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The spotlight is on data. As countries move toward post-pandemic recovery, they will prioritise compliance and recouping revenue. But to achieve that, they need to collect high-quality data and have powerful analytics capabilities to analyse it, and lastly, to make use of collected data. Tax authorities must follow the key AEOI trends in 2022.
COVID-19 continued to impact the world in 2021, hampering economic, social, and regulatory growth. For many, this meant turning to public spending to pay for the necessary emergency measures. Now, we are moving towards living along with the virus – the new normal – and restarting processes that were previously put on hold.
Tax authorities are increasingly under pressure to meet gaping holes in public spending, and many are reluctant to resort to an increase in taxes – as they are unpopular and could hinder economic recovery. An effective solution is cracking down on compliance by increasing tax transparency.
The automatic exchange of information (AEOI) is a standard that administrations can leverage. They can combat the illicit flows of money and strengthen their compliance framework. There are four key trends that tax authorities should be aware of in 2022 to ensure they keep up to date with the latest on AEOI.
Tax administrations must be able to process data and have the right systems to meet the next frontier in data standards. It is essential to have efficient data collection and transfer frameworks, as authorities will need to interpret that data quickly.
AEOI will push for data matching, sorting, visualising, and analysing – allowing authorities to get a better insight into taxpayer behaviour and a more immediate view of tax information. This requires having sufficient data points and higher quality data.
Technological developments in software solutions give authorities further market intelligence and allow them to make faster and more informed strategic decisions. They must ensure they have the right data foundations so that they can build on this technology in the future.
Meeting transparency standards requires considering future changes and updates. Information requirements will only become more demanding as the scope broadens, and the speed of exchanges accelerates.
The OECD is already signalling its goals in this area as it expands its Common Transmission System (CTS) to facilitate exchange of information on income derived through digital platforms. In the past, this information was exchanged manually via post or email, but this carries several risks and inefficiencies.
CTS 2.0 went live in February 2021 and allows for countries to send unstructured files such as information requests. The OECD has provided a detailed manual on how to do this but as it is new, not many jurisdictions have used it.
The push for digitalisation only continues to gain speed and has been accelerated by the pandemic.
While individual administrations must improve internal structures to improve transparency, they need to remember that AEOI is ultimately collaborative. The standard requires efficient communication on several levels.
Tax authorities must work with industry stakeholders, domestic regulatory partners, and partner jurisdictions to facilitate AEOI compliance. Having a streamlined communication strategy with reporting entities is mutually beneficial - the better the reporting the more it will help find the most common mistakes so authorities can easily avoid them.
This can also raise areas of concern for stakeholders and allow the relevant authority to provide additional guidance. Some authorities have successfully engaged different parts of the process by forming steering groups or committees that include all organisations involved, spreading the responsibility and control of AEOI.
The digital economy came under scrutiny very quickly during the pandemic. While brick and mortar companies suffered from lockdowns and travel restrictions, digital companies leveraged the increased digital usage.
This meant countries began to scrutinise these cross-border activities that they felt derived value within their borders. However, without existing frameworks to capture and tax these business models, some turned to digital services taxes (DSTs) – which are difficult to comply with and create disagreements on taxing rights.
The OECD has moved closer to a solution in principle, but many practical challenges remain. The measures – known as Pillar One and Pillar Two - seek to overhaul global tax rules by 2023, including revising transfer pricing rules for the reallocation of profit to market jurisdictions and setting a global minimum corporate income tax.
AEOI has a role to play in capturing the digital economy, as countries will seek to have more oversight on cross-border activities. Tax authorities must be able to keep up with the speed and breadth of these digital economy companies to ensure they are filing accurate returns and paying the correct amount of tax.
Any developments in the taxation of the digital economy will have implications for AEOI, and vice versa.
The renewed focus on transparency and data will only continue to grow in 2022. The future requires leveraging data, keeping up with digitalisation, collaborating with more stakeholders, and managing the digital economy. A daunting task for any tax authority.
Administrations should consider all their options to ensure they are meeting targets. This means keeping up with changes but also ensuring that their compliance systems are robust, flexible, and scalable. Investing in the right technology now will future-proof revenue collection and transparency.
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