By Jérôme Duperrut
– Associate Director – Economic Analysis & International Institutions – SICPA
The Covid-19 pandemic has already had many dramatic direct effects, has started to create indirect impacts and is likely to generate ripple outcomes in the coming years. One area hit by all of these is tax collection. In the short-term, tax collection is falling dramatically, even more than during the global financial crisis in 2008. At that time, the financial sector and global undeclared financial flows were blamed. The main medium-term response by the global community was to strengthen bank regulation, broaden the taxation of global financial flows and put an end to banking secrecy. Strong policy actions were taken to combat tax avoidance through the base erosion profit shifting (BEPS) framework and the automatic exchange of information. The rationale was to expand the tax base by bringing the internationally mobile tax base into the tax net. The long-term positive impacts have already been seen with financial institutions better positioned to absorb shocks and many countries – especially low- and middle-income countries – better able to collect tax revenue.
The effects of the Covid-19 pandemic will also necessitate a major increase in tax collection in the medium-term to pay back the strong and necessary fiscal stimulii and to ensure debt sustainability. But there is no obvious “target” for tax collection and no obvious “bad guys” to go after. Taxation remains a central attribute of national sovereignty and politicians might be keen to do grandstanding and call for strong tax policies. Ideas about taxing environmentally-damaging activities and introducing (temporary) solidarity levies might emerge.
However, in the world of 2020, a major drawcard for tax authorities is that trusted technologies can be deployed to come to the rescue of domestic revenue mobilization.
Indeed, new technologies are likely to contribute meaningfully to a quick and sustainable recovery in tax collection by strengthening tax administration. In other words, countries have an opportunity to adopt technologies that propose a better way to deal with current and upcoming fiscal challenges. As much as the Covid-19 pandemic has shown that the capacity, the skilled manpower and the technology of the health sector were key to addressing the spread of the virus, the use by tax authorities of technologies will be central to addressing the fiscal challenge. The technologies are likely to bring the highest benefits in middle- and low-income countries. Some of these trusted technologies – such as secured tracking and tracing technology, secure fuel marking, electronic cargo tracking, and devices to monitor VAT transactions – have already proven to be beneficial in countries that are early adopters.
Technologies for taxation can help in three major ways:
- First, technologies can increase trust in tax authorities. During and after the Covid-19 crisis as with past crises, tax morale is likely to tank and tax evasion to increase. For example, in South Africa, smuggling and under-declaration of cigarettes and alcoholic beverages has increased manifold, costing the tax authority significant revenue. The emergence of new tax evasion schemes and illicit trade patterns could become entrenched. In most countries, taxes are collected based on the principle of self-declaration, whereby a taxpayer fills out a tax declaration. A control by the tax authority is only likely to take the form of an audit conducted in the distant future. However, technologies can pre-populate tax returns with credible information limiting the scope for misdeclaration. Because they rely on contact-less processes, they reduce personal interaction between taxpayers and the tax authority, lessening corruption risks. Of course, these technologies should be provided independently from the taxpayers themselves to guarantee the integrity and accuracy of information. Technologies contribute to strengthening the level-playing field between taxpayers, ensuring that all are treated fairly and efficiently.
- Second, technologies can mitigate the fall in revenue collection. Even before the Covid-19 pandemic, the record of many countries at collecting taxes left much to be desired: they were operating largely below their tax frontier. However, those countries that were already adopters of technologies are likely to experience a lesser fall in tax collection and a quicker rebound after the crisis. Technologies can strengthen the integrity of the tax register by locking-in the informal sector and identifying active and inactive taxpayers. Technologies primarily targeting one type of tax – for example, excise taxation – can also help secure the collection of other related taxes, such as value-added tax (at the point of manufacturing), customs duties and related import levies (for imported goods) and even corporate income tax. The interoperability of technologies and tax systems can add further value. Finally, in the context of a health pandemic where social distancing rules have been put in place, technologies and digitalization have proven to be very useful to continue engaging with taxpayers.
- Third, technologies can help forecast tax collection in a more credible manner. In most countries, tax declarations are returned with a relatively important lag jeopardizing near-term and possibly next year tax forecasts. Technologies can inform the authorities in real time about the change in economic activity and in the tax base. For example, the tracking and tracing technology used to help collect excise taxation on cigarettes, spirits, beer, wines, soft drinks, bottled water and the secure fuel marking solution used to monitor fuel consumption, inform the tax authorities on an hour-by-hour basis. This live information drawn from producing and importing taxpayers – which are often large taxpayers and key contributors to the fiscus – can help provide insights at the company-specific level, ensure more precise modelling of the tax shock and even provide information about the buoyancy of other more delayed taxes, such as corporate income tax. The use of direct technologies by the tax authority alleviates the need for third-party information, which is often very difficult to obtain even in the best of circumstances. The information is collected directly at source, transmitted to the tax authorities, and owned by them.
In conclusion, technologies for taxation that link physical transactions with tax collection – tracking and tracing technology, secure fuel marking, electronic cargo tracking, devices to monitor VAT transactions – are expected to mitigate the impact on tax collection in countries that have adopted them. The Covid-19 crisis is likely to increase the demand for these technologies. The trusted technologies will help restore tax collection, increase compliance levels, strengthen tax administration, and improve an economy’s overall competitiveness.