in dependent relationship that must submit their annual income return.

With these two examples, we can see the assistance improve the voluntary compliance and at the same time should reduce both extensive and intensive control tasks. An improvement of compliance can be expected if the system provides a service to taxpayers and provides TAs with the possibility to show the information that it holds, which implies as an absolute precondition that there is a very good system of information from third parties.

These systems were devised by the Nordic countries, which have reported the following pre-conditions[1] as essential):

  • complete systems of third parties who submit information to the body collector,
  • identifiers of taxpayers with a high level of integrity,
  • compatible legislative framework,
  • high degree of automation of the information providers,
  • large-scale information processing,
  • automated and minimal interactions with the taxpayers.

Also, another advance in the assistance function product of technological progress that seems important to highlight is the one Spain, where the Tax Agency (AEAT) will implement from July of this year a new management system for the value added tax (VAT) based on the immediate provision of information[2] (SII).

This system is based on the bookkeeping of the VAT registry through the electronic site of the AEAT via the almost immediate delivery of the invoicing records.

From the point of view of the assistance, the S.I.I. will allow the taxpayer obtaining the fiscal data since they will be provided on the AEAT site with a book “declared” records and another “contrasted” with information from third parties that belong to the system.

The taxpayer may contrast this information before the expiry of the deadline for submission of his monthly VAT return, facilitating the completion of the self-assessment and the detection of errors, avoiding future requirements of the AEAT.

We consider that this S.I.I. system of the VAT books in digital form and online through the website of a TA is as a further step into the implementation of electronic invoices by the countries.

We also see this as a first step on this issue which could lead to TAs providing directly a management accounting software so that all of the accounting would be carried also in the offices of the tax administrations, which would create significant advantages for the TAs, such as having homogeneous higher quality data for all taxpayers, using the same name for the accounting headings, to use these data for all the control process from the planning, investigation, selection and both for extensive and intensive controls, to exchange information more easily with other countries, thanks to an unified information.

From the point of view of the taxpayer, this would be a time-saver since the accounting management software would allow entering the data more quickly than a manual accounting and also improve inter alia the inventory control and collections.

In the end we have synthesized only some of the aspects of the taxpayer assistance but we are convinced that there will be permanent changes in the topic and updates towards the concept of virtual office, since we have moved from a paper-based TA to a computerized and automated TA, where face-to face contacts with taxpayers are increasingly less frequent.

The virtual office is no more than a general access point that TAs make available to taxpayers so they can make their online tax paperwork more easily.

But we want to open the debate in this comment on precisely two issues:

  1. Will all these new forms of assistance supported by the technology and information systems produce simplifications in tax legislation?
  2. Are we witnessing a process where taxes will no longer be determined by taxpayers but by the tax administrations?

With respect to the first question it seems that the simplification of the tax system allows the taxpayer to easily understand their tax obligations, calculate their taxes without too many costs and at the same time the TA’s work is carried out effectively.

I.e. the simplicity obviously reduces the costs of compliance for the taxpayer and the administration costs of the TA system and by contrast, the lack of simplicity and neutrality of a system invites tax avoidance.

However we must not not lose sight that simplicity is contrasted against another tax principle, which is equity, however in recent years a breakthrough of simplicity and efficiency is noticed over equity, such as manifested by the Mirrlees report.

Obviously the world is complex, relationships are complex and hence tax systems also are, but it seems to us that these efforts made in the field of tax assistance will be an incentive to simplify tax legislation.

So for example, by pre-filling the tax returns for income taxes, the TAs could limit the range of deductions to those that are verifiable with information from third parties.

The same will happen with the examples that we discussed about the VAT or accounting books managed by the tax administrations offices.

We have rejected the idea of ruling by means of computer systems since it is clear that taxes must be established by law, but we wish to open the debate if the developments in taxpayer assistance will necessarily simplify the system, or at least in a first stage will provide greater certainty and transparency in the relationship between the taxpayer and the administration.

As for the second question of whether tax systems will move from being self-assessed by the taxpayer to a form of administrative assessment by the tax administrations, we understand that so far this has not happened, because usually the pre-filled returns make the information available to the taxpayer, and if necessary they may rectify the information but they are still in charge of the primary responsibility for determining the assessment.

This doesn’t eliminate the fact that with the progress in assistance, we will see in the not so distant future that policy changes will be introduced to expressly consider that TAs will make the assessment for certain taxes similar to the census tax affecting certain assets.

To conclude, we are convinced that the investment of tax administrations in terms of information and assistance, incorporating all the technological advances will certainly result in greater efficiency and effectiveness in their mission.

When new technologies are incorporated by the TAs, in the majority of cases they involve a true reengineering in the form in which procedures are carried out, making them become simpler and more effective.

In addition to the investment, the training of human resources is crucial since the success or failure of the incorporation of new technology will be a direct result of the human resources’ skills, which are the main assets of the tax administrations.

[1]   Tax Administration Manual. CIAT. IBFD. 2011, p. 341

[2]   To broaden the subject see http://www.agenciatributaria.es/AEAT.internet/G417/informacion.shtml

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.

6 comments

  1. himanshu tyagi Reply

    after reading the whole article from my openion technology simplify taxes. this is the advancement in this field.
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    1. Alfredo Collosa Reply

      Hello, thank you for your comment

  2. ravesh Reply

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  3. Alfredo Collosa Reply

    Hello, thank you for your comment

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  5. Alfredo Collosa Reply

    Hello thank you very much

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