A Changing Technological Landscape and the Impact on Tax … · 2016-11-21 · Rethinking Tax...

Institute for Austrian and International Tax Law www.wu.ac.at/taxlaw 1

A Changing Technological Landscape and the Impact on Tax Revenue Collection and Processes

IOTA Annual Conference '16

Budapest, Hungary8-9, November 2016


Introduction

Technological developments have increasingly impacted the way businesses, especially SMEs, operate

Tax administrations are therefore increasingly seeking ways to exploit technological developments to enhance tax compliance

However, compliance is not limited to filing tax returns but covers wider range of processes many of which take place outside the view and control of tax administration

The emergence of mobile payment platforms in Africa therefore presents unique opportunities for tax administrations to collaborate with taxpayers and tax intermediaries to influence this environment to enhance compliance


Part I

Trends in Tax Compliance: the Influence of Technology


Trends in Tax Compliance (1)

Traditional view

Enforcers of tax law confined to:

• reviewing filed tax returns,

• verifying their correctness and

• targeting non-compliance by subjecting taxpayers to audits - ideally targeting high risk tax returns

Success was measured by audit yield

Looked to past conduct rather than the future behaviour

Cons: time consuming procedures; involving extensive information gathering and discussion of positions with the taxpayer; and lengthy objections and appeals procedure



Compliance Risk Management: Managing and Improving Tax Compliance - OECD (2004)

To enhance better case selection, more emphasis was, over time, placed on risk assessment

Underlined the shift to managing risks and increased interest in understanding taxpayer compliance behavior

Concluded that improved compliance rather than audit yield is the desired outcome of any compliance process

Emphasized the importance of understanding the underlying causes of non-compliance (holistic view of the taxpayer)



Understanding and Influencing Taxpayer Compliance Behavior - OECD (2010)

Was a recognition that a strategy based solely on deterrence can have major drawbacks and does not automatically lead to improved results in tax compliance

Compliance is not restricted to finding as many errors as possible but more about influencing taxpayers environmentto make it easier to comply and difficult not to comply

Emergence of behavioural economics as frame of reference for thinking about regulation and tax regulation in particular

Traditional economic models of behaviour lack explanatory power



Right from the Start: Influencing the Compliance Environment for SMEs - OECD (2012)

Shift in compliance strategies to focus on influencing taxpayers environment and processes that lead to the tax return

The shift to prevention is informed by the developments in technology and their application to SMEs

Four dimensional approach• Real time action - prevention

• Focus on end-to-end business processes

• Making it easier to comply and difficult not to comply

• Active involvement and engagement of taxpayers, their representatives and other participants



Participatory: recognizes that tax intermediaries and other service providers e.g. software developers, telecoms, banks or industry associations can provide additional certainty and or more cost effective solutions

Broader objective: reducing intentional evasion and strengthening overall willingness to comply

Real benefits to taxpayers: less trouble (extensive audits, re-assessments and penalties or fines) and uncertainty reduction

Tools: legislation, cooperation with stakeholders (ala cooperative compliance), application of new technologies, use of third party data etc



Tax Compliance by Design – OECD (2014)

Acknowledged that digital landscape has significantly evolved and SMES are adapting to these technological changes and increasingly manage their information and payments digitally

Recognized that a complete digital chain of information can improve processes as well as tax compliance

Business transactions can be captured digitally and coordinated with electronic payments and electronic bookkeeping and further on with electronic reporting and payments to tax administration

Aims at making tax compliance a natural part of the day to day transactions



Secured chain approach:

Focuses primarily on the taxpayers internal processes and how they can be supported by trusted intermediaries; data collection and processing to information takes place within taxpayers business and intermediaries that support it

Centralized data approach:

Data collected by third parties and information supplied directly to tax admin which transforms it into information about tax liabilities and payments



Rethinking Tax Services: the Changing Role of Tax Service Providers in SME Tax Compliance – OECD (2016)

Tax service providers are important in any system

Technological developments have led to the rise of new service concepts, new patterns in customer interaction, and new types of businesses offering tax services

New entrants come into the market with core capabilities in software development, data analytics and other non-tax related domains

Presents opportunities to provide better services to taxpayers and also ensure better compliance


Potential of Technology Developments to Tax Administrations Tax administrations can take advantage of technological

developments to:

• Increase compliance by collaborating with taxpayers and tax intermediaries to build in compliance into business systems and processes i.e. influencing taxpayer environment at transaction level

• Provide better services and reduce tax compliance costs e.g. by simplifying payment procedures, pre-filling tax returns, facilitating electronic filing and record keeping

• Lower tax administration costs by adopting a more system-based rather than traditional case-by-case approach

• Better audit trails, evidence gathering and identification of fraud

• Promote integrity of tax administrations e.g. by reducing physical contact with taxpayers

• Identify unreported business income using digital and electronic records created as significant sources of intelligence


Part II

Mobile Money and Tax Collection and Processes


What is mobile money payment platform?

