• Reducing The Administrative Burden and Increasing Tax Compliance

    By Ksenija Cipek


    Authors: Ksenija Cipek and Iva Uljanić Škreblin - Ministry of Finance, Tax Administration

    A number of tax administrations have long ago established systems or processes aimed at reducing administrative burdens imposed to taxpayers, especially obligations related to tax on labor, including automated reporting on payroll. Such approaches, which are based on information received from third parties, also improve the level of tax compliance. These automated procedures are now further improving as a result of increased availability of data on other sources of income that in some countries allow for a comprehensive pre-filling. Tax administrations are increasingly analyzing how such approaches can be used for businesses as well as for individuals. In this regard, the availability of digital information and the use of technology by taxpayers in their daily business increasingly allow tax administrations to incorporate taxation-related tax liabilities and reporting within existing taxpayer's systems (such as accounting software and records tools, online banking, electronic cash registers and mobile applications).

    A growing number of tax administrations are increasingly working or cooperating with external providers of software services and entrepreneurial programs as well as developing their own solutions such as applications that support recording, calculation, reporting and payment of taxes. Such a way of implementing tax liabilities in the system that taxpayers use primarily for other purposes, provides an opportunity for tax administrations to reduce the administrative burden on both sides - the taxpayer's and the tax administration's, while at the same time improving the overall tax compliance because the whole system work almost automatically and does not require additional administration from the taxpayers since they already use it for some other purposes and would use it even without having tax liabilities.

    The administrative burden for taxpayers can also be reduced by increasing the efficiency and security of reporting on income/revenues and transactions and some tax administrations are analyzing the possibility of applying "blockchain" technology for this purpose. Blockchain solves the problem of creating a distributed database without the need to use a special entity to monitor transactions. In “blockchain” it is replaced by a decentralized network of unknown computers that validate transactions based on a specific algorithm1.

    Blockchain is a technology that is based on a distributed ledger where everyone in the block chain has all the information and can be used to store any kind of data, including financial transactions. Since everyone in the chain has all the information, it is considered to be a very secure way of storing data, since nothing can be changed without all other participants in the chain verifies it. Blockchain technology therefore has the potential to be used for the particular process that tax administrations apply in everyday communication or interaction with taxpayers, for example, can serve as a secure method for registering and verifying the authenticity of taxpayers or storing data on certain transactions (for example, taxpayers, register of landowners and other property, etc.). However, as with any other new type of technology, caution is required, especially since there is no mechanism for the central rules management system and this may also pose a certain risk of efficacy.

    The current Croatian Government also recognized the importance of reducing administrative burdens for businesses in general in all business segments and in January 2017 adopted the Action Plan for Administrative Disbursement of the Economy in 2017, covering seven sectorial areas. In June 2017 the Government adopted a Decision on the extension of the application of the SCM2 methodology for measuring and targeted reduction of the administrative burden for businesses3, based on which a systematic analysis of additional forty legislative areas affecting business operations has started. In March 2018, the Government adopted a new Action Plan for Administrative Disbursement of the Economy in 20184, as a part of the reform package to stimulate economic growth, and is also an important component of the National Reform Programme within the European Semester. The measures included in this Action Plan have been established through a comprehensive process of analysis and measurement of more than 570 regulations within which almost 1800 different administrative obligations have been recorded.

    The action plan was prepared using the standard cost model (SCM), which has been widely applied in the EU. SCM methodology is a tool within the assessment of economic effects of regulations. The administrative burden for businesses is measured by the following standardized formula:

    SCM formula:

    • the cost of time for an administrative obligation x
    • Gross hourly cost (wage) x
    • material and overhead cost (30%) x
    • external tariff x
    • frequency in a year

    = administrative cost for an entrepreneur x

    • the number of businesses to which the regulations apply

    = administrative cost for the whole economy

    The measurement procedure and the determination of the measures of economic disbursement were carried out in inter-departmental coordination with the competent state bodies and public administrations and through numerous consultations with business associations as representatives of the businessmen to whom the regulations relate. Already during the process of measuring and drafting the Action Plan, the competent authorities have carried 48 measures estimated to decrease the administrative burden of businesses for over HRK 23 million, accounting for 11.6% of the measured cost of administrative burden, and this year, it is planned to implement another 98 different measures, so the administrative burden should be reduced by additional 12%, or by HRK 625.9 million. The Plan contains a series of measures and activities aimed at removing administrative barriers, simplifying regulations or facilitating effective communication of businessmen with state administration bodies through the introduction of electronic procedures. The largest savings in this Action Plan are foreseen in the Ministry of Finance's, Tax Administration (577 million kuna) by abolishing some obligations to keep records of paid earnings from the employment, contributions and taxes, simplifying other forms that the tax payer have to submit to the tax administration etc.

