A new OECD report entitled “Tax Compliance by Design: Achieving Improved SME Tax Compliance by Adopting a System Perspective” was published on 24 October 2014. The report looks at how to improve SME compliance by making better use of the technology and internal systems within SMEs. Tax administrations throughout the world are looking for ways to create an improved relationship with small and medium enterprises (SMEs) and increase the levels of voluntary tax compliance. This helps both the tax administration and the business to save compliance costs that arise when tax obligations are not fulfilled on time.

The OECD report is part of a series of studies on questions of relevance to tax administrations. Revenue bodies differ in their organization and resources, and the tax systems they are responsible for administering can differ greatly from one country to another. The OECD however intends to produce material to inform administrations about the possibilities available and inspire them to improve compliance.

The report discusses the idea of tax compliance by design, which means that the tax administration can make full use of the available technology and of the internal systems used by SMEs to help businesses to incorporate tax compliance into their financial systems. Tax compliance would then become a normal part of the business processes of the SME. This is becoming more important as tax administration resources cannot stretch to dealing with SMEs on a one-to one basis

SMEs are very important to a country’s economy as drivers of economic growth and employment. However they see the costs of tax compliance as a burden especially as these costs represent a higher proportion of operating costs for SMEs than for larger companies. The tax compliance burden can therefore negatively influence the ability of an SME to grow its business.

The OECD study looks at tax compliance by design which contains elements already in use in some countries. This is based on the premise that SMEs are aiming to be tax compliant but that their inadequate business systems and incomplete understanding of the tax system have held them back and been a cause of non-compliance. However SMEs are increasingly using some type of technology in their internal systems to keep records and keep the management or owners informed of how the business is developing. Tax compliance can be incorporated into these internal systems and become a by-product of the processes used by the business for its own accounting and record keeping.

By using a process referred to as “right from the start” an SME can change from being a passive recipient of tax returns, to which it attempts to respond within the deadline, to an active player in tax compliance. Instead of being sparked into action by the prompting of the tax administration by means of a return or reminder, the SME can build compliance into its systems from the start and see compliance as a normal business process. To achieve this goal the revenue bodies will need to collaborate with SMEs and other important participants in the compliance process such as accountants, software developers, banks or industry bodies.

The study looks at two different approaches to tax compliance by design, referred to as the “secured chain approach” and the “centralized data approach”. The secured chain approach ensures that there is a secure flow of data from the initial capture of a business transaction in the system to the determination of the correct tax liability. The centralized data approach allows the tax administration itself to capture business transactions from source, to the greatest extent possible, to establish the correct amount of tax with minimum input from the taxpayer. Combinations of these two strategies could also be used.

The report therefore encourages tax administrations to look at the development of tax compliance by design, taking into account their own circumstances. They should first make an assessment of the current situation in their jurisdiction, and then map out the path toward the desired goal by looking at the flow of data in their system, the participants in the system and the infrastructure that would be needed to achieve the goal. Finally the tax administration can plan the practice implementation of the system, planning the level of control and involvement with taxpayers.