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The world is moving toward a ‘big brother’ tax system as a result of the OECD’s base erosion and profit shifting project and the growing role played by information technology, the Latin America tax director of Dell, Inc. said.
“We’re in a world today where information about everybody’s taxes and everybody’s accounting will be readily available for taxpayers, for third parties, for everybody,” Lionel Nobre said during an Aug. 29 Bloomberg BNA panel at the International Fiscal Association congress in Rio de Janeiro.
Unlike Brazil, where technology has shaped the country’s tax system, this will be very difficult to understand for some jurisdictions, Nobre said.
Taxpayers in Brazil have to report their tax information on a real-time basis, Nobre said. “The tax authorities know about my taxes before I do.”
“Since everything is electronic, your tax position is very important,” the Dell official said. “The tax authorities are seeing the information before we can see the information, so that they can cross-reference.”
Countries around the world are enacting new documentation requirements, including country-by-country reporting of tax data, to comply with new rules issued by the Organization for Economic Cooperation and Development as part of its BEPS project. The new rules have raised fears that the information will be quickly leaked and become public, putting companies under a harsh spotlight.
But for Nobre, the rules aren’t just a fear—it’s a current reality and also a unique business opportunity for him.
“The silver lining is that all of this data collection and data is all stored and processed on Dell’s listservs,” Nobre said. “Our largest customers in Brazil and in the region are tax authorities. And why do I say that? I say that because maybe 10-15 years ago you would never think that the tax authorities would be as sophisticated as companies.”
Taxpayers will need to be cognizant that all of their information will be shared between tax authorities when they make decisions on mergers and acquisitions or other cross-border transactions, Nobre said. “We have to be prepared and we’re not prepared.”
The Dell official added that information technology engineers are needed to truly understand the changing landscape of tax. “I have four or five IT engineers,” he said. “They’re the people that are solving my tax issues.”
Many jurisdictions, such as Brazil, Mexico and Argentina, apply penalties to taxpayers who make errors on their tax returns, according to Nobre. For instance, if a taxpayer puts in "$1 billion” instead of a "$1 million,” the fine is 10 percent of the difference.
“It’s very hard for the best tax lawyer in the world to defend that you didn’t make a mistake because it’s not a tax issue. You’re self-assessing,” he said, adding that the tax authorities know that if they inspect every taxpayer, they will find issues. “They will find problems, and maybe they might even put in jeopardy the economy of the country because there are so many mistakes.”
Nobre also said the tax authority in Brazil is using social media data to analyze risky individual taxpayers. “That’s the new world,” he said.
The pitfalls of an electronic environment is that a computer that’s cross-checking a company’s information may mean that the taxpayer loses out on developing relationships with tax officers and thus being able to deal with tax issues that arise.
“If you’re a large company, they find an error and automatically they’re sending you an email or text message saying pay $120 million in 130 days,” Nobre said. “And that’s happening to everybody, small companies, large companies, mid-sized companies.”
Rather than being a burden, new documentation requirements, combined with new data analytics and artificial intelligence, could help companies better manage information, according to Isabel Verlinden, a global transfer pricing leader at Brussels PricewaterhouseCoopers.
“We have informational benchmarking, legal entity data, all sorts of information, and they’re buried in spreadsheets all over the place,” she said, speaking at a different panel at the IFA Congress. “Maybe by the use of data analytics in a more efficient way, we can think about bringing those together in a more dynamic way.”New OECD documentation requirements, including master file and country-by-country reports, could be an opportunity for firms and companies to streamline their information-gathering operations, and even use artificial intelligence.“You might think this is very scary,” Verlinden said. “Now we’re going to talk about machines using human intelligence, and learning to write and code software. This is what we are already doing. This is what we are helping our clients with.”
Natalia Quinones, a partner with Quinones Crus Abogados in Colombia, said the idea of using artificial intelligence in tax planning and compliance indicated a wide gulf between taxpayers and tax administrations in the developing world.“We have on the one side a multinational with data mining and very thorough value chain analysis, and then on the other side we have a tax administration with probably just one person in charge of transfer pricing, and this person will probably not speak English,” Quinones said on the same panel as Verlinden. “What I think we’re reaching is not just an asymmetry of information, but also an asymmetry in technology, in personnel and in capacity.”
But according to Nobre, other Latin American countries are already ahead of Colombia in developing robot helpers on tax.
“The tax authorities in Brazil are way ahead of any of the Big Four,” Nobre said. “Way, way ahead.”
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