By Athina Neocleous
Manager, Tax Department
K. Treppides & Co Ltd
In the era of the coronavirus pandemic, the digital revolution, and the ever-evolving globalization, the digitalization of the tax administration seems to be a one-way route. But what exactly is the digitalization of the tax administration and how this will affect the tax function around the globe?
When we say digitalization of tax, we mean the complete transformation of the tax processes using digital methods and not just the simple digitization which only suggests that we turn physical records to their digital equivalents.
The tax administrations seem to be embracing this as they would like to reduce as much human interaction as possible, using automation and analytics to drive decision-making, increase their efficiency and to focus their resources on more important cases such as cases of tax evasion, fraud, and aggressive tax planning.
Even though there is no specific road map for countries to follow on their journey to digitalization, there are some main approaches that countries have been taking to digitalize their processes.
One of the most common aspects of digitalization is the pre-population of the returns. This is the case where the tax authorities pre-populate the returns with information already available to them from other sources, in an effort to simplify the processes and reduce errors.
Tax authorities have also increasingly been seeking to collect real-time or near-real-time information from both taxpayers and key third parties who generate tax-related information.
Also, it is evident that most tax authorities are starting their digital journey with Value-Added Tax (VAT) due to its highly transactional data. For example, in the United Kingdom (UK), HMRC has been carrying out a digitalization program called Making Tax Digital (MTD) that requires taxpayers to keep digital records and submit information using a commercial software rather than manually completing online tax returns. HMRC has started this journey with VAT and as from April 2022, all traders must report their VAT amounts using MTD enabled software.
Some countries, such as Brazil, have pursued digitalization by requiring electronic invoices, other countries are using the information gathered through digital systems so that they can target audits more effectively. Also, a significant aim of some tax authorities is to include tax into the taxpayers’ other natural systems, e.g., embedding tax into accounting platforms.
As with everything, even though we understand that the digitalization has a lot of benefits, it also comes with various challenges that the tax authorities need to overcome.
One of the main challenges is the digital exclusion, with the digitalization there is this assumption that all taxpayers have access to technology and that all of them are willing to interact with the tax authorities using these new digital methods. However, this is not always the case.
Another, very important challenge, is the identification where for example in countries like the UK or the US where there is no universal citizen ID, it is very difficult for the tax authorities to connect all the parties involved and create a single database. This is something that Estonia has resolved by introducing the e-ID card.
The tax authorities also need to be well prepared for this major change and they also need to consider the complexity of their country’s tax system, both in terms of tax rules and existing legacy systems.
So, how does the digitalization of the tax administration affect the tax function? It is obvious that the digitalization of the tax administration intensifies the pressure for change on the tax function within businesses as well.
The tax functions need to be prepared to provide new, accurate and quality checked data to the tax authorities at any point. As a result, there is an increased need for businesses to digitize their internal functions as well. They need to start investing in new technology, start automating their internal processes and they need to start encouraging their employees to work with their machines in order to obtain better quality of data and to deliver valuable insights to their businesses.
And now you may be thinking, where is Cyprus in all of these? The Cyprus Tax Department (CTD) seems to have identified the need to digitalize their tax administration and transform their processes so that they are in line with the needs of today’s tax world. The CTD is in the process of introducing the Tax For All (TFA) platform, which is set to replace the existing tax platforms, including TAXISnet, with the intention to offer to the taxpayer a more integrated picture of their tax affairs in a simpler, more secure and transparent way.
The TFA platform is set to be developed in three stages starting with VAT in the first stage and with direct and other taxes in the next two stages.
Some important practical changes that we expect to see regarding VAT is a new VAT return in the form of questions, submission of all returns and any supporting documents electronically, ability to make payments electronically, access to payment history and direct communication with the CTD through the platform.
Now it remains to be seen how this will unfold, how the tax function will embrace it and how this significant change is going to be managed.
K. Treppides & Co Ltd is the largest independent consulting company in Cyprus with an established international presence and offices in Great Britain and Malta. Today the company employs approximately 200 professionals. It offers a full range of consulting, tax, accounting services to groups, companies and investors operating internationally in a variety of financial and business sectors. The Company, which started its operations in 1985, has 36 years of expertise and an elite team of experienced executives who can guide and assist investors and businesses during the establishment process and subsequent investment activity in Cyprus and internationally.
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