On 20 May 2022 the OECD’s Forum on Tax Administration published a report entitled Towards Seamless Taxation – Supporting SMEs to Get Tax Right.
The report looks at efforts by tax administrations to integrate taxation processes into the systems and processes of small and medium enterprises (SMEs) and considers the issues arising from this. The possibility of coordination of tax processes and taxpayer systems has been made possible by the increasing digitalisation of the economy and the progress made towards further digitalisation of tax administrations in recent years. This trend has been accelerated in response to the challenges arising from the pandemic.
Digital tax administration has already improved the efficiency of tax administration as it has been introduced for registration of taxpayers, issuing tax assessments, tax enforcement and dispute resolution. Compliance has been improved for taxpayers through the availability of online filing and payment, digital communications and taxpayer services.
The drawback of the current compliance process is that it still relies on voluntary compliance, with the onus on the taxpayer to keep correct records, complete the tax return correctly and meet the required deadlines. This adds to the compliance burden and to the number of errors in returns; and is costly for SMEs which have fewer resources than larger organisations.
Compliance costs arise from the need for SMEs to use systems for their tax compliance that are different from their usual business accounting systems. For tax reporting they often need to extract information manually from their accounting records and also spend time collecting information from third parties.
Earlier studies by the Forum on Tax Administration have identified two ways of ensuring a seamless approach referred to as tax compliance by design. The “secured chain approach” would ensure there is a secure chain of information from the point where transactions are first recorded through to the computation of the correct amount of tax. The tax administration would ensure that the flow of information is secure.
The other method, the centralised data approach, would enable the tax administration itself to capture as much information as possible at source on the business transactions of the taxpayer. The tax administration could then compute the tax payable with only a minimum need to gain further information directly from the taxpayer. The whole process would be facilitated by the tax administration which could manage the information and computation itself.
The tax administration could also use a combination of these two approaches to achieve a correct understanding of the tax position.
Tax administrations need to consider how to restructure their processes to adapt to systems used by taxpayers and build tax compliance requirements into those systems. By using Application Programming Interfaces (APIs) taxpayers can coordinate their processes with the systems used by tax administrations, both for specific aspects of compliance and for taxation processes generally.
Reliable and verified data needs to be exchanged between SMEs and the tax administration, preferably without manual intervention, so that when a transaction is completed it is directly included in the tax compliance process. Tax administrations may therefore consider the use of elements of systems such as e-invoicing, online cash registers and electronic bookkeeping.
The report sets out ways in which tax administrations are using APIs and working with SMEs and their service providers to create suitable systems. Examples and case studies are presented illustrating situations where tax administrations have worked with taxpayers to implement the type of processes envisaged in the report.
