Making Tax Digital is narrowing Tax Gaps internationally

As the OECD drives the switch toward real-time tax returns through digitalisation, tax gaps are narrowing in individual countries. Kingpin has identified 5 tax jurisdictions where digitalisation has helped to close their tax-gap; Italy, Czech Rep, Poland, Australia and the UK.


Tax

EU gets tough

According to a report commissioned by members of the European Parliament, the EU’s annual tax gap was reported as sitting between €750bn and €900bn annually, with between €50bn and €190bn coming in the shape of corporate tax avoidance – however, these figures are disputed.

What is not in dispute is the EU’s determination to clamp down on corporate tax avoidance. This is very much in line with public dissatisfaction on the matter, with corporate avoidance pushing the tax burden onto individuals and SMEs.

This came to a head in 2016 as the EU ordered Apple to pay a record €13bn fine for unpaid taxes to the Irish government. The decision came after a 2 year investigation which found that Apple had avoided over €100bn in tax through Irish led BEPS schemes.

Tax gaps internationally

Individual EU members and other states internationally have also made efforts to close their tax gaps. Using digital methods to streamline their collection process, countries have seen significant gains – this is most evident in VAT collections;

Italy - As of 1 January 2019, electronic invoicing is mandatory for private businesses for all transactions performed between businesses resident or established in Italy, with the sole exceptions of those enrolled in a special scheme for small enterprises. The creation of the system was prompted by the fact that Italy’s VAT gap is the largest in the EU, accounting for 23% of an estimated €151.5bn VAT missing.

Czech Republic - The digitalisation of VAT reporting was a reaction to the country having one of the highest rates of VAT fraud in the EU, with a €2.5bn VAT gap in 2014.

Poland - Using digital data gathered from businesses, Poland recovered around (€35m) and identified 85,000 invoices which became subject to further investigation.

Australia - in 2015–16, the net large corporate income tax gap is estimated to be $1.8 billion (4.4%). This gap has reduced over previous estimates.

UK – HMRC reports VAT receipts for Q1 of this year were up 4.8% on the same quarter from the previous year, reaching year were £34.5bn. This is a continuation of a long-term upward trend.

 


 

Global solutions being advocated

The Independent Commission for Reform of International Corporation Tax (ICRICT) has advocated for a global unitary tax rate to standardise contributions across the world. A unitary rate will disincentivise companies from moving their operational HQs to countries with lower corporate tax rates. The commission suggests that if this is not yet achievable globally, the US and EU should take the lead.

However, in the EU’s case, the difficulties of implementing this become obvious. The investigation into Apple also ruled that "Ireland granted illegal tax benefits to Apple", through BEPS tools such as “Double Irish”. Apple’s fine was ordered to be repaid to the Irish state, yet the Dail Eireann voted to reject payment, honouring agreements which initially lured Apple to the Republic.

National opposition persists

The Irish state has subsequently lodged an appeal against the EU’s ruling. They’ve suggested that Apple did not breach Irish tax regulations, as the BEPS tools were legal under Irish law. The EU is not mandated to control national tax affairs and the Irish have criticised the investigation’s ruling as an attack on its sovereignty.

Ireland's stance surprised many. However, foreign controlled multinationals make up 50% of her top 50 companies, responsible for over 80% of Irish corporate taxes. Multinationals directly employ a quarter of the country’s labour force (and pay half of Irish salary taxes). In this context it is clear to see why the Irish government are keen to honour their government mandated avoidance schemes with large multinationals.

Clearly there will be difficulties implementing a unitary rate on a global scale. This will be exacerbated by nations who seek to gain a competitive advantage by engaging in a “race to bottom” – competitively lowering corporate tax to attract inward investment. It remains to be seen if Post-Brexit Britain will engage in similar competitive tactics. The next few years will be crucial for the future of corporate tax collections in relation to multinationals and digital tax returns will play a substantial role in this.

 

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