    Namely, the Ministry of Finance's measure in the area of tax, customs, excise duties and special taxes included in the Action Plan 2018 have been established through a comprehensive process of analysis and measurement of regulations under the jurisdiction of the Tax Administration and the Customs Administration. The measurement procedure and the determination of positive measures that will be introduced in order to decrease the administrative burden have been conducted through numerous consultations with entrepreneurs and business associations as representatives of the businessmen to whom the regulations relate. Measures proposed by the Ministry of Finance's relate to the abolition of certain reports and records, the simplification of reporting, the facilitation of electronic reporting, etc., which will ultimately lead to a reduction in administrative costs for businesses to which the measures relate.

    The Tax Administration has carried out measurement in the field of personal income tax and compulsory contributions, profit tax, VAT, general tax law, fiscalization and local taxes, games of chance and administrative cooperation. During the measurement, the Tax Administration sent a call for completing electronic questionnaires to 3,075 taxpayers (randomly selected), of which 474 (about 15%) filled the questionnaire. It established more than 400 tax-administrative obligations and only for 10 obligations the Tax Administration estimated the expense of fulfilling the obligation because it did not have enough data and the remaining actual information was based on the information provided by the entrepreneurs themselves.

    Through the above mentioned questionnaires (that were anonymous), apart from the response of the time spent for a particular administrative obligation, the Tax Administration has also collected a large number of proposals for reducing administrative burden and improvement of business processes as well as objections to the work of the Tax Administration in general.

    Some of these proposals have already been adopted in the course of measuring administrative burdens, and the measures to be implemented in 2018 have also been envisaged and included in the aforementioned Government Action Plan for 2018.

    Based on the survey carried out as part of the measurement of the tax burden of taxpayers, it can be concluded that taxpayers in Croatia follow world trends, i.e. according to their proposals and technological knowledge it seems that they are not far away from taxpayers in most developed countries of the world. Their requirements are all in line with good practices that are already being implemented in a number of countries or proposed globally as part of the OECD's work for increasing the efficiency of tax administration, voluntary compliance and tax collection and consequently for reducing the tax evasion and tax fraud. For example, taxpayers in Croatia are proposing:

    • greater automatism in filling tax returns (i.e. more use of pre-filling),
    • linking of data and not reporting of data which the tax administration or some other state body already has information,
    • greater digitalization of the tax reporting process (all forms should be filed electronically by eTax portal; data should be withdrawn directly from other programs, such as bookkeeping programs or online banking; the sums of individual data must not be manually entered-it should be carried out automatically; Tax Administration should warn automatically the taxpayer if there are unwilling mistakes in the tax form rather than punish him immediately; the tax payer should not have to submit forms for linking the information on tax payment and the data of the tax due previously submitted in other form-the process should be automated etc.),
    • tax form simplification and better guidelines (which can be achieved by using advanced analytics to determine exactly which instructions/guidelines are needed and when, in order to be timely and easily understandable),
    • the Tax Administration should develop its own software programs that will enable faster and easier filling of tax forms online,
    • new identification technologies should be used,
    • risk analysis should be used more often and for VAT refunds data and additional documents should be asked only from those risky taxpayers (otherwise honest taxpayers feel under unnecessary pressure and this may lead to their tax morals falling) etc.

    Furthermore, using advanced analytics to analyze the behavior of taxpayers, i.e. using for example the method of taxpayer's e-mail or inquiry analysis ("text mining"), which some countries already use, misunderstandings about certain obligations could be avoided and on the other hand, the taxpayer's trust in the Tax Administration could increase, as well as the satisfaction of taxpayers with the services provided by the Tax Administration. Namely, the results of these analyzes could be used to carry out a true information campaign (the publication itself on the tax administration website is not sufficient) when introducing changes; it could be explained exactly why a measure is being introduced or a purpose of a new form and how the information submitted to the tax administration will be used. This should reduce the taxpayer’s resistance when introducing such new measures. Furthermore, it could also be reported afterwards how these data were used (if used) and which were the benefits for the society as a whole, because it is apparent from the taxpayer's response in the survey carried out as part of the measurement of the tax burden of taxpayers in Croatia that they are very irritated about certain administrative obligations related to reporting data on which they consider to be nothing but a shift from the Tax Administration to them. This can also be linked to good practices in some countries using advanced analytics to predict the taxpayer’s behavior as well as the effects of tax reforms.

