• A new tripartite pact underpinned by tax technology beckons?
Articles:

A new tripartite pact underpinned by tax technology beckons?

14 September 2018

Tim Dearden, Vena Solutions - Chief Strategy Officer |
Marcus Botha , Head of Corporate Tax |

The terms of reference of the contested SARS Commission of Inquiry, currently sitting, include the impact of the conduct of SARS management on the public image of SARS upholding the basic values and principles governing public administration envisaged in section 195 of the Constitution. In terms of this section, SARS (as an organ of state) must always act with a high standard of professional ethics and act impartially, fairly, equitably and without bias.

There is little doubt that the President has demonstrated his commitment to restoring the reciprocal relationship of trust between the government, the tax administration and the country’s taxpayers – a tripartite trust which has been badly eroded in recent times. The government of the day, the tax administration and the taxpayer all have their respective crucial roles to play in re-establishing such trust, based on the underlying principles of mutual respect, transparency and a cooperative and constructive working relationship. Such mutual trust can further lead to a collaborative relationship to create a more certain and positive business environment to the economic benefit of all parties. The crux to tripartite trust is that it needs to be demonstrable. In order to achieve a natural progression to demonstrable trust, an assessment of the immediate benefits that technology can provide is relevant.

Human Rights

It is instructive to note that the President confirmed in his State of the Nation Address that “tax morality is dependent on an implicit contract between taxpayers and government that the state spending provides value for money and is free from corruption”. Continuous and independent performance measurement of this implicit contract could be the answer to enhanced trust, increased tax morality and sustainable tax value created in society. His assertion resonates with a Report of the International Bar Association’s Human Rights Institute Task Force on “Tax Abuses, Poverty and Human Rights”, which has a particular focus on tax abuses that have negative impacts on developing countries. The Task Force concluded that tax abuses negatively impact the enjoyment of human rights, as they deprive governments of the resources required to provide the programmes that give effect to economic, social and cultural rights and to create and strengthen the institutions that uphold civil and political rights. The Report emphasises that actions of states that encourage or facilitate tax abuses could constitute a violation of their human rights obligations. As such, there could be an argument for negligence if available measures (or technologies) are not employed to mitigate tax abuses, reduce poverty and the enhancement of human rights.

The SARS Service Charter

The role of SARS, in its capacity as the custodian and administrator of the tax system, is to build the confidence of all taxpayers in the system and uphold the implicit contract which in turn would encourage taxpayers to do the right thing by fulfilling their lawful responsibilities. The SARS Service Charter, which was published recently, is a welcomed development which undertakes to uphold the South African Constitution and Bill of Rights to provide a service that is fair, accurate and based on mutual trust and respect and to demonstrate values of accountability, fairness, honesty, integrity, respect and transparency - all aspects in which SARS appears to have fallen well short of recently.

A question to ask is whether SARS should consider responding with technological remediation and implement digital tax governance in our tax system, whereby enhanced data transparency is facilitated.

In terms of large corporate taxpayers, tax authorities globally have been introducing initiatives to ensure that a company’s approach to managing tax is overseen by its board of directors. This requires tax data. In Australia, when engaging with such a taxpayer, an important departure point for the Australian Tax Office is to understand a taxpayer’s tax governance framework (TGF).

Last year the Australian Tax Office expanded its “Tax Risk Management and Governance Review Guide”, which sets out both board and management level responsibilities for the management of tax risk, together with a framework for controls and testing and the corresponding digitalisation of tax. The Guide now includes a “director’s summary”, which outlines the responsibilities of directors and public officers in the context of TGF, as well as guidelines for the various internal stakeholders to assist in the testing and self-assessment of the operational effectiveness of a corporate taxpayer’s TGF. In addition, the ability afforded by the ATO to large corporate taxpayers to report voluntarily under a “Tax Transparency Code”, to conclude an “Annual Compliance Agreement” with the Australian Tax Office and to strive for a low risk rating in terms of the “risk differentiation framework” of the Australian Tax Office are all factors which encourage the maintenance of open and constructive relationships between the two parties.

In the South African context, corporate governance principles expressly recognise the role and responsibilities of the board and the audit committee in governance and oversight, including the formulation of a tax strategy and policy that are aligned with responsible corporate citizenship and wider stakeholder considerations. However, lack of guidance on the corporate governance tax responsibilities and duties of boards and audit committees, and failure to operationalise tax strategy and policy has resulted in tax value lost in our society. Again, a digital tax governance framework that ensures consistent application by taxpayers and transparent tax data by tax administrations could be the answer to create tax value.

