Introduction

Digitalization, new technologies and digital business models are now the major building blocks of our lives and economies. The health crisis of the COVID-19 pandemic highlighted our dependencies on these technologies, demonstrating their importance across entire industries to ensure business continuity.

Tax administrations and specialists are not immune to the digital shift. To them, digitalization is not just about tax but also modernization, and they are fully engaged in the long and involved process of digital transformation to embrace the challenges and opportunities ahead.

COVID-19—Wake up call and digital maturity magnifier

With change comes opportunity. Regardless of their nature, crises do not only deliver constraints, but also unequivocal advancements in technology, mindsets, financial trends and lifestyles.

Before the health crisis, the day-to-day activities of many tax professionals were still structured around their physical presence in the office, paper-based signatures, and an exhaustive manual document management approach. Almost overnight, they have had to seamlessly shift to virtual conferences; e-signatures, eSeals and electronic authentication services; and automated document management systems, all of which are pushing companies and governments to take an unprecedented digital leap.

Already well-advanced in other industries such as media, information and communications technology (ICT) and e-commerce, the health crisis has accelerated digital adoption across all sectors, driven by new-generation information technologies such as the internet of things (IoT), cloud computing, big data and data analytics, robotics, and machine learning, all of which create new tax opportunities. Whether it is robotic process automation, new tax technologies, or task automation for strategic decision-making, technology delivers the potential of improved services, better customer experience, and new digital products.

Further opportunities have arisen from the research and innovation activities that play an essential role in responding to the COVID-19 outbreak. They are key to boosting the transformation of socio-economic systems and building more sustainable production sectors. Public investment in research and innovation must be prioritized to capitalize on the wide range of small and medium-sized enterprises (SMEs) and start-ups offering technological solutions to achieve better economies of scale, improve operation efficiency, and facilitate new ways of working.

The European Commission’s fair and simple taxation recovery plan

In light of the recent isolation measures imposed by the health crisis, governments and the private sector alike are faced with an impending urgency to digitalize their operations and procedures to continue providing their services and products in an optimum manner. Consequently, tax professionals must integrate this new digital dimension into their practice to remain a knowledgeable, coherent and efficient partner for their clients.

The European Union (EU) is coordinating a common response to the COVID-19 outbreak to mitigate its socio-economic impacts and support national efforts to achieve recovery. In this context, the EU is setting up frameworks to create long-term sustainable financial ecosystems that will incentivize digital investments at national levels^[1].

The European Commission has adopted a dedicated pack of tax policies for a unified approach to administrative cooperation, tax transparency for digital platforms, and efficient tax governance to encourage fair taxation practices for digital goods and services. This 25-point action plan aims to make taxation fair, simple and in line with the current socio-economic and digital market requirements

.As part of the latest review of the Directive on administrative cooperation (DAC 7)^[2], particular attention is being given to the automatic exchange of information across Member States on revenue generated from digital activities (e.g., online sales of goods or services, online platforms, digital assets, etc.). This proposal strengthens the transparency rules that apply to all digital transactions to mitigate tax abuse.

This action plan will facilitate data access and usage, new technologies, and research and innovation resources for all EU Member States to improve compliance and reduce administrative burdens. To this end, the action plan forms part of the EU’s long-term strategy to support digitalization across all industries by creating a stable socio-economic landscape where taxation is well-regulated to ensure fair trading conditions for all players.

Therefore, technology remains one of the EU’s main points of attention, both as an enabler of operations and a tax policy topic. And, as a result, it automatically becomes a topic for tax professionals too.

Extensive national incentives for digital transformation

While there are significant discrepancies in the level of digital investments across Europe, major players such as the United Kingdom, Germany, France and Luxembourg have rapidly responded to the crisis by designing incentives to support digital investment in the private sector.

Germany has proved its dedication to improving its digital infrastructure to new levels. Their goal of building a powerful nationwide broadband network to support the upgrade to high-speed electronic communication networks has meant that Germany has one of the best broadband coverages in Europe^[3]. Despite the COVID-19 outbreak putting great pressure on its financial resources, Germany has committed to continuing digital investment by offering a series of incentive packages to digital companies.

With an annual spending budget for research and development and digital investments of EUR106 billion, Germany continues to promote innovation and foster the advancement of new technologies. In addition to the German government offering financial grants, loans, guarantees and equity capital to technology companies, since January 2020, companies may also claim tax credits of up to EUR500,000 per year for research and development^[4].

Likewise, since this year, France can boast competitive taxation for technology companies and innovative start-ups. Aiming to foster research and development investment across all industries, France has created programs for businesses to benefit from tax reliefs for research and development costs, enhanced depreciation measures and exemption from certain local taxation^[5].

Luxembourg’s high-performance computing capabilities, advanced cybersecurity expertise and robust financial incentive packages means it has the necessary infrastructure to support the growth of its digital sector. Access to funding is critical for businesses, researchers and start-ups looking to accelerate their activities. Luxembourg authorities have made grants for research and development activities, investments in digital assets and upgrading existing operations available to both the public and private sectors. Also, Luxembourg-based companies and private-sector research organizations can benefit from financial aid programs in the form of subsidies and tax reliefs that cover the costs related to research and development activities and innovative projects^[6].

