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Oct. 21 — Digitization of tax administration is accelerating in Central and Eastern Europe as technology costs decline and the early successes of some countries’ use of digital tools to fight fraud spurs others to follow.
Slovakia is among the success stories--according to Patricia Macikova, spokeswoman for the Financial Administration of the Slovak Republic, the percentage of value-added tax (VAT) audits that are “justified” by subsequent findings reached 95 percent after the 2014 introduction of electronic VAT control statements. These require taxpayers to provide detailed reporting of invoices in their VAT returns and they are then combed for missing traders and other red flags.
This approach has since been emulated by the Czech Republic, which introduced VAT control statements in January and, to a degree, also by Poland and Lithuania, among others, which have gone a step further by introducing standard audit files for tax purposes.
Similarly, the fact that sales reported by individual entrepreneurs in Croatia jumped by 55 percent in the restaurant sector and 28 percent in the retail sector—after introduction of an online system of electronic records of sale a couple of years ago—was hardly lost on the Czech Republic, now planning to launch a system modeled after Croatia’s on Dec. 1.
The Czech system will initially apply to restaurants and hotels, and from March 1 also to retailers and wholesalers.
The process of digitization of tax administration “has been intensifying in the last couple of years” according to Peter Molnar, a senior tax manager at EY in Hungary.
In an Oct. 14 telephone interview he told Bloomberg BNA that while many advances have been driven by the countries in Central Europe racing to catch up with the rest of the European Union (EU), they are “also copying each others’ already piloted methods.”
To be sure, there is plenty of catching up to do, Andrzej Palys, manager, tax technology practice, KPMG in Poland, told Bloomberg BNA in a Oct. 13 telephone interview. He estimates the region to be between five and 10 years behind the rest of the EU in most respects.
For example, in 2008, Portugal implemented the international standard audit file (SAF-T) for electronic exchange of reliable data between organizations and tax authorities. Poland did so this year, he said.
But there are also instances of the region starting to pull ahead, Molnar said, citing the example of Hungary’s electronic road transportation control system (EKAER), launched Jan. 1, 2015, to help tax and customs authorities fight VAT fraud by monitoring the physical transportation of goods in and out of Hungary.
Companies do regard many of these changes with apprehension—they come, after all, with additional costs to ensure compliance, plus there is uncertainty over whether tax authorities will use additional disclosures to primarily target serious offenders, as they have been declaring, or whether they will use them indiscriminately, as some market players fear.
However, there is also the understanding and expectation of good things to come. These include tax collection systems becoming more transparent, tax audits more predictable and the overall leveling of the playing field, local tax practitioners said.
“The beginning is bad news” for companies, Peter Chrenko, tax and legal services partner at PricewaterhouseCoopers in the Czech Republic, told Bloomberg BNA in an Oct. 13 interview.
“It’s about transformation, it’s a burden, it’s something new, it’s about some costs” for building up compliance.
Longer term, however, companies stand to benefit, particularly if they invest in internal compliance tools that will help them ensure that the data they report meets tax administrations’ criteria, Chrenko added.
“Once it is implemented, it will give me, as a company, the comfort of knowing that what I hand over is correct and that I don’t run the risk of being audited,” he said.
“And even if there is a tax audit from time to time, I don’t have to fear it because I know that things are under control.”
Multinationals stand to benefit in particular, Grzegorz Poniatowski, director of fiscal policy studies at Warsaw-based CASE-Center for Social and Economic Research, told Bloomberg BNA in an Oct. 17 e-mail.
“As far as multinational businesses are concerned, my impression is that there are mostly upsides,” he wrote. He said unfair competition from fraudsters decreases revenue for global companies, “thus they are in favor of anti-fraud measures, even if they increase compliance costs.”
An example of this is the steel industry in Poland, where “large players supported and advocated for introducing reverse charge mechanism and joint liability for VAT transactions,” Poniatowski wrote.
Still, Molnar worries about the data that will be used.
“So far the tax inspector came every second year, they looked at the VAT spreadsheet, they pinpointed a few invoices, they got the invoices, and they checked them,” he said.
“We call it the mine-sweeper approach, like in the Minesweeper game. Whether they find something and it exploding into a problem is random.”
Becoming more transparent means that if companies “make mistakes, which they sometimes do due to the large number and/or complexity of transactions, this can be quickly and easily spotted,” he explained. You will be under an x-ray. They will see everything, every transaction. If you make a mistake, it is very likely that they will see it and come after you.”
And the attitude of the tax authorities can be far from understanding.
“Sometimes in carousel fraud situations when the fraudsters disappear, the inspectors try to argue that the involuntarily involved multinational also knew or ought to have known about the fraud and try to make the assessment there,” he said.
According to Chrenko, advances in digitization of tax administration are largely enabled by technological advances.
“Technologies today make it possible to work effectively and to mine large amounts of data,” Chrenko said.
“It’s what’s happening in the corporate sector, and states would be stupid not to join in,” particularly as technology costs decline and computer processing power grows, he added.
At the same time, data sets available to tax authorities are growing in variety and depth—both in terms of what can be collected locally, particularly when it comes to transactional data, and what becomes available as part of international exchange of information, such as country-by-country reporting for multinationals in line with EU and OECD’s anti-tax avoidance recommendations, according to Chrenko.
These data sets are increasingly mapped and analyzed in ways that are similar to the way banks and insurance companies use forensic analytics to detect fraud, Chrenko said.
And the overlap with the commercial sector doesn’t end here.
Chrenko said digitization of tax administration also allows for “improving customer experience” by eliminating “the need to write information requests and giving me access to the tax file, to make sure, for example, that I am not in arrears with payments.”
Alena Schillerova, the Czech Republic’s deputy finance minister for taxation and customs, told Bloomberg BNA in an Oct. 12 telephone interview that that was very much the intention of the Czech finance ministry and that the working title of the project was “tax kiosk.”
The kiosk would, among other things, draw on a variety of databases to help taxpayers pre-fill their tax forms and also provide online payment options. Taxpayers already have online access to parts of their tax files.
But before the kiosk is introduced, the tax administration has to replace its computer information system that was introduced in 1992 and is built using Informix 4GL, an application development language that goes back to the mid-1980s.
A replacement system isn’t expected before 2020, Schillerova said.
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