Restore confidence

The President has acted quickly in taking the first step to restore public confidence in SARS. Large corporate taxpayers in South Africa should now evidence their bona fides in contributing to a new spirit of fiscal partnership by endorsing and operating within clearly defined tax principles and communicating their tax approach, including tax technology, to all stakeholders. This would be an important first step in both establishing trust and building credibility, with not only the fiscal authorities but institutional investors, civil society and the public at large. Reciprocally, SARS should establish its own internal digital tax governance framework and procedures to foster cooperative and collaborative relationships with its corporate taxpayer clients, based on a commercial and operational awareness of their industries and supply chains, as well as on the existence and effectiveness of the taxpayer’s governance and risk management framework.

The key is in data

In order for SARS and corporates to be effective and transparent and to feasibly adhere to the ever changing domestic and global landscape, the key is in technology and, more specifically, in data.

In 2018 the use of technology for solving everyday processes has become common place, with every company having a computer-based general ledger, banking automation, automated filings to tax administrations and regulatory bodies, consolidation tools and workflow tools. Despite all this access to technology we have yet to solve the problem, we have yet to substantially reduce risk. In fact, risk has increased, with finance, tax teams and boards still feeling exposed and under water.

The issue largely rests in three parts: the sheer volume of data and information, decreasing deadlines and timetables, and most importantly the inability for systems to speak and reconcile to each other.

Every accounting and tax periodical that you open currently praises the wonders of artificial intelligence and machine learning, the miraculous time savings they generate and the nirvana of this future world. As we look to this future, let’s remember the history of technology.

In the late 1990s and 2000s we were promised a new era of technology with online shopping, robotic droids, instant access to data and a dream world of productivity. This was followed by the dot.com crash! Yet in 2017, Amazon completed their first automated drone delivery with a 20-minute turnaround from ordering to door step. The use of google is pervasive and online shopping is an everyday occurrence (just 20 years later than promised).

The promise of fintech has been similar. Now, as we stand 10 years into a fintech cycle, we are starting to see the light and the art of the possible with fit-for-purpose applications in a finance and tax context.

For the finance, tax, tax administration and national treasury fraternity - trying to get through data gathering and preparation, close processes, fillings of return, tax seasons and budgets - the key is in data: The organisation, structuring, transparency and the flow of that data. This data dos not only consist of debits and credits, but the operational data. HR data, sales data, project or transactional information, capital expenditure, down to the journal entries. This is the data that drives taxpayers, tax administrations and ultimately the country.

A brief universal example

If you request a tax department of an organisation to provide the bottom-line pre-tax taxable income for the 2018 financial year, it will differ from the bottom-line income before tax used by the same organisation’s financial accounting department. In most cases it will differ from the group strategic plan. This exposes a board of directors, the audit and risk committees and senior management. Each party is constantly moving between different data sets with no clear reconciliation between them, signing off on accounts, attesting to balances internally and with multiple regulators. Add layers of operational data and then ask the questions: How confident are you in your data? At what cost? Can you demonstrate the financial and tax value your organisation created and disclose this in the annual and integrated reports?

The same issue exists within tax administrations when the same tax department files these data sets in their returns or submissions. The result: a systemic tax problem that impacts society and faith in the fairness and transparency of the tax system.

Create tax value with the exchange of transparent data

If you start with a single trial balance, the difference between a set of statutory accounts, a tax filing, internal management reporting and strategic planning is simply the rules and the method in which data is summarised and aggregated. The base starting point is identical. Technology today allows you to move from these reported views with ease, reducing risk, creating transparency and value; allowing for a single data platform for use and access across the enterprise and between both internal and external stakeholders; with financial, tax and operational data centrally managed and sourced. This approach allows for transparency internally and to government, it clearly demonstrates the data gaps and allows corporates and government to work together to create a long term sustainable tax ecosystem.

Tax technologies are the often neglected, poor cousin of the finance departments when it comes to the allocation of IT and resources. We need to explore the building blocks of how to leverage the investment in technology and create tax value so as to at last deliver on the fintech promises.

Read more BDO Insights