With over EUR31 billion of funding available to its Member States, the EU is committed to supporting the digital transformation of public sector institutions and facilitating the digital upgrade of the private sector as well^[7].

Tax compliance: 100 percent automation as a target to reduce costs

The fast-developing technologies of artificial intelligence are now entering into the highly regulated field of tax compliance.

Aimed at reducing errors, tackling tax fraud, identifying credit fraud, predicting market trends and automating tasks, artificial intelligence and automation are gradually changing the way tax departments operate.

While authorities are using digital technologies to reduce the administrative burden of tax compliance, tax departments are looking into new technologies to improve the efficiencies of their operations and reduce operating costs to better capitalize on their tax professionals’ technical skills. To achieve full automation, a critical point that businesses must consider is the level of their professionals’ digital maturity and the continuous development of their digital capabilities. Digital upskilling is a journey, not a destination.

Artificial intelligence, machine learning and robotic process automation are some of the technical solutions that tax departments can use to automate tax-related processes, therefore facilitating the electronic filing of tax returns, reporting obligations, or the international exchange of information. Complete automation of tax processes means improved accuracy, efficiency and reliability of tax reporting and a significant reduction in running costs, allowing for increased investment in research and development and digital assets portfolio expansion. Without the administrative burden on their shoulders, tax professionals can concentrate on creating an excellent customer experience.

Tax advisory: Dashboard and predictive analytics to empower tax advisors

Data analytics have been in use since the mid-1990s; however, in tax, the use of data analytics in the day to day has only recently intensified.

As a field governed by intricate sets of data intertwined with complex regulatory frameworks, tax is the perfect sector for the application of advanced technologies^[10]. Artificial intelligence and machine learning are solutions to help tax professionals capitalize on the opportunities of big data.

While there may be questions around the upcoming risk of the redundancy of tax advisory, advanced technologies are contradicting these theories. By replacing the existing manual data processing methods with automatically generated curated reports, artificial intelligence boosts compliance security, detects tax fraud, and allows tax advisors to focus on value-adding tasks^[11]. Real-time data feeding dashboards support decision-making and enable predictive analytics that enhance tax advisors’ capabilities.

Blockchain, the building block of tomorrow’s interactions with public entities

Through the advantages of blockchain—security, efficiency and velocity—the public sector can upgrade their service offerings to unprecedented levels.

Globally, countries like Canada, Brazil, the United Arab Emirates, China and India are carrying out pilot tests for applying blockchain technology to public service provisions and setting up internal applications. Several federal agencies in the United States have deployed blockchain-based programs for voting, identity management, healthcare, company registration, inland revenue and general administrative services.

With more than US$1.4 billion private investments made in blockchain by the private sector since 2014, there is still great potential to be mined by public institutions employing blockchain technologies^[12]. Nonetheless, while there is widespread interest in adopting this type of technology, policymakers must keep up with this pace. For blockchain to become universally used, it is critical to have the right legal framework in place that supports the transactions and exchanges performed.

Blockchain is also a technology that aims to replace third parties in each transaction; therefore, lawyers and tax professionals will face an unprecedented threat to their core business.

Conclusion

For decades, technological advancements have been transforming industries. While tax has proven its resilience in embarking on this digital transformation, it is now critical for the industry to capitalize on the opportunities brought by technology. With growing competition and the ever-changing digital habits of customers, tax professionals are now facing the challenges and opportunities of the digital revolution. By having new digital tools at their side, tax professionals can provide better services than ever before, making their work more valuable and irreplaceable.

Tax Digital Factory at Deloitte Luxembourg

By embracing digital technologies, we created an inhouse Tax Digital Factory to better serve our clients and offer outward technological tools to support the application of FAIA, DAC 6 regulations and alternative investment fund reporting obligations, to name but a few.

We understand the challenges of change and have the experience and ability to assist you in your digital transformation. Do not hesitate to get in touch should you wish to learn more.

[1] Source: https://www.digitaleurope.org/resources/post-covid-recovery-plan-for-a-stronger-digital-europe/

[2] Source: https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1334

[3] Source: https://ec.europa.eu/digital-single-market/en/country-information-germany

[4] Source: https://www.gtai.de/resource/blob/63830/c3ca681faf8bcbe5a36cde95057bdc11/20200511_FF_Incentives_RZ_Web%20(2).pdf

[5] Source: https://www.impots.gouv.fr/portail/internationalenbusiness/tax-incentives

[6] Source: https://www.tradeandinvest.lu/invest-in-luxembourg/

[7] Source: https://ec.europa.eu/inea/en/news-events/newsroom/over-31-million-eur-eu-funding-available-to-further-develop-trans-european-digital#:~:text=Up%20to%20%E2%82%AC31.4%20million,benefits%20of%20citizens%20and%20businesses.

[8] Source: https://www.digital.govt.nz/digital-government/international-partnerships/the-digital-9/

[9] Source: https://e-estonia.com/

[10] Source: https://www.compact.nl/en/articles/data-analytics-applied-in-the-tax-practice/

[11] Source: https://www.reuters.com/article/sponsored/AI-and-the-future-of-the-tax-function

[12] Source: https://www2.deloitte.com/us/en/insights/industry/public-sector/understanding-basics-of-blockchain-in-government.html