Reimagining the future of the tax system

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Kate Barton, Global Vice Chair – Tax, EY

• Tax authorities are fast becoming the data centres of government, with all the associated risks and responsibilities.
• They can use enhanced digital capabilities to improve the taxpayer’s experience and increase compliance.
• Rich tax data can provide insights to improve government administration and decision-making.

Do you believe that 2021 is the year of re-imagining? I do, whether it’s the result of a strategic business decision, a recovery plan to rebound from the COVID-19 pandemic, or the reaction to a world that’s changed around us – immensely and immutably – over the past year.

We only have to look as far as the World Economic Forum’s (WEF) Davos 2021 Great Reset Initiative to see the importance of a world that comes together to support new ways of working, with operating models and strategies designed to bolster economic recovery.

More resilient company infrastructures can stave off economic difficulties. A robust yet very flexible plan that allows companies to make the best use of new and emerging technologies will enable remote and gig workforces and foster new and different client connections.

Arguably more than at any time in at least the last four decades, we’re seeing the expanded use of an unexpected mechanism to support this change while also underpinning trust and building long-term value. That mechanism? Tax.

• Tax authorities as deliverers of the trillions of dollars of government stimulus;
• tax professionals as stewards of that stimulus at the corporate level;
• tax administration as the government’s data warehouse;
• tax policymakers as the architects of new types of taxes, reliefs and incentives – from altruistic social solutions that address human and environmental conditions, to revenue-focused enforcement mechanisms driven by near-universal digitalization;
• and taxpayer dollars derived from innovative assessment and collection methodologies, the growing gig economy and increasingly sophisticated digital tax authorities.

As the tax ecosystem continues to evolve, tax authorities are not only experiencing substantive change, but also driving it. They are fast becoming the data centres of government, with all the associated attendant risks, responsibilities and opportunities. With this, governments around the globe are challenging their respective tax authorities to reinvent how they operate.

While we saw the first wave of change begin several years ago with the growing digital economy, the response to the economic fallout caused by the pandemic has certainly accelerated the process and expanded the scope of responsibility and the role of tax.

Through every stage of the pandemic, tax authorities and tax policies have been instrumental in helping all taxpayers: individuals, businesses and organizations. Unprecedented levels of government spending have been necessary to stimulate a recovery from the deepest global recession since World War Two. That has meant $28 trillion in financial stimulus issued by more than 140 jurisdictions around the world to date – more than three times the amount of debt created by the global financial crisis and roughly equal to the annual nominal GDP of the US, UK and Japan combined.

So, in addition to their traditional remit, tax authorities became the de facto stimulus arbiter and distributor of economic relief in its various forms – a natural progression to become the key interface between government and citizen, particularly in the context of rapidly transforming economies and the new sources of data, digital tools and advanced analytics resident in the rapidly expanding profile of tax administration.

Eventually, governments will look to balance budget deficits and taxes will invariably rise – but timing those increases carefully will be crucial if governments are to drive growth. Looking into 2021, we expect the COVID-19 pandemic to continue accelerating the transformation of the global economy. Now, despite the conundrum that policymakers face over when to pivot from stimulus support to revenue-raising measures, tax authorities can use these enhanced digital capabilities to improve the taxpayer’s experience, increase compliance and enhance operational excellence.

One immediate objective is to make it simpler and more efficient for taxpayers to identify and pay just what they owe, no more and no less. With new digital systems, government services are more accessible, better communicated and quicker to deploy and access. And because governments collectively lose $3 trillion annually to tax fraud, there is real benefit to applying new technology, innovative artificial intelligence (AI) and data systems to identify key data patterns in commerce that signify fraudulent activity. Closing this gap would be a significant step in closing the revenue gap, which could support the financing of sustainable development goals around the world.

“The Great Reset” set out by the World Economic Forum calls for addressing “the inconsistencies, inadequacies and contradictions of multiple systems”, including those in government. With their greater roles and taxpayer and transaction-level data, tax authorities have the opportunity to become very citizen-centric and work to ensure that all decisions are grounded in facts and driven by data. This should go a long way to improve the citizen’s experience with all things tax related.

The ecosystem on this side of the fence is structured to help tax authorities deliver on the promises of governments. With the innovations of the last few years – whether through improvements in digital identity to provide instantaneous and mobile taxpayer access to their government footprint, electronic cash registers that deliver real-time sales data to tax administrations, or data sharing that produces pre-filled tax returns – tax administrations have already advanced significantly on their core aim.

Transforming Markets

During the last 50 years there has been unprecedented progress in human indicators – life expectancy has increased to record levels; infant- and maternal mortality has fallen; more girls are staying in school; more people have been lifted out of poverty than ever before; and inequality between nations has narrowed. The market system has served us well.

But deep fractures are beginning to show: gaping inequality within almost all countries; record environmental degradation and species loss; and the broader impacts of irreversible climate change. Our markets are unsustainable – and we need a new economic model.

To tackle these challenges,Transforming Markets is one of four focus areas at the World Economic Forum’s 2019 Sustainable Development Impact summit. A range of sessions will bring stakeholders together to take action that places human and environmental health at the core of market systems and value chains. These include building sustainable markets, responsible supply chains, moving beyond disposability, circularity and scaling solutions of the Fourth Industrial Revolution, among others.

Greater benefits await. When governments leverage the rich tax data to benefit their other agencies such as justice, social welfare, environmental and more, they can provide deeper insights to improve government administration and decision-making, leading to more positive outcomes around policymaking, fraud detection and social welfare determinations.

This enhanced tax ecosystem can foster better relationships between tax authorities, tax policymakers and taxpaying citizens. The one non-negotiable criterion is that it be built on a foundation of transparency, accountability and trust that respects the importance of data protection and privacy to underpin the digital future.

What exactly does that look like? That’s where the discussion begins.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.