Launched in Kenya in March 2007

Synonymous with m-pesa but other platforms include: Airtel Money, Orange Money, Equitel, Mobikash and Tangaza

Started as person-to-person money transfer

Evolved to encompass savings and loans, payment of salaries, settlement of utility bills and school fees and to enable vital health and agricultural solutions

M-pesa portfolio includes lipa na m-pesa, bank to m-pesa, lipa kodi, salary disbursement, utility payments, airtime purchase, mshwari


The Rise and Rise of Mobile Money Payments in Kenya

Statistics from Communications Authority of Kenya (April –June 2016):

• Mobile subscribers: 39.7 million

• Mobile penetration: 90%

• Mobile money subscriptions: 26.3 million

• Mobile money transfer agents: 158,727

• Mobile commerce transactions: 227.3 million

• Transactional value: 404.1 billion

• Person to person transfers: 429.4 billion


Impact of Mobile Money Payments in Kenya

Key driver for financial inclusion and financial sector deepening (75.1% from 26% in 2009)

Enables businesses, especially SMEs, to effortlessly collect and manage cashless payments

Enhanced record keeping: every transaction record is easily accessible via till statements

Full integration with over 37 banks and financial institutions

2016 FinAccess Survey:

• Nearly twice as many Kenyans use mobile money

• Headroom for further growth in retail payment and digitising utility payments


How do SMEs fit in?

OECD study describes SMEs as "backbone of many of our economies" - 60% or more employment in many countries

EU study found that 80% of exporting firms were SMEs accounting for a third of EU exports by value

Kenya has an estimated 2.7 million SMEs who are not registered for tax purposes

Informal sector is also growing at a faster rate than formal sector - 82% vs. 18% (KRA 6th Corporate Plan)

SMEs are also migrating from paperwork to digital spurred by technological advancement


Challenges with SMEs

Recent studies show tax administrations deploy considerable resources to ensure SMEs report all income

Targeted by many tax administrations as the least compliant component of the taxpayer population

Challenges include:

• No third party reporting hence easier to conceal income and difficult to directly verify income with third parties

• Expenses may be overstated to reduce tax liability

• Complicated by poor quality or complete lack of books and records

Considerable resources may be spent to be tax compliant


Part III

Leveraging Technology: the Case of Kenya Revenue Authority


Excerpts from the KRA Sixth Corporate Plan 2015/16 – 2017/18

Key thrusts:

Leveraging technology to enhance service delivery and promote compliance

Shifting the customer service paradigm by improving service accessibility through service centres and technology platforms

Shifting focus from enforcement towards building taxpayer trust through facilitation

A key strategic objective:

Enable business by leveraging technology to achieve full electronic service leading to enhanced operation efficiency and higher customer satisfaction


Theme: Building trust through facilitation so as to enhance tax compliance

KRA is changing tax compliance approach to focus more on customer facilitation rather than traditional enforcement

6th Corporate Plan focuses on the utilisation of innovative practices and technology products to deliver better efficiency

Recognition that tax administrations now deal with a range of intermediaries that would not have been seen as integral to the tax process in the past

Intermediaries role is also rapidly changing

KRA is identifying opportunities for digital integration with partners and stakeholders in the tax system and explore real time automated review of taxpayer submissions


Technological convergence to transform delivery of tax services

Implementing ambitious technology initiatives in all areas of operation:

• Domestic taxes: iTax

• Customs: iCMS (Intergrated Customs Management Systems)

• Data management: DWBI (Data Warehouse and Business Intelligence)

• Administration and Support Services: ERP (Enterprise Resource Planning)

Supporting sub-systems

• Regional customs: ECTS (Electronic Cargo Tracking System)

• Domestic taxes: EGMS (Excisable Goods Management System)


The KRA M-service

KRA M-service is a mobile phone-based services platform with two service components:

• SMS and USSD informational services; and

• Mobile payment of all taxes

KRA M-service is aimed at meeting customers need for:

• Convenience, real time on the go services

• Abandoning bureaucratic and burdensome processes

• Improving service delivery to customers

• Inclusiveness by incorporating intermediaries


KRA M-service: Better Interaction with

the Tax Administration




https://m.youtube.com/watch?v=IA0EJm3XvFo

https://m.youtube.com/watch?v=IA0EJm3XvFo




SMS and USSD informational services

Quicker service delivery: grants taxpayers access to specific information held in KRA by making simple queries on SMS or the menu driven USSD.

