by Frantisek Imrecze*
The primary objective of a tax system is to raise revenues to finance public spending most efficiently. The design of tax systems plays an important role in supporting economic growth and ensuring social fairness, as it affects the behaviour of citizens who can be workers, investors, savers, consumers and taxpayers at the same time.
Digitalisation challenges tax administrations in ways we did not necessarily see happening ten years ago. A World Economic Forum Report concluded that in 2018 71% of the global work was the product of the human labour force, with 29% by machines (AI). The report estimates a significant change in the next couple of years and estimates that by 2022, 48% of the work will be supported by artificial intelligence.
Meanwhile, despite more than 80% of businesses fulfilling their tax duties, a disconnect remains which digital could address. It goes without saying that the digitalisation of the tax system should be accompanied by other measures with the ultimate objectives to drive voluntary compliance, enhance the customer experience, reduce the costs of tax compliance and improve the efficiency of tax administration, notably in supporting legitimate businesses against unfair competitors.
Consistent with the willingness to create a well-functioning single market, Europeans have agreed to remove restrictions on the movement of goods and to abolish distortions of competition and measures of discrimination. This should also apply to taxation, not least as it is fundamental for competition.
When we talk about taxation, there is no doubt that we need harmonisation of definitions and principles to ensure fair competition and equal treatment of products across the EU. An example of this divergence is how European countries approach the definition of cryptocurrencies and how these assets are regulated. At the moment the likes of Estonia see them as currency, while France and Germany view them as financial assets convertible to currency, which puts them in different taxation categories.
Tax system needs to be fair and take into consideration the circumstances of each country, which means that tax rates should be left to the national governments to decide and adapt in line with their GDP and national purchase power with a certain level of flexibility. For governments to do this, there needs to clear principles in place for taxation which crosses borders and unites Europe. This is where smart tax comes in.
For a tax system to be smart, we need balanced, stable and predictable regulation at EU and national level. Just like citizens know when it is tax season, governments need to know when the state coffers will be replenished every month, quarter or year. This structure of predictability is a simple and efficient way for governments to plan and for businesses the opportunity to grow. Smart taxation also means fair treatment of all EU Member States. Price differentials for consumers goods are normal because they represent the varying income levels and cost of living across the EU. For example, in the context of excise duties the affordability of tobacco products is what matters when one considers the drivers of the illicit tobacco trade.
All of this represents a real challenge for national tax legislators that have to adapt as quickly as possible to economic changes, whilst considering future innovations, even if these are becoming more and more unpredictable. Tax certainty has a great impact on business decisions, in the absence of which, modified business structures, increased costs, and changes to investment decisions could arise. Businesses are looking for more certainty and simpler and straight forward regulation in this rapidly changing economic environment. A response from policy makers with a smart approach to taxation is needed to allow businesses to grow, be competitive and comply in an easy way. The relationship between the taxpayer and the tax administration in this globally changing economy is of an increasing importance to create the conditions to ensure tax models are fair, efficient and sustainable.
*Executive Secretary at the Intra-European Organisation of Tax Administrations
**first published in: www.euractiv.com