Two fundamental assumptions will underlie most of what is written and discussed about tax management in the coming years. One is that the world inhabited by tax and accounting professionals is becoming more “complex.” The second is that tax professionals need to embrace new technologies to meet this growing complexity head on.
There is plenty of truth to this complexity/technology trope, but it tends to be obscured by a lack of understanding about the nature of complexity and the role technology plays in both creating and solving the problems of twenty-first-century taxation. As with most things involving technology, the situation facing tax professionals is really much more complicated than most people realize, even those who live it every day of their working lives.
Let’s start with the tax code itself. When decrying the complexity of the U.S. Internal Revenue Code (IRC), pundits often note that the IRC has bloated to more than 4,000 pages—the result, primarily, of lawmakers using the tax code as a mutual punching bag for public policy. Indeed, according to the nonprofit Tax Foundation, Americans will collectively spend more than eight billion hours dealing with their taxes just this year, hours that will amount to more than $300 billion in lost productivity. But the IRC’s hefty page count is not the only culprit. For tax professionals, the difficulty of digesting the IRC is compounded by the more than 400 updates and changes the tax code receives every year and the confusion such a Band-Aid approach to tax policy inevitably causes.
Constant tweaking of the tax code introduces uncertainty and unpredictability into an already mystifying equation, resulting in errors of omission, awareness, interpretation, and computation. The irony of course is that many of these changes and addendums are made in the interest of “simplifying” the tax code. The 2017 Tax Cuts and Jobs Act (TCJA) was in fact billed, by its proponents, as a necessary overhaul of a needlessly complex system. Although the TCJA did simplify the process for many individual taxpayers by raising the standard deduction, corporations—especially multinationals—have had a somewhat different experience.
The Complexity Trap
For multinationals, complexity comes in the form of ever-changing regulations, stricter compliance and reporting requirements, more data-intensive processes, and a host of other factors, including a global push for something close to real-time taxation of various business transactions. Multinationals must also work within and around the tax frameworks established by the countries in which they do business. This means that those who work in multinational tax departments are often vexed by countries with inconsistent or incomprehensible tax frameworks, capricious auditors, and unreliable actors with whom they must necessarily try to communicate.
The economic consequences of an increasingly byzantine global tax framework are significant. In 2017, the Vienna University of Economics and Business studied drivers of tax complexity in 108 countries and found that “details and changes of tax regulations” were the two primary sources of tax complexity worldwide. According to the study, “Complex tax laws, regulatory uncertainty, and the costs of complying with those laws place corporations in such environments at a competitive disadvantage and could force them to move to other countries with less complex tax laws in the future.” Citing conclusions similar to those recently voiced by the Organisation of Economic Co-operation and Development (OECD), the study warned that “complexity and uncertainty need to be reduced to foster investment and economic growth.”
If only things were that simple. To wit, the study also noted, “To reduce compliance costs, governments have already introduced several simplification measures in the past, ranging from flat tax rates to simplified tax returns. However, instead of reducing tax complexity, these measures often led to even more complexity.”
Technology to the Rescue?
Now, technology is often touted as the solution to many of these pressures and problems. And to be sure, today’s most onerous tax obligations could not be met without the aid of superior technology. But in some cases, the technological “solution” also has a hand in creating the problem it is intended to solve.
Consider the push for real-time reporting. The very idea of real-time tax reporting would not be possible without sophisticated computers, software, integrated networks, and the technological game-changer that is blockchain. But once a feat like real-time reporting becomes technically possible, it can rather quickly go from an interesting concept to a binding legal requirement, without much time to breathe in between. Indeed, because almost all businesses now have an immediate electronic record of every transaction, governments all over the world are changing their filing practices to insist that they too receive that information, more or less immediately, along with the tax revenue that goes with it.
The inevitable consequence of this compression in reporting timelines is an almost symbiotic relationship between business and government financial systems as well as heightened expectations about what information can and should be shared among them. The European Union’s Standard Audit File for Tax (SAF-T) standard is a prime example of this phenomenon. SAF-T requires businesses to share a remarkable amount of transactional data with EU tax authorities, including (but by no means limited to) general ledgers, accounts payable, vendor data, payment ledgers, vendor invoices, and inventory master files.
In the United States, the Internal Revenue Service has long pushed for a similar integration and acceleration of tax reporting and collection. And the infamous Wayfair ruling has virtually every merchant in the land looking for an easier—preferably automatic—way to keep track of sales transactions in individual states. Given the possibilities of modern cloud-based sales tax automation, state governments are also understandably keen to shorten the turnaround time between an online vendor’s collection of sales tax and its payment to the relevant government body.
There is nothing necessarily wrong with these developments. In fact, good intentions drive most such advancements—to simplify the tax process for individuals and businesses, reduce error and fraud, and provide governments with more accurate, timely data. Then again, the road to hell may well be paved with cautionary tales about grand technical experiments gone tragically awry, so at least some skepticism is warranted.
On a more prosaic note, as technology continues to gift us with amazing new capabilities—to do more with less, as it were—it’s also worth remembering that once the magic wears off and these new capabilities become routine, what primarily ends up changing for tax personnel are expectations about what can and should be accomplished in a given time frame. After all, the invention of the vacuum cleaner and the washing machine did not eradicate housework; they simply made more time available for other chores.
The Silver Lining
Going forward, tax professionals everywhere will ride the technological juggernaut whether they want to or not. Furthermore, the relative complexity of the tax function will continue to escalate as more data accumulates, more powerful tools to manage and analyze it become available, and expectations about what can and should be done with all that data continue to soar.
If there is a silver lining in all this, it’s that complexity is a form of job security for tax professionals. Indeed, after all the routine processes are automated and the low-hanging fruit is sufficiently plucked, what’s left is the hard and satisfying work of making order out of chaos—of using one’s tools and training to guide clients and companies through the tumult of the technological wonderland we all now inhabit.
There’s nothing simple about the task ahead. But that’s OK, because the most rewarding challenges also tend to be the most difficult.
Tad Simons is a technology journalist who writes about enterprise management and workflow for the Thomson Reuters Thought Leadership team.