The problem

From a complete reading of the previous posts in this series, someone could maybe infer that I believe the tax administration is in a dead end against the challenges presented by the digital economy. In this regard, I think it is good at this time to remember the well-known story on the instructions that the coach gave to the Brazilian the team selected during the 1958 World Cup. Feola told his players what they should do to outwit their rivals: generate empty spaces and, of course, score goals. Hearing this instruction, the famous Mane Garrincha asked the trainer if he had already arranged something with the opposite team so that they would cooperate with the moves.

Of course, Garrincha was right: “the other team also play”. In the case of the use of the technology, we could say that the administrations are the others. Without technology, it would be impossible, to mention just a couple of visible examples, that in several countries in Latin America we have reached 100% of electronic tax returns; that taxpayers can receive through the Internet, in their mobile devices, a draft return or proposal, that more than 30 billion electronic invoices are at the disposal of the respective tax administrations. The massive sending of information from third parties and the on-line availability, on the tax administration website, of electronic withholding certificates or simplified accounting for small taxpayers are performed through the same Internet that allows to distribute intangible goods and provide services. Obviously the technology presents many challenges, but also huge opportunities. Never before the Administrations had so much information.

For many observers, the biggest problem for authorities is that the digital economy exacerbates the problems arising from the international trade operations in which some companies use abusive tax planning, particularly with international operations between related parties with the intention of paying less taxes globally, creating the problem of the tax base erosion and profit shifting to other jurisdictions (1). This problem may be exacerbated because today’s technology make possible, for example, the sale of goods and the provision of services in a country, other than residence, without any physical presence or, much less, a permanent establishment. This problem can also be increased by the availability of technological means that allow, with different levels of complexity and effectiveness, to give an anonymous character to transactions, with fake or disguised locations. It may also allow using encrypted coins not controlled by any central bank, forcing and perhaps a change in that old discussion about “source or residence?” to face the risk of “nor source nor residence”.

There are various proposals on this issue, ranging from establishing a new definition of permanent establishment, better adapted to the digital economy, to establish withholding mechanisms in financial transactions, and perhaps more complex issues that go beyond the purpose of this post. Here, by the end of 2015, mainly under the impulse of the BEPS initiative (2), we will know more strategies, proposals and recommendations by the Ad-hoc Working Group created for this purpose, as well as from academics and study centers.

But, in my opinion, the greatest challenge for the tax administrations is that the digital economy is yet to come. Within the information technology, a characteristic is being confirmed. In simple terms, every 2 years, the number of transistors on an integrated circuit doubles. This observation is known as Moore’s law (3) and has been verified for many years; although it has slowed down, it is expected to maintain significant growth rates during a few more years.

This exponential growth is at times difficult to perceive intuitively, so it is worth reminding the legend of the rice and the chess board (4) and how a debt can grow from a grain rice to the size of Mount Everest. Or, in examples more consistent with current technology, it is possible to load in our pocket more computation capacity than a space agency of the 1960s; the fact is that a USB flash memory could reach 128MB in 1998; today, it can reach 64GB or 500 times more. And from the point of view of using applications, we have become accustomed to have our pages translated on the Internet from one language to another in the blink of an eye, we can dictate text to the cell phone which becomes quite successful written messages and machines can talk to us based on the information they have, for example indicating with name and surname the next street where we have to turn; simultaneous translation will probably also be offered “as a service”, from many-to-many languages, without the participation of human interpreters, and the use of simultaneous translation with human interpreters will be probably reserved for special occasions where more than a simple literal interpretation has to be conveyed as, for example, the double meaning of words in a joke or pun.

A sometimes not-so-predictable consequence of this exponential growth is, as in a chess board where in each square would have twice the amount of rice grains than in the previous square, changes ahead are bigger than those we have already seen. So the advances in the digital economy and their consequences so far are small compared with those yet to come. If the rate of growth continues, we will see that in that regard, the next 8 to 10 years will see more changes than those occurred in the previous 50 together. So strategies and solutions should not be made for what we have today, but for what will happen tomorrow.

Good luck

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