Radical change, much of it driven by new digital technology, is affecting every aspect of our lives and work − including taxation. With tax authorities around the world investing heavily in the latest data analytics technology, forward-thinking organisations are already looking for ways of upgrading their own digital capabilities to gain deeper insight into their transactional data and manage their tax affairs more efficiently.
Data analytics setting the pace in tax
Don’t be distracted by the drones and bots: some of the most exciting and relevant digital action is taking place behind the scenes at tax authorities all over the world. In the spirit of the fourth industrial revolution they’ve started to build a highly advanced infrastructure, collect information, and run forward-thinking projects.
A typical example is the Connect platform set up by the HMRC, the UK’s tax authority. It uses advanced tools to analyse data and detect fraud and non-compliance by connecting huge volumes of information from many different sources, internal and external. HMRC has invested around GBP 80 million in the project, and has disclosed that so far it’s been able to collect a total of GBP 3 billion from enquiries generated by the platform. That’s an incredible return on investment.
In such a dynamically changing and technologically advanced tax environment, you also need to invest to keep up. The good news is that there’s a substantial potential return on this investment for you too. We foresee a period of uncertainty, possibly lasting years, as the business world adjusts to the rapidly increasing use of advanced technology on the tax front. By upgrading your own digital capabilities, you can reduce this uncertainty, adapt more quickly, and gain an early mover advantage.
State-of-the-art technology for tax audits
To get a better idea of the kind of technology we’re talking about, let’s consider one of the main areas in which tax administrations are investing: tax audits. Thanks to their new digital capabilities, the volume of information authorities are able to collect is growing exponentially. In addition to their own data, they’re using advanced tools to collect new information from sources such as other governmental bodies, international platforms, taxpayers and third parties. To process this information, tax authorities are investing in highly advanced infrastructure, for example data warehouses, Hadoop clusters and supercomputers for artificial intelligence such as IBM Watson. They’re also initiating projects to detect taxpayer non-compliance or fraud and support the audit process using machine learning, artificial intelligence, natural language processing and deep learning algorithms.
To make sure you’re tax compliant and indirectly reduce the risk of being audited, you need to be using the same technology as the most advanced tax administration.
Technology in the service of transparency
But it’s not just about technology. It’s about gaining greater and quicker transparency. As the tax authorities move closer and closer to the ability to monitor in real time, your comfort and security depend on being constantly aware of your own behaviour as a taxpayer.
This is particularly relevant given the possibility in many countries of being held jointly and severally liable for fraud (specifically in relation to VAT). Not only do you need to reduce the risk of being indirectly involved in fraud; you also need to have your tax rules under control to demonstrate your honesty to the tax administration.
Ready for the new world of tax?
Imagine you were required to send your data to the tax authorities right now. How safe would you feel? Do you know your anomalous transactions, and can you explain them to your management board or the taxman? If you’re comfortable with questions like this, you’re prepared for the new world of tax.
Wherever there’s change, there’s opportunity. We’ve been tracking these new developments for quite a while now and asking ourselves how we can help organisations make the transition to the new digital taxation environment. How can we help our clients deal with the challenges around large volumes of transactional data? How can you make sure your data are correct and that you don’t miss out on opportunities?
Our conclusion is that it’s more important than ever to have transparency on your business transactions. Whether you opt for traditional data analytics or employ the same data-driven methods that some tax authorities are already using, we recommend taking a deep look into your data and thinking about whether you need to invest more now to gain transparency and be compliant.