Tax authorities looking to meet automatic exchange of information (AEOI) commitments need to implement new systems. The crucial question is whether to build a framework internally or buy a ready-made solution. Both have key points of which to be aware.
The Organisation for Economic Cooperation and Development (OECD)’s Common Reporting Standard (CRS) requires the sending of taxpayer financial account information. The overarching objective is to promote transparency as a tool to combat illicit financial flows and tax evasion. For tax authorities around the world, this means they need a technical solution to meet complex requirements.
Tax administrations in developing countries—where the tax authorities are already stretching their resources and are finding it difficult to mobilise resources—face two main paths. They must decide between building an AEOI structure from scratch or buying a ready-made tailored solution. The key considerations to be taken into account when making this decision are set out below.
First, the level of both capital and human Investment is one of the key elements to consider. Many organisations underestimate the level of investment and internal expertise required to build a bespoke system that will meet all the current and future global tax exchange requirements be they from the OECD, EU or others.
Often, the perceived key benefit of an in-house system is that it can be built to the specific wishes of the organisation, using existing knowledge to meet new and changing standards. However, in practice, this is has been shown as being both difficult to achieve and, even more so to maintain.
As with any solution built from scratch, the initial time resource spent on developing an internal solution must be seriously considered. Custom development requires considerable planning, design, testing and in the case of AEOI, time to gain a deep understanding of the standards, specifications, and OECD guidelines.
An out-of-the-box solution draws on specialist knowledge and experience, meeting the complexity of the requirement based on international guidelines.
Furthermore, purchasing a solution does not mean that they are given a one-size-fits-all project. The solution is tailored specifically to the needs of the tax authority to ensure compliance with these standards.
Most importantly, a Commercial off-the-Shelf (COTS) solution as supplied by a third-party vendor can be competitively priced, with fixed cost options available for 5-10 years and can be implemented in a total of 6-12 weeks from project kick-off to solution go-live. This ensures that budgets and timeframes can be much more accurately forecasted.
Having technical know-how is a key factor in the build or buy decision. While on the surface AEOI seems like a simple concept, fully understanding what tax authorities need to do from a regulatory and technical perspective is much easier said than done.
Tax administrations should consider whether they already have the right skills and expertise available, or whether they have the time to train and upskill their teams to build and implement a project from beginning to end. Additionally, it is hard to put a price on a team’s time, particularly if the knowledge and skill gap is unknown.
Further, the different exchange standards, like FATCA, CbC Reporting, CRS have different requirements, and the personnel must deeply understand the specifications, standards, and guidelines as well as having the right experience with creating requirements and system specifications. This involves the challenge of designing and building information systems that meet AEOI standards.
In contrast, implementing a third-party vendor solution means that years of expertise is included in the service. Software providers dedicate extensive resources to the analysis and research of all guidelines and updates. Furthermore, through close work with the OECD and experience from providing solutions to other tax authorities, software providers have often built unique subject matter expertise in this area.
This means that the time commitments are reduced and can be precisely assessed. While it is best practice that the tax authority appoints an internal project manager for the duration of the implementation, other involvement is minimal. Therefore, resources are required for no more than two days to complete technology testing and the total project duration can be just three weeks.
One other factor to think about is future changes and updates to AEOI standards. As combatting tax evasion and improving tax transparency gains momentum on the global agenda, we are seeing an increasing number of exchange requirements. These include the recently agreed DAC 7 regarding exchanges of platform sellers amongst EU member countries and the talk of a standard requiring exchanges of beneficial ownership information.
Tax authorities in developing countries must foresee that internal and global tax environments will continue to evolve, requiring a future view of how the system will react with broader and deeper obligations. Similarly, administrations must accept that taxpayers will have different levels of sophistication and consequently require varying levels of support during filing.
Buying an off-the-shelf product comes with the ability to develop it further and with the right expertise on hand, is always ensuring that tax authorities keep on top of changes. Using the learnings from other organisations also ensures a future-proof solution.
Software providers develop these systems to ensure they collect and validate data from tens of thousands of taxpayers with no service interruptions during peak filing periods. They also provide a manual data entry option. This embeds all the required validation rules that guarantee the creation of data in the right format for transmission to partner jurisdictions.
With the ever-growing threat of cybersecurity risks, tax authorities also need to weigh up the consequences of possible data breaches. Building systems in-house require strenuous trials, testing and must be proven to be extremely secure.
The taxpayer data collected and ultimately transmitted to partner jurisdictions is sensitive, and a security breach of any kind would be highly damaging. Software providers work diligently to ensure data protection is of the highest quality. Over the last 17 years, and implemented in over 30 governments globally, our RegTech solution has never suffered a security breach.
Buying a solution ensures that the software regularly passes security and penetration tests conducted by some of the strictest regulators and tax authorities around the world. For example, in this regard, we work with organisations such as QinetiQ, which is trusted by the UK’s Ministry of Defence. Further, in the course of implementing our AEOI solution, many tax authorities have conducted their own penetration testing with very high thresholds and the solution has successfully passed each of these.
With similar considerations to future-proofing solutions, tax authorities in developing economies must ask themselves whether they have the resources to ensure that their systems can be maintained and developed.
Understanding whether systems can react quickly to updates on all aspects of AEOI standards is key. Resources must extend and develop the system when the specifications, standards and user guides are changed by external organisations.
When supporting an internally built system, employees can affect the quality of support available to the solution as the original team familiar with the bespoke solution may have moved on.
Additionally, solutions should aim to keep up with the best practice in place in other tax authorities and constantly be improved to enhance the end-user experience for taxpayers to facilitate and encourage compliance.
Software providers maintain an active support desk to respond and react rapidly to any service issues that occur. Furthermore, all changes are incorporated into the solution and subsequently delivered to tax authorities as an upgrade under their Support and Maintenance contracts at no extra cost.
The ready-made solution also benefits from the experiences of other administrations using the same product, which helps ensure a stable and field-tested system. Further development of the solution is carried out by all the users together with the provider, reducing development costs and increasing opportunities for helpful improvements.
Nigeria’s tax authority, the Federal Inland Revenue Service (FIRS), partnered with our AEOI Solutions to upgrade the reporting system and ensure compliance with AEOI, allowing us to play a pivotal role in delivering the necessary technology.
‘’We selected [them] AEOI due to their expertise, not just in the area of IT, but also in international taxation obligations, as well as their prior experience of working with African government authorities,’’ says Femi Edgal, Deputy Director and Head of the Exchange of Information at FIRS.
FIRS fully implemented the AEOI platform to fulfil its commitments set out under the OECD’s CRS regulation. This resulted in financial institutions filing their first annual returns for AEOI-CRS in Nigeria in September 2020.
The Nigeria project was delivered fully remotely, making it the second after Oman, showing that even with physical and travel restrictions in place, we support tax authorities with developing their tax transparency plans.
“Despite the obvious challenges posed by the pandemic and the new world we now operate in, thanks to the excellent cooperation on both sides, we are delighted to see the project reach ‘go-live’,’’ adds Edgal.
A ready-made solution meets all necessary internal and external requirements for tax authorities by combining technical expertise, strong technological implementation and guaranteeing a successful project from time and financial investment.