Is There a Life Without Tax Returns?

By?Anatoly Gaverdovsky, Chairperson?and Founder,?Digital Tax Technologies

Traditional Tax Declaration Principles

The tax return is the sacred element of tax administration in almost every country in the world. If there are taxpayers, then there is the obligation to pay the taxes and file tax returns.

The standard tax administration process using a tax return includes the following elements.

• Regulators introduce the procedure for exercising tax control in the tax code and by-laws.
• Authorized agencies develop a tax return forms that reflect the correctness of the calculation of the tax base and the amount of tax payable to or refundable from the state budget.
• After closing of the reporting period, the taxpayer files a tax return and submits it to the tax authorities within the period established by law. For the absence of a declaration or violation of the submission deadlines, tax administration enforces fines.
• The tax authorities conduct an in-house audit (sometimes called a?cameral audit) of the tax declaration to determine the correctness of the data and calculations. Usually, the national tax code defines the periods for conducting a desk activities, including in-house and field audits.
• The tax authorities have the rights to request supporting documents from the taxpayer. They might apply other methods of control to determine the reliability of the specified information and lawfulness of the use of benefits, deductions, and other methods of reducing the amount of tax to be paid.

Disadvantages of the Tax Return

Administration of the tax return life cycle requires significant financial, timely, and labor resources from tax authorities and taxpayers.

• An increase in the number of taxpayers and the number of declarations requires a rise of auditing staff and additional expenses from the state budget.
• The tax authorities develop the tax return forms and requirements based on their interests, and never mind ease and convenience for taxpayers. As a result, professional help is required to complete tax returns, including paid services from tax officials or tax consultants.
• The taxpayer must also pay for the costs of using information systems and pay for the work of employees for maintaining tax records, preparing a tax return, and working with tax authorities during audits.
• The tax authorities incur significant labor costs to carry tax control. Up to 50% of the inspectors take part in the audit processes. Despite that, they ensure control of only the most significant taxes, such as VAT or income tax.

With a traditional approach, the tax authorities stay in a systemic deadlock, and they need to seek a way out. Solution is to shift to digital tax administration with access to taxpayers’ digital primary data and documents. It enables effective workflows within the tax authorities and gets the tax base information without the involvement of the taxpayer. On that basis, the tax authorities can calculate the tax liabilities without using the tax returns to reduce the administration burden for the entire economy.

Benefits of No-Filing or Return-Free Tax Regimes

Rejection of a tax return saves the taxpayer from the need to maintain tax records and fill out a tax forms. Tax authorities can spare the costs of conducting desk audits. This will reduce the workloads by up to 50% and increase the efficiency of the tax administration without adding personnel.

Q. What is return-free filing and how would it work?

A. If an income tax system were simple enough, the government could withhold taxes owed and do its own accounting at the end of the year without much help from taxpayers.

What is return-free filing and how would it work??Urban Institute, Brookings Institution

Many tax administrations in the world are consistently following the path of eliminating the tax returns. The reform may begin with the digital tax administration of individual property and motor vehicles. Information for calculating the amount of taxes to be paid comes from the state registers. The legislation must make it mandatory for asset owners to register objects of taxation in relevant state systems. This information helps to calculate the tax base without additional communication with taxpayers.

Another example of implementing a non-filing tax control system is the digital administration of the professional income tax (PIT) with the?special?tax regime for self-employed. The taxpayer registers income in a mobile application or data gathered automatically through integration with electronic platforms and banks. The tax administration automatically calculates the amount of tax to pay and notifies the taxpayer. He can pay the tax on time by using a linked credit card.

The next step could be the implementation of a non-filing tax administration for taxpayers with an annual turnover of up to a certain level and staff of up to 5-10 people. In this experiments data comes from the banks that are integrated with the tax information system and from the online cash registers.

The expansion of digital tax administration to other, more sophisticated taxes, such as value added tax or income tax, requires the revision of the tax code. The current regulation usually is a strong interlacing of tax benefits, exemptions, risks and other factors as the legacy of previous decades. Revising current tax regimes is a futile task, as changes are likely to provoke resistance from both taxpayers and tax authorities. The most rational way is to introduce new tax regimes step by step with the progressive transfer of taxpayers and the consecutive elimination of antiquated approaches.

To learn more about digital tax administration approaches, solutions and best practices, please visit our site at?www.taxtech.digital