A few minutes' walk from Red Square in Moscow stands a Soviet-era high security building housing Russia's Federal Tax Service. But inside, there is nothing Soviet about the technology on display.
Standing in front of a huge video wall, Mikhail Mishustin, head of the tax service, prepares to show off its capabilities. "Where did you stay last night?" he asks. When I reply, his staff zoom in on a map to Hotel Budapest on the screen. "Did you have a coffee?" His staff then click on the food and drink receipts in the hotel from the previous evening. "Look, it sold three cappuccinos, one espresso and a latte. One of those was yours," Mishustin declares triumphantly. He was right.
This is the future of tax administration — digital, real-time and with no tax returns. The authorities receive the receipts of every transaction in Russia, from St Petersburg to Vladivostok, within 90 seconds.
The information has exposed errors, evasion and fraud in the collection of its consumption tax, VAT, which has allowed the government to raise revenues more quickly than general Russian economic performance.
The new system is directed more at shopkeepers than oligarchs. Russia still scores poorly on international league tables of corruption, being ranked only 138 out of 180 on the Transparency International corruption perceptions index, with concerns including cronyism, a lack of independent media and a biased judiciary. But reducing tax evasion among ordinary Russians and highlighting corrupt tax officials have helped raise revenues and clean up the system.
It is just this sort of technology, says Pascal Saint-Amans, that promises to be a "game changer". Saint-Amans is the director of the Centre for Tax Policy and Administration at the OECD in Paris, he believes a lot of work is still needed to ensure digital information gathered by tax authorities remains secure and is not used to become "Big Brother and an oppressive state".
But there are, he says, huge advantages for tax authorities collecting online information to ensure money owed is actually paid. "We're talking hundreds of billions worldwide," he adds. Being able to track information "has always been the taxman's dream".
This optimism stands in stark contrast with the usual gloom that surrounds the collection of revenue needed to fund public services. At a time of ageing populations and growing demand for healthcare, pensions and social care, there are regular fears about the ease with which footloose tech giants have been able to shift profits around the world to avoid corporate taxes.
But in the world of tax administration there is more hope. Chris Sanger, who leads global tax consulting at EY, says: "The benefits of technology for tax authorities in indirect taxes [such as VAT] may well outweigh the problems it brings in the direct tax system [such as corporate taxes]".
With an overdependence on oil and gas revenues and serious concerns over evasion and corrupt officials, Russia's tax system was ripe for reform. Handpicked by President Vladimir Putin to run the Federal Tax Service, Mishustin was a technology specialist by background, not a policy expert, and chose to seek to improve revenues by adopting and refining the most cutting-edge systems around the world.
Normally economists and policymakers learn to do technology. Mishustin says, "We built the technology and are now becoming economists."
VAT was his first target. This tax has taken the world by storm since France introduced it in the 1950s. It is now levied in more than 165 countries accounting for more than 20 per cent of annual global tax revenue and raising more than US$3 trillion in advanced economies alone. VAT's two principal advantages are in the amount of revenue it can raise for governments and its perceived robustness to fraud compared with sales taxes such as those still levied in the US.
As it is collected along the supply chain, with companies able to claim a refund of tax they have paid on their inputs and charging it on their sales, it has an inbuilt self-enforcing element. All sides want proper documentation of their sales and purchases in case they are subject to a tax audit. In reality these happen rarely.
But there are two areas where VAT has been subject to significant fraud in most countries.
First, where some traders do not pay the tax they owe on their sales and then go missing, so the authorities lose the tax owed. Second, where retail customers collude with sellers to buy goods and services (generally services) without seeking a receipt and VAT is not charged at all to the final consumer.
The VAT tax gap between revenue due and revenue collected was about 20 per cent in Russia before its reforms, according to Mishustin, and in a mature economy such as the UK, HM Revenue & Customs estimated it at 9.1 per cent in 2017-18.
To address the leakage, Russia built two huge data centres and legislated so that companies had to submit every invoice between businesses. It also mandated every retailer to buy new cash registers that were linked securely and directly to the data centres.
In real time it can now check every invoice to ensure VAT refunds it pays are linked to invoices where companies have remitted the same money to the authorities. Then using artificial intelligence, it can quickly find patterns in the data and companies which have many broken links, allowing the authorities to target certain companies for a tax audit.
Since everything is linked, it can also spot tax officials with a low collection rate from the companies for which they are responsible.
The 20 per cent VAT gap has now fallen to 1 per cent and, as collection has become more efficient, receipts have soared. Between 2014 and 2018, the money collected from VAT rose 64 per cent, compared with a 21 per cent increase in nominal household consumption over the same period.
A few clicks after looking at my hotel coffee, the Russian system can show the sales and prices of all coffees sold across the country, or any other good or service. The system uses AI not just to identify retailers or restaurants that might be selling less than expected by using cash transactions off the books, but also reads receipts to give nationwide statistics.
"How do you measure inflation in the UK?" the tax commissioner booms. After hearing an explanation of how an army of people with clipboards fan out once a month across the UK checking prices for goods and services, he cries: "Bullshit! That's bullshit. We can see everything bought everywhere," says Mishustin, who is showing the system for the first time to an international media organisation.
The Russian authorities are seeking to extend technology-led tax collection into the informal economy, where low-income self-employed people — for instance childminders or workers in the gig economy — earn small sums that have rarely been scrutinised, even though these payments are subject to income tax. Those that sign up to a new smartphone app pay 4 per cent of turnover, deducted automatically from their bank account, on services.
Take-up so far this year has exceeded expectations since compliance guarantees the authorities will not chase people further for unpaid tax.
"Most people want to be clean," says Mishustin, who has now done deals with companies such as Uber and Airbnb to deduct payments directly via the app. "We want to be inserted into the national ecosystem of taxpayers and then not bother them further."
While Russia is at the cutting edge with its tax administration system, it is not the only country seeking to use real-time data to clamp down on fraud and tax evasion. Many others now link cash registers to their tax systems, especially where evasion was rife in the past.
Portugal, an early adopter, added an extra incentive for shoppers to pay VAT and ensure retailers did the same. If consumers add their personal tax number to an electronic receipt, the number is added into a monthly lottery for a substantial prize, such as a new car.
According to Rita de la Feria, professor of tax law at Leeds university, consumers in areas that have seen high VAT evasion, for example restaurants, can get a 15 per cent deduction on the VAT paid from their annual income tax assessment.
"It has changed the mentality and the way society views informality," she says. "Now in Portugal, retailers routinely ask you if you want to add your tax number on to any bill".
In many Nordic countries, Sanger says, the authorities have sufficient verified data that they can hand out pre-filled tax returns and ask individuals to simply approve them. Instead of outrage at the Big Brother state, "the challenge is getting people to bother to check".
The examples do not, however, resolve significant concerns over data protection and privacy. In Portugal, unlike in Russia, if