    Advanced analytics can also be used to monitor the effect of regulations and possibly certain administrative obligations can after a period of time be abolished, increasing the satisfaction of taxpayers, if it turns out that this data is no longer needed, that there has been a change in the taxpayer's behavior in the desired direction (especially for measures which were introduced purely to track and report errors in reporting in a timely manner) or that the administrative burden for taxpayers is greater than the benefit of a particular tax liability, i.e. that the measure did not achieve the desired results. This would surely increase the satisfaction of taxpayers, their tax morals, the voluntary compliance and the trust in the tax system as a whole, as well as increase the efficiency of tax administration and, of course, reduce administrative costs both for taxpayers and for tax administration.

    The analysis in the OECD's report "The Changing Tax Compliance Environment"5, also supports the aforementioned conclusion, which among other things states that the purpose of the tax administration is to collect the revenue needed to finance public services, and the 3 most important elements are:

    • optimization of the tax compliance in a cost-effective manner,
    • minimize the burden on taxpayers and
    • build and maintain the trust of taxpayers.

    It is further emphasized that the burden on taxpayers in fulfilling their tax obligations can create significant opportunity costs by extrusion of productive economic activities. This is a particularly high risk for small taxpayers. Confidence in the fairness of tax administration (as well as the wider tax system) is also stressed as very important for the sustainability of the tax system and the retention and improvement of tax compliance.

    Many countries already apply new technologies in order to reduce administrative burden for taxpayers on the one hand and on the other hand to increase voluntary tax compliance and reduce reporting errors. Thus, in the OECD's report "Tax Challenges Arising From Digitalization"6, it is mentioned that a large number of tax administrations use "pre-filled" tax returns for individual or all sources of income, such as Belgium, Denmark, Finland, Hungary, Iceland, Latvia, Malaysia, Malta, Norway, Singapore and Slovenia. Next, Australia has created a mobile application that allows taxpayers to register the tax-recognized costs they incur by using the camera on their mobile phones and using location services to register official travels for tax-recognized car costs, eliminating the need for additional paperwork. Kenya introduced 2013 iTax system - an online tax collection system that allows fully integrated and automated income tax administration solutions, including the pay as you earn system, VAT and withholding taxes. The system allows taxpayers to simply update their data, submit tax returns, register all tax payments, and submit a status query, monitoring their account's status in real time.

    This article can be concluded by saying that only a small number of examples are given in relation to the far-reaching implications, that is, the advantages and risks for the entire tax system, which digitalization and new technologies can bring. This ranges from the effects of automation and artificial intelligence to workforce, the changes that the development and increasing use of 3-D printers and Augmented reality can bring to the value chain (i.e. the implications of VAT calculation), to the ability to use "big data" and advanced analytics for a radical revision of the tax policy decision-making process and the activity of taxpayers' compliance with each taxpayer in real-time.

    Tax administrations that are left behind or are not going to step in time will have difficulties in identifying and monitoring new risks, new business models, new ways of avoiding taxes, and on the other hand taxpayers who, as we have seen from the aforementioned research in Croatia, follow world trends especially in the field of technology, will not tolerate such lagging and will provide ever greater resistance to the absurd filling of the mass of data and forms and be more dissatisfied with the work of the tax administration as a whole and will either remain in the gray economy zone or it will resort to it more and more, because they will be frustrated and demotivated or ultimately will not start business in a country where the administrative burden is too high.

    1. Reference: https://www.bug.hr/tehnologije/sto-je-u-stvari-blockchain-i-kako-radi-3011
    2. The Standard Cost Model (SCM) is a method for determining the administrative burdens for businesses imposed by regulation. It is a quantitative methodology that can be applied in all countries and at different levels
    3. Croatian "Official Gazzete" no. 60/2017
    4. Akcijski plan za administrativno rasterećenje gospodarstva 2018., https://www.mingo.hr/page/standard-cost-model
    5. OECD (2017), The Changing Tax Compliance Environment and the Role of Audit, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264282186-en
    6. OECD (2018), Tax Challenges Arising from Digitalisation – Interim Report 2018: Inclusive Framework on BEPS, OECD Publishing, Paris

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  • 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

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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