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Tax Authorities Lag Businesses in COVID-19 Digital Transition

Posted on Nov. 20, 2020

The coronavirus pandemic has sped up the world’s digital transition in business, education, and tax administration, but bureaucratic challenges remain for taxation of digital economic activity, say young tax professionals.

In a November 19 virtual seminar for young tax professionals hosted by the International Fiscal Association's Young IFA Network, panelists across the world said even before the pandemic, they had noticed businesses and governments transitioning to digital practices for tax collection, information gathering and sharing, offering services, and managing employees. But while the crisis pushed businesses and tax authorities to implement “pandemic-proof” strategies, it also exposed weaknesses in the international tax system and technological capabilities of many tax administrations, they said.

Lucas de Lima Carvalho, global head of tax at EBANX in São Paulo, said he has seen firsthand  business clients modify their practices to become more complex and technologically agile in response to the crisis. As businesses have modernized their systems, he said, tax authorities are struggling to keep up with new taxable revenue schemes and account management.

“If tax authorities don’t adhere to artificial intelligence or increased use of machine learning, they will lag behind, and they won’t provide an adequate response for control and ability to collect revenues,” de Lima Carvalho said. “After this event [the pandemic], tax authorities will be pushed to do that, and because of budget pressure, they’ll have to find new ways to tax the digital economy.”

While OECD countries continue negotiations on a two-pillar multilateral proposal for reforming corporate tax rules to address the challenges of the digital economy, aiming for agreement by mid-2021, countries around the world — including France, Spain, Nigeria, and India — have turned to digital services taxes to capture revenue from online sales and other electronic commerce.

Preshnee Govender, Africa tax coordinator for KPMG in Cape Town, said in her experience, African tax authorities do not receive adequate funding to carry out the digital transformation. Further, she expects to see interpretational disputes arise from tax audits because several governments have pushed unilateral DST legislation with varying definitions and little corresponding operational capacity.

On the other hand, many African businesses — even small, informal ones — were already improving their digital infrastructure, which caused tax administrations to react with more digital options, said Elisangela Rita, an international tax specialist with the Angola Revenue Administration in Luanda. “There is no way back, no slowing down from technological transition,” she said.

In a similar vein, the Indian economy has undergone a huge technological transformation, said Anubha Mehra, director of Deloitte India’s business and international tax practice. More business services are moving online; businesses are automating practices with AI so employees can spend more time with clients; and they are investing in cloud storage and other technology to enable remote work operations, she said.

Plans are also underway in India to build “robust data infrastructure,” for which government investment is needed, said Mehra. Tax administrations are holding virtual tax court hearings, introducing faceless audit schemes for domestic taxpayers, and reforming administrative practices to be more technologically compatible, she said.

Many EU countries, including Austria, have incorporated EU VAT e-commerce rules over the last year, said Karoline Spies, professor and chair of tax law at the Institute for Austrian and International Tax Law at WU (Vienna University of Economics and Business). Austria offers a special investment bonus of 7 percent, she said, and to encourage digital transition, it doubles the bonus if companies invest in digitalization tools.

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