Authors: Ksenija Cipek and Iva Uljanić Škreblin - Ministry of Finance, Tax Administration
To the mutual linkage of legislation, as complete law in a particular country, and the development of technology, especially in the field of information technology and artificial intelligence, has often not been paid enough attention in the past. Ever faster and continuous technology development in this new era requires redirecting legislators to this particularly important component. This refers to total legislation, but is particularly interesting and important in the area of tax legislation. Focus and attention to the development of technology and recent achievements in this area also affects the creation of executive authority policies, including tax policies.
Fundamental strategic goals of the state, in its economic (fiscal and monetary) policy, are certainly GDP growth and production growth, growth of investments, in particular greenfield investments, high rates of economic growth and employment, stable and stimulating tax policies, price stability (decrease in the rate of inflation), economic liquidity, monetary consolidation, currency and exchange rate stability, low interest rates, rising money supply, loyal market competition.
Tax policy encompasses not only fiscal components, but also wider: fostering equal regional development, permissible state aid especially in the area of education and research and development projects and de minimis state aid, the social aspect (exemptions from tax payment / tax relief for a certain category of taxpayers), reduction of administrative burden and administrative costs of entrepreneurs, efficient, optimally organized and educated tax and customs administration etc.
Taxation should be: structured, simple, transparent, understandable and accessible. Such goals are not always easy to achieve, but without the effort to reach them, for the taxpayers (partners, stakeholders) the administrative burden will be greater than necessary. The effect will be reflected in their business, liquidity and capital. This will reflect on the whole economic policy, and thus on the quality of life of all citizens.
The paradigm of legislation that we know is based on one principle: technology always follows legislation! Today, such a paradigm is no longer acceptable. We can imagine a tax policy that can have very good goals, but if doesn’t follow technological development, a positive result can be totally omitted. As we mentioned before a tax legislation should, among other things, be understandable and reduce the administrative burden on entrepreneurs and citizens (of course, it is also necessary to reduce the tax burden, but that depends on a number of factors within each country).
How much and how has the paradigm that we know changed? Technology allows a range of tools that can have a positive impact on tax policy. If tax legislation follows the goals of simplicity, visibility, comprehensiveness, structuring, transparency, availability and affects the decrease of taxpayers' administrative burden, the tax policy objectives will be positive. In most countries efforts are being made and tools are provided for the utmost openness of tax and customs administration to taxpayers, which contribute to their voluntary tax compliance.
Take for example the electronic services provided by the tax and customs administration. Filing of prescribed forms and reports online is one of the tools. Entrepreneurial insights are also ensured in his tax or customs duties. The taxpayers’ rights are available on the official web pages of tax and customs administrations. These administrations send electronically to tax payers information relevant to their lawful and timely tax compliance. Such a two-way approach between taxpayers and tax and customs administrations should necessarily be encouraged (as well as in other state and local bodies) in all legal issues other than those that can be reasonably justified as necessary for communication without using electronic services.
Of course, it will require the amendment of a series of regulations in order to create a legal basis for the same. However, if we want to achieve the goals of tax policy that will stimulate the overall economic policy, that is necessary. In this way, savings are also made on side of state institutions which is very important. An expensive state administration is not an option. For example, until recently, the usual delivery of decisions and acceptance of complaints (either by state institutions or by taxpayers and citizens) was "in paper". With the development of certified signatures, e-administrative offices and digital archives, such action becomes legitimate questionable. In this way, state administration becomes faster and more efficient, and human errors are reduced to a minimum. Does this mean that the use of technological achievements in this segment necessarily leads to reductions in the number of employees? Not necessarily, though the state administration should be small (as far as possible) and efficient. Capable and robust management should provide a good internal organization that includes training and directing officers to areas that are highly risk-averse to enforcing tax and customs duties (and others) in accordance with the law. There is a very open and often insufficiently prepared space for efficient staffing.
Obviously, a variety of tools available and the latest developments, such as the use of Blockchain technology and other technologies, lead to changes in the existing paradigm. Can technology development be stopped? No, the world goes further, as was in our history. Should this development be stopped at all? Of course not. The development of new technologies allows and will further enable the achievement of goals that have long been the goals of any state administration whose primary purpose is to serve its citizens in the fulfillment of their obligations and the exercise of their rights.
