…and the future of tax collection worldwide
Russia’s Federal Tax Service, by the hand of the agency’s executive Mikhail Mishustin, has revolutionized the tax administration and developed a technology that will presumably be the future of tax collection worldwide. It consists in a digital and real-time system, which allows Russian officials to receive the data regarding every registered transaction that occurred in the country within 90 seconds after it took place.
The phenomena of ageing population is pressuring governments around the globe, as it is substantially enlarging the expenses with healthcare, social care and pensions. Alongside, the major tech enterprises have been discovering the way of shifting profits around the world and avoiding corporate taxes. In order to tackle these issues and raise funds to face increasing expenses and decreasing revenues in the sector of direct taxes, the Russians have decided to bet in the collection of indirect taxes, mainly in VAT.
Value Added Tax, VAT, is a broad consumption-based tax assessed on the value added to goods and services. This tax is now present in more than 165 countries and represents approximately 20 per cent of all global tax revenues per year.
But, in two main areas, VAT is subject of fraud: firstly, some traders don´t pay the taxes they owe on their sales and go missing, leaving authorities without collecting what legally belongs to them; secondly, customers collude with sellers to buy goods and services without receipt, with the purpose of avoiding VAT being charged to the final consumer.
To overcome fraud, or at least its majority, and prevent tax evasion and corruption, Russia developed and establish cutting-edge technology. Every retailer had to buy a new cash register, linked securely to the Federal Tax Service’s data centers, and was obliged to register every single transaction. The technology, through the use of Artificial Intelligence, is able to find patterns and spot businesses’ suspicious activity, for example if companies are registering less sales than expected because they are making cash transactions off the record, and even monitor the tax officials and their collection rates to detect corruption. This system also enables the government to control the number of sales and the prices of goods and services and provides national statistics, being inflation one of the most important.
However, there is still the wish to extend the system to the informal economy. Individuals just have to sign up to a smartphone app and what they owe will automatically be deducted from their bank accounts. Tax officials are, of course, relying in the fact that most people want to be clean and don´t want to get in trouble with the government. Even though “The Russian way of taxes” has all the advantages mentioned above, it is actually more directed to shopkeepers than to oligarchs, as corruption is still quite present in Russia’s society. Yet, this policy helped raising revenues significantly and also helped cleaning the system.
The leader of the global tax consulting at EY, Chris Sanger, says: “The benefits of technology for tax authorities in indirect taxes may well overweight the problems it brings in the direct tax system”.
Like Russia, there were many other countries that adopted the real-time data in tax collection, with the intention of reducing tax evasion and corruption. Portugal was one of those countries, an early starter. The shopkeepers’ cash registers are connected to the tax authorities’ systems too, but Portugal added other incentives. If consumers add their personal tax number to the electronic receipt, they can get a 15 per cent deduction on the VAT paid from their annual income tax assessment as well as becoming eligible to win a monthly lottery, which price is usually a brand-new luxury car. Through this incentive strategy, consumers are more likely to pay VAT and so ensure that retailers do the same.
Although many consider this is the future of tax collection worldwide, others believe that this will never be possible to implement in more mature democracies, due to the principles of privacy and data protection. The public is quite skeptical to accepted immensely intrusive state technology. OECD is trying to draw core standards at least for its state-members, aiming at securing data and preventing it from being misused.
For reflection purposes, it is feasible to leave the question: Will people actually be worried about their privacy and their personal information or, in another way, are they worthy to claim these rights when they share their private lives with the big tech companies?