Ksenija Cipek has worked for 24 years for the Ministry of Finance, Tax Administration of the Republic of Croatia. She is a highly respected and recognized international tax expert who has been heavily involved in lawmaking and was responsible for many tax reforms in Croatia. As a Project Leader, she established the Compliance Risk Analysis System (CRMS) and provided an ideal solution for automatic VAT refund based on the Risk Analysis System in the Croatian Tax Administration (2016). She is currently involved as a Head of Risk Analysis in the future development of the CRM System, a connection of tax legislation and CRM System through risk analysis, especially in an analysis of solutions for applying new technologies such as Blockchain and Digital Distributed Ledger. She is Board Advisor of the European Network for Economic Cooperation and Development (EUCED A.E.I.E. – E.E.I.G), Member of the European Law Institute (2018), Contributor Member of the Blockchain Chamber of Commerce (USA), Member of a Government Blockchain Association (GBA), Member of the British Blockchain & Frontier Technologies Associations (UK), Lecturer at the Faculty of Law of the University of Zagreb – Department: Income Tax, Member of the Working Group 10 ‘Harmful Tax Practices‘, OECD, Member of the Project Group for Update CRM Guide and Outcome Measurement (FPG 083, 084) – EC, Member of the Project “General Audit Support” – GAS, Member of the Tax Advisory Committee (2017), Member of the Strategic Management Committee of the Tax Administration Modernization Project (2016), Member of Advisory Body for Compulsory Tax Rulings (2017), Member of the EU Council Working Group: Code of Conduct (CoC) and Common Consolidated Corporate Tax Base (CCCTB) – 2017, Project Manager “Transitional Instruments – New Applications of the Croatian Tax Administration Information System” (2017), Member of the Working Group in relation to projects for Tax Administration modernization (2015), Coordinator of Idea Solution and Regulatory Arrangement of a Special Pre-Filing Taxation Process (2014), Coordinator of Conceptual Solution and Regulatory Arrangement of the Unified Tax Form (JOPPD) 2013, and many others.
Q & A with Ksenija:
Q: Where do innovation and taxation intersect? What’s happening in this space?
A: We are living in a truly exciting time of digital evolution. In all parts of life, we see the development and impact of new technologies and digital innovations. This is certainly evident also in the field of taxation and finances. Interesting is that the paradigm between legislation and technology is shifting. The paradigm of legislation that we know is based on one principle: technology always follows legislation! Today, such a paradigm is no longer acceptable. We can imagine a tax policy that can have very good goals, but if it doesn’t follow technological development, a positive result can be totally omitted. Technology allows a range of tools that can have a positive impact on tax policy. If tax legislation follows the goals of simplicity, visibility, comprehensiveness, structuring, transparency, and availability, and affects the decrease of taxpayers’ administrative burden, the tax policy objectives will be positive. In most countries, efforts are being made and tools are provided for the utmost openness of tax and customs administration to taxpayers, which contribute to their voluntary tax compliance.
Take for example the electronic services provided by the tax and customs administration. Filing of prescribed forms and reports online is one of the tools. Entrepreneurial insights are also ensured in his tax or customs duties. The taxpayers’ rights are available on the official web pages of tax and customs administrations. These administrations send electronically to taxpayers information relevant to their lawful and timely tax compliance. Such a two-way approach between taxpayers and tax and customs administrations should necessarily be encouraged (as well as in other state and local bodies) in all legal issues other than those that can be reasonably justified as necessary for communication without using electronic services. Of course, it will require the amendment of a series of regulations in order to create a legal basis for the same. However, if we want to achieve the goals of tax policy that will stimulate the overall economic policy, that is necessary. In this way, savings are also made on the side of state institutions, which is very important. An expensive state administration is not an option. For example, until recently, the usual delivery of decisions and acceptance of complaints (either by state institutions or by taxpayers and citizens) was on paper. With the development of certified signatures, e-administrative offices, and digital archives, such action becomes legitimately questionable. In this way, state administration becomes faster and more efficient, and human errors are reduced to a minimum.
Obviously, a variety of tools available and the latest developments, such as the use of Blockchain technology and other technologies as Distributed Ledger Technology (DLT), machine learning, and even artificial intelligence, leads to changes in the existing paradigm. Can technology development be stopped? No, the world goes further, as was in our history. Should this development be stopped at all? Of course not. The development of new technologies allows and will further enable the achievement of goals that have long been the goals of any state administration whose primary purpose is to serve its citizens in the fulfillment of their obligations and the exercise of their rights.
Q: What is appealing or concerning from a governmental standpoint about new technologies in taxation?
