Technology can help reduce tax fraud

On 25 May 2021, a public hearing was held at the European Parliament (Subcommittee on Taxation) on the following topic: “How can technology help reduce fraud and make tax compliance easier?”. Several experts spoke on the way forward regarding using technology to combat fraud and make tax compliance easier. Momchil Sabev, from the European Commission’s Taxud Directorate-General, outlined Brussels’ work to help national tax authorities share tax-relevant data more effectively. According to Mr Sabev, the sharing of data available to each Administration will be the key to the future, and technology plays an essential role in this.

Stefka Dzhumalieva, from the European Commission explained the work initiated in 2016 in using blockchain to facilitate tax compliance and combat fraud. Finally, Peter Green, from the OECD Forum on Tax Administration, presented the work published last December (Tax Administration 3.0) in which he advocates the use of technology to increase tax compliance among OECD countries. DG TAXUD is in convinced of the high potential of the technology and has been investing in the development of the capacity to use blockchain since 2017. To this end, a pilot project with eight Member States on a module of the so-called “System for Exchange of Excise Data” (SEED) was launched in 2019 to develop a solution to synchronise data automatically and transparently on the blockchain.

 

The potential of technology and the reduction of tax fraud

A similar pilot project is being prepared on a module of the VAT e-Commerce package, the so-called “One Stop Shop Import Data Register” (IOSS-DR) on the European Blockchain Services Infrastructure. Once completed, and if the European Blockchain Services Infrastructure evaluation is successful, Member States will have the possibility to synchronise the IOSS-DR data on a traditional database connection or on the alternative blockchain mechanism. It will no longer be a proof of concept or pilot but an operational service. Therefore, the long-term ambition is to use the European Blockchain service infrastructure as a platform for a new generation of trans-European (decentralised) systems. Peter Green went on to point out that in tax system areas where the responsibility for reporting taxable income lies with the taxpayer, the challenge for tax administrations is to improve voluntary compliance. This is where technology can make a difference in improving services for taxpayers, making it easier to comply with tax obligations and providing more real-time assistance. It can be very effective in reducing errors and minimising burdens. The significant increase in data sources – for example, through third party reporting, e-invoicing systems, online cash registers and international information exchange – together with increasingly sophisticated data analysis are also helping to improve risk assessment.

With that said, in more general terms and focusing on the issue of excise duties, applied to the consumption or use of certain products (EU legislation applies to alcoholic beverages, tobacco products and energy products), trade between Member States in excise goods is usually carried out under a duty suspension arrangement, with excise duties being paid at the end of the transactions by the Member State where the goods are traded. To send or receive goods under a duty suspension arrangement, both the sender and the consignee of the goods must be registered in the SEED database of their Member State.

 

The SEED-on-Europe service

Through the SEED-on-Europa (online System for the Exchange of Excise Data) service, businesses will be able to check via the internet the validity of the registration number of their trading partners in the other Member States and their products, without having to ask the national administrations. The Commission and the Member States have already planned to fully computerise the procedures for the movement of goods under customs suspension arrangements since 2009. Under the Excise Movement and Control System (EMCS), which has been developed in cooperation with businesses, the computerised system covers the validation, control and completion of formalities applicable to excise goods under duty suspension arrangements.

For these movements, the system provides for replacing the paper Administrative Accompanying Document (AAD) with an electronic message, thus enabling real-time control. Based on these brief indications alone, it is easy to see that this is the frontier to invest. And, for example, precisely on the subject of blockchain, Sogei is experimenting, on behalf of ADM, this technology on some useful use cases for systems of traceability of alcoholic beverages, thus exploiting the advantages of decentralisation, data encryption, non-rejection of transactions, etc..

In particular, the request for certification, the result of the certificate of conformity and the association of batches are recorded on the blockchain. The experimentation is also part of the perspective of using the new technologies not only for institutional controls but also for a profitable collaboration between the Administration and operators, as also hoped for by the European Parliament, in particular in the use of DLT (Distributed Ledger Technology) as one of the fundamental tools to move from a centralised management model to one distributed among all the actors of the commercial chain. Another frontier to invest in, concerning institutional controls, is the interoperability of databases. In recent years, the programme to innovate the information bases of the tax registry has moved along three lines:

(a) the process of integrating administrative databases, which has progressively made it possible to establish a dialogue between a plurality of information sources, to carry out increasingly complex economic and statistical analyses and to assess the effects of tax policies in a context characterised by increasingly interconnected phenomena;

b) the quantitative and qualitative strengthening of the capacity to respond to requests for statistical information through increasingly widespread dissemination of statistical data and online information based on three cornerstones: the relevance and timeliness of statistical information; continuous dialogue with institutions, research centres and citizens; the usability of open data through which users are allowed to process data and produce statistical information independently;

c) the impetus given to new infrastructural solutions for data analysis, which will be able to maximise the potential of the information assets of the databases.

The integration of large quantities of data from different information sources will make it possible to carry out analyses of varying complexity and use machine learning algorithms for predictive purposes. And in this direction, for example, the aforementioned ADM, at the forefront of this evolutionary process, can count on a truly significant amount of databases, including just as an example: ASI (Computerised Goods Samples Dispatch Management), AUDUM (Single Register of Customs and Monopolies), AEO (Status “authorised economic operator”) database, ANTI-FRAUD database, COGNOS (on operational flows), e-AD (electronic administrative document), e-DAS (simplified electronic administrative document), e-MVS (Excise Movement Control System), EMCS (movements and controls of excisable products), FALSTAFF (goods suspected of violating intellectual property rights), InDEx/Vies International Data Exchange/Vat Information, LIMS (Laboratory Information Management System), SEED (validation of Community information on excise duties), S.TRA.D.A. (EU electronic data exchange management system). (System for the management of electronic data exchange in the EU), A.E.S. (Automated Export System), Register of gambling accounts, European Tobacco Tracking System, etc. A ‘firepower’ to build the future.

*Giovambattista Palumbo, Director of the Eurispes Tax Policy Observatory

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