I have been working with a tax authority on developing some scenarios that were translated into a transformation roadmap with the objective of increasing tax and non-tax revenue.
One of the challenges is to predict active debt management before arrears occur. The idea is using advanced analytics by modelling the risk that company will fail to pay their taxes, by creating clusters of potentially high-risk debtors, based on available information regarding the annual, quarterly and monthly returns filling. One of challenges that exists in this approach, despite being proven that is more effective that discover “after the fact” the existence of a tax debt, is by the constant change in business models, companies makes new investments or shift to new business models that drags quickly the company to a position it cannot comply with its tax payment obligations.
Know Your Customer (KYC), is an approach that is being used, mostly in financial institutions, in terms of opening a bank account, require trading operations or process payments. Some banks are enhancing the concept of KYC to a point that they rely on information that is not related with transactions between the customer and the bank. As I pointed in this previous post, about creating a Banking Platform as a Service, that goes beyond on implementing a new IT capability that can spark new business opportunities and expand the traditional bank value chain, banks today can have a very precise view of a profile of an individual or enterprise. In some KYC scenarios and because of the magnifying effect of such profile. As an example, if you are an individual, instead of asking what was the brand of your first car, they will start asking questions on which part of the globe you were 2 months ago, where you stayed, what brands did you spend money with and what kind of affiliation you have with a 3rd party loyalty program or even if you have contracted loans with other institutions and which under what circumstances such loans were requested.
From a government perspective, using a shared and expanded Know Your Tax Payer (KYTP) is a valuable approach not only to prevent tax arrears or unrecoverable tax debt, as well as uncover misreporting and non-compliance related with the structure of income flows or unreported income or even claiming subsidies or tax deductions regardless of the source. Despite there is a convergence of government data interchange effort, as well as, trying to overcome some legal constraints in terms of sharing tax information across multiple government agencies that own the responsibility of collecting different non-tax revenue sources, it is still clear that there are missed opportunities in terms of securing tax collection.
One of the events that is being used to detect failure on future tax payment, is when is flagged by bank that a customer is missing payments regarding a loan or its ratting was put with a negative outlook. That event can be used by the government agency to start working with the individual or enterprise in order that will not exist missed tax revenue. The Know Your Tax Payer (KYTP), can be also used by all the entities that feed knowledge base, e.g. other banks that belong to the system (Telecom’s, Utilities, Insurance Companies) will also be alerted by a missed loan payment contributing to decrease their risk exposure, when debt carousel schemes are implemented. There are other scenarios that such an approach can also be beneficial, not only related with tax compliance. In terms of investment programs, related with shared responsibilities on entitlement of government funds, which access is granted by a government subsidy, as well as, by banks, even under a syndicated loan approach, using a KYTP will contribute access to grants or subsidies to entities that deserves such access and in better terms and change tax payer behavior.