A: Over the last 10 years, tremendous progress has been made in gathering, organizing, storing, and managing global data. As a result, activities that used to require a lot of time now take just a few minutes. These transformations are a consequence of technological advances that allow tax administrations to understand, analyze, and act upon information available to them. Many tax administrations already use the wealth of information they have in order to better understand their taxpayers and occurrences that appear to improve their efficiency and operational efficiency, provide better services to taxpayers, achieve better results with existing or fewer resources, and direct their attention to the riskiest taxpayers, etc. In this way, not only does the tax administration realize cost savings, but also taxpayers express greater satisfaction with the work of the tax administration as a whole. This is because, in addition to receiving better service or assistance in meeting their tax obligations, compliant taxpayers feel no more pressure and repression due to frequent oversight. They place greater trust in tax administration because attention is focused on those who really avoid tax payments, thereby allowing healthy competition and achieving fairness in taxation.
Additionally, advanced analytics allows tax administrations to more quickly and accurately identify taxpayers who use fraud or evasion schemes, which can also deter other taxpayers from using those schemes. This, in turn, increases the number of taxpayers who will voluntarily meet their tax obligations.
On the other side, the new business model, as sharing economy, collaborative economy, the gig economy, and economy of cooperation, make new challenges for tax administrations. The increase in voluntary tax compliance as their antipode has a reduction in tax evasion and tax fraud. Although the European Union has been focused for several years on fighting against aggressive tax planning linked to cross-border business (mainly by large multinationals), many countries – particularly small countries like Croatia – face a special form of tax evasion: failing to accurately report revenue, and overstating costs and expenses through fraudulent invoices. These challenges are more pronounced in economies that are highly dependent on cash transactions, as well as in economies with well-developed digital platforms that allow commerce to occur online through businesses that are not registered in the country where profits are generated, and countries making wide use of barter or the sharing economy.
In 2017, the OECD issued a report titled “Technology Tools to Tackle Tax Evasion and Tax Fraud” based on 21 countries’ experiences in using cost-effective technological solutions for the prevention and detection of tax evasion and tax fraud, particularly in the field of cash transaction and sharing economics. The report emphasizes the key successes in using these technologies, identifying not only countries experiencing a significant increase in tax revenues, but also discussing the consequences of the overall increase in taxpayer compliance. Avoiding to report all financial transactions is no longer related to the simple non-registration of an individual cash transaction, but taxpayers are increasingly using sophisticated methods involving technological solutions, such as using cashiers in demo mode or deleting a transaction after the invoice has already been issued. The research has shown that taxpayers mostly use two tools: “phantomware” and “zappers.” Both tools allow the user to delete individual sales records thus reducing total reported sales. Because of their hidden nature, it is hard to get rid of these tools, particularly because the cash registers seem to work normally. These models are specific in the application of so-called “Fiscal pits” or electronic fiscal cash registers, which individual countries use, and at the end of the day, supply sales tax information. But when data is sent to the tax authorities in real-time, these tools do not work.
Q: Is there any evidence of impact on what innovations in this space has accomplished so far in Croatia?
A: Croatia is one of the countries that began several years ago (in 2013, to be precise) to use the technological tools it was trying to introduce in the retail segment, i.e. cash paid transactions. This is a project on the fiscalization of cash payments, the way of tracking transactions between taxpayers in real-time. Also, in 2016. Croatia has finished one of the largest projects in the Croatian Tax Administration named Compliance Risk Management System. Compliance Risk Management System (CRMS) is a tool that without any modern tax administration cannot be effective. The manual work of tax officials and auditors is no longer acceptable, considering that taxpayers’ business activities are increasingly taking place in a virtual space, through rapid transactions. The standard procedures of officials and auditors are increasingly becoming a thing of the past because they cannot cope with the changes that have occurred. However, new technologies and solutions, if they are recognized and implemented in tax administration on time, allow the development of new tax procedures and tools that will be compatible with the new age.
The benefits of CRM System: classification of taxpayers in predefined risk categories, based on their behaviour, enables mass-based detection of types of risky behavior, increases taxpayers’ trust in tax administration, increases compliance with tax laws, establishes uniform procedures in tax administration, focuses on risky taxpayers, automatic VAT refund, optimization of audit capacity to the riskiest taxpayers, prevention, and detection of internal risks, etc.