Decongesting KRA banking halls by enabling taxpayers to get the information through their mobile phones rather than by physically visiting KRA offices.

Services uniformly available through three major mobile network operators: Airtel, Telkom Orange and Safaricom



the Tax Administration (2)

Services available on the SMS and USSD platforms include:

Domestic Taxes: Individual PIN Checker, Company PIN Checker, Tax Compliance Certificate Status Checker, Tax Station Enquiry.

Customs Services: Clearing Agent Status, Manifest Status, Manifest Amendment Status, BL/AWB Status, IDF Status, Entry Status Validation, Direct Assessment Amount Payable, Temporary Car Exportation Status, Simba Entry Amount Payable, F147 Amount Payable, Simba Entry Payment Status, F147 Payment Status

Traffic Revenue: Logbook Postage Status, Driving License Postage Status, Driving License Classes.


KRA M-service: Simplifying Payment

Procedures and Methods


KRA M-service: Simplifying Payment

Procedures and Methods

Mobile payment of all taxes

Aimed at simplifying tax payment processes as well as providing taxpayers with a more convenient alternative for payment of various taxes

A unique KRA Payment Reference Number (E-Slip Number) is obtained online from KRA business systems to facilitate mobile payment:

• Domestic Taxes: iTax

• Customs Services: Simba system

• Traffic Revenue: By dialing the KRA USSD code *572# and selecting the E-Slip Generation self service menu


The next frontier: access to mobile

payments platforms data

"...in order to make it easier for taxpayers to submit their tax returns in the iTax system, I propose to

amend the Tax Procedures Act to grant Kenya Revenue Authority powers to collect information in

advance from identified persons for purposes of pre-populating the information in the iTax system.“

Henry Rotich

Cabinet Secretary for the National Treasury

2016 Budget Statement



payments data

Expanding the tax base

Information can be used to detect economic activities in informal sector

Can lead to identification of taxable person not registered for tax purposes

Risk profiling

Information from third parties and taxable persons transactions on mobile platforms

Matched with filing patterns to identify business not filing returns and/or not meeting their tax obligations

Non-compliant taxable persons identified for compliance checks and/or audits



payments data

Audit trail and evidence gathering

Its difficult to monitor cash based information but use of banking channels for payment makes transactions easier to observe and monitor

Important to bring together information from different sources to verify information provided by taxpayers themselves

KRA can track receipts and payments of business's, their suppliers and businesses down the economic activity chain



payments data



payments data

Pre-filling tax returns

Cleaned data from mobile payment platforms could, potentially, be used to pre-fill tax returns

Through self assessment taxpayer can be asked to verify this information

Corruption, bribery and money laundering

ICT based interaction reduces interaction with revenue bodies

It can promote transparency and can be a powerful tool in tackling corruption and reducing opportunities for bribery


Potential Challenges and Concerns

Legislative framework: Access needs to be anchored in law

Privacy and confidentiality: Banking and micro-finance laws and Constitution of Kenya Article 31

Infrastructure: Software and hardware and analysis capabilities

Potential for abuse of data by government officials and the need for proper safeguards it's only used for intended purposes

Cooperation from stakeholders: needs buy in from the telcos and input from software developers


Conclusion

The upsurge of mobile money payments can provide avenues for:

• Fully integrating the taxpayers and the tax administration business systems and processes to reduce compliance costs and enhance compliance respectively

• Simplifying tax payments and collection processes and methods

• Expanding the tax base by providing data for taxpayr recruitment

• A solid audit trail brought about be enhanced record keeping


Institute for Austrian and International Tax Law

Clement MigaiResearch Associate

Welthandelsplatz 1, Building D 3, Floor 2, 1020 Wien, Austria Tel: +43 1 313 336 5925Fax: +43 1 313 336 90 [email protected]

Thank you for your attention!

mailto:[email protected]

A Changing Technological Landscape and the Impact on Tax … · 2016-11-21 · Rethinking Tax...

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