In creating a tax policy, in order to achieve its full positive result, we can no longer ignore the technological possibilities. For example, a tax policy may include a new tax treatment of a particular income or delivery, but if at that point the legislator does not pay special attention to the availability of the latest technical capabilities and does not invest in it (either immediately or in a timely manner), the objectives will not be met either on the administration side, nor on the side of entrepreneurs and citizens. The law may stipulate that taxpayers should submit a particular report to the tax administration (only in the case that they are not available by exchanging data between government bodies!). If at the same time the legislator does not take into account that this report can easily be delivered, accepted and processed using new technologies (it is also necessary to prescribe by a legal act and to make available and prescribe all technical requirements), the cost on both sides and the reduced efficiency of tax administration will be the result that tax policy did not want to make.
Certain taxpayers rights, such as the right to VAT reimbursement within the legally prescribed deadline, by using modern technologies embedded in the risk analysis system, will be automated, and that means an equivalent treatment across the state administration, cost reduction over a longer period of time on the tax administration side and the realization of the lawful right of reimbursement on time without the human factor influence. This will consequently strengthen the trust of taxpayers in the tax administration.
Or for example, if the legislator sets a longer deadline for the VAT reimbursement not taking into account that technology can provide a much shorter deadline, the consequence is the reduction of taxpayers' rights and the reduction of their liquidity necessary for further business activities and development (the option is borrowing at often unfavorable interest rates, and that should not be an option if we want a quality economic policy as a whole).
Let's look at pre-filing of tax returns, especially within direct taxes. Have the application of technology and its incorporation into the tax legislation, achieved the goal of service delivery to citizens and entrepreneurs by the tax administration, and reduced time-consuming cost and minimized the human factor? Yes. However, the lack of recognition or education of the legislator about such opportunities, results in tax returns that are still "in paper" submitted to the tax administration.
Does the investor want such an environment? No, unless there is a really justified reason (investing precisely because of certain geographic, climatic or infrastructural possibilities). But suppose that more states have such opportunities. Then the investor will decide to invest in the country whose environment in the tax and customs area (and certainly wider) is optimally acceptable to business. In that case applying technology surely gets a decisive role!
Can technology enable tracking, for example, the deadlines of statute of limitation for tax collection? Yes. How important this is, is often seen in the tax administration reaction when it is too late! The tax collection was not executed, the deadline expired, and the tax revenue is not in the state or local budget.
Or how to recognize and respond timely to high risk taxpayers without applying technology as an integral part of a quality risk analysis? A tax administration that does not respond to such technological opportunities puts itself in the position of a highly risk factor in the function of timely collection of tax revenues and the prevention of tax fraud.
There can be a lot of examples, but the conclusion itself implies: the paradigm is really changing! Legislation should surely follow the technology development to achieve the goals of economic policy, among others, for investment growth. Sometimes technology will have a direct impact on the legal solution, so the legislation will then be following the technological achievements! Is it really necessary to bring several tax solutions when, with the availability of technology data that is or will be incorporated into tax administration information systems, only one solution can be made? Is it necessary to have only personal delivery of tax decisions when it is possible to deliver it electronically? Is it necessary that the taxpayer can obtain the tax certificate only in the tax administration office in "paper"? In preparing the legislative framework the legislator must take into account all issues and chose an option that will yield effective results on both sides.
Tax legislation also faced changes in business related to the digital economy. Digital platforms and taxation in a way that a permanent establishment, as usual, is defined as a fixed places of business, has become a challenge and very quickly. Providing virtue services or paying using crypto currency become a reality. For all these challenges, tax legislation must be ready, and this is possible by recognizing technical possibilities and technology development today, as well as by monitoring the technological achievements that are only at a certain stage of development.
Possible development of artificial intelligence by incorporating cognitive, human potential into robots will certainly affect tax law (regardless of the morale constraints). Should we prepare for it in the future or be already ready now? Now!
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Ksenija Cipek is based in Zagreb, Croatia and she is a lecturer at the local University of Law and a Member of European Law Institute. Ksenija has over 20 years experience working at the Ministry of Finance and the Tax Administration. She is a highly respected and recognised tax expert who has been heavily involved in lawmaking. Ksenija is also an author and books writer.
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