Data Warehouse (DWH) is the basis of CRMS. Data quality plays a crucial role in the success of a DWH, and CRMS. Tax administration should not forget that all data is collected for a specific purpose. Solely collecting and storing data for no specific purpose is not acceptable for a number of reasons. Tax administrations, for taxation purposes, must collect data from other institutions, if those institutions have such data. It is not acceptable to request data from taxpayers (administrative burden and costs!) if the data is available in the institutions, and to do so requires online connection of institutions. CRM System becomes a base of tax audit plans. Tax control plans are increasingly adapted to new business models and must be flexible in preventing tax fraud. CRM System enables the identification of the riskiest taxpayers and, for which, in most cases, tax control is required. For example, Croatian CRM System recognizes the riskiest taxpayers by the risks that are triggered in complex composite models by tax type. Risks from different composite models can compare data with one another. In this way, the system creates a “big picture” of the riskiness of each taxpayer and selects the taxpayers who, in that case, have the intended measure of a tax audit. The system, therefore, makes the choice of taxpayers for audit very transparent, because it treats taxpayers the same way. The selection of taxpayers for oversight is no longer limited to the auditor’s exclusive plan or their selection. Of course, this does not exclude the possibility for tax auditors to initiate tax audits according to the information at their disposal, but not located in the data warehouse, however, such cases are a very rare exception. The system, therefore, makes the choice of taxpayers for audit very transparent, because it treats taxpayers the same way. Auditors using the CRM System can perform audits very effectively given that they are aware of the risks that are triggered. Oversight becomes targeted precisely at risky tax areas. Also, CRM System has made possible automatic VAT refunds, without any manual work, to the compliant taxpayers.
Also, the General Audit Support project (GAS) has finished 2019 and is in the testing phase, and we expect that very soon it is fully applying. It is an operational system that will assure uniform approach in tax matters, tools for support not only in auditor work but also the work of tax officials in local tax offices and office for large taxpayers. Now we are focusing on the project of predictive analytics, which is in a high stage of implementation.
Q: Where do you want to grow in this space? Where do you see innovation headed that will solve current tax issues?
A: About new business models, tax administrations have started activities in this area to reduce tax evasion through technological antitrust and regulatory and legislative frameworks. International co-operation may be of help in this area, especially because online platforms are located outside the country where its users live. The advantage of digitalization, especially in the P2P transaction area, is that even before digitalization of any kind of transaction, these were not new jobs created by digitalization or these new business models, but before the bid and demand were mostly merged through oral recommendation, familiarity, physical market or social advertising, or networking. In most cases, in fact, it took place in the form of a gray economy, which made it difficult for tax authorities to discover and monitor.
Digitalization has created an advantage for tax administrations, namely making customer and server data available online, creating a new potential source of information for tax administrations to monitor and estimate taxable bases that were previously unregistered. Encouraging economic activity and ensuring appropriate tax treatment, however, requires tax administrations to take into account the impact of administrative burdens on online platform users. This has already been recognized in many countries, and simplified tax regimes or special tax incentives for micro, small, and, medium-sized enterprises, and for individuals who are not primarily engaged in the main business but are being implemented in order to move them out of the gray economy and encourage voluntary tax compliance. It is necessary to assure, however, that applying the same rules for all does not reduce the competitiveness of those who still conduct business in traditional ways, compared to those who do business digitally. Therefore, it may be helpful to adopt provisional measures to attract taxpayers who are just starting their business in the economy of sharing or the gig economy, considering that it may be new taxpayers who are not familiar with the tax regime but may not, in the long term, become competitive with traditional business that provides the same or similar services.
What could also be helpful in this area is for tax administration to receive data from the platform itself. This could, on the one hand, increase the voluntary reporting of receipts (since taxpayers would know that the tax administration would receive that data later) and, on the other hand, enable tax administrations to carry out the taxation procedure themselves and automatically fill in the tax returns, sending the taxpayers just a bill for the tax due. Also, in the platform where the payment is made or where the payment platform is in the billing service, the obligation to calculate and pay a deduction tax for the platform itself can also be applied. However, such measures would not be so effective when the platforms are located in another jurisdiction, where the tax administration must rely on the exchange of information with the competent tax authority in that jurisdiction (often a time-consuming process).
Maybe it is time to start thinking of direct access to the data between countries. Certainly, for our common goal to stop tax fraud, that should be a faster and easier way.
Also, many advantages for tax administrations are in the field of Blockchain technology and DLT. The characteristics of these technologies could be useful for tax authorities, especially real-time information, immutable data, etc. The use of smart contracts becomes necessary and important. Many tax administrations are analyzing and testing these new technologies, and, from my point of view, that is the future.
My opinion is that countries should start to analyze the potential of paying taxes by coin, and not only for VAT purposes, for all taxes (hypothetical TAXCoin). Whether and when such a solution will actually be implemented will show in time and new studies will emerge that will take into account all the advantages and disadvantages of such a solution. However, tax administrations can be expected to act proactively in thinking, testing, and proposing new solutions in collaboration with academics, tax experts communities, Blockchain technology experts, and other stakeholders — most important of these are taxpayers. Because what do taxpayers expect? Efficient, fast, and inexpensive tax administration, as little as is only necessary administrative burden and as little administrative costs as possible for quality administrative services. These goals, with the optimal use of tax audit resources through the development of a quality risk analysis system, the promotion of compliance, and prevention instead of repression, will open the way for tax administrations to act proactively and target their new development and structure.
Ksenija’s Networking Interests:
- Experts from the private sector, commerce, and academia that have information and research to share on tax systems
- Tax experts on improving systems
- New technology experts in the tax sector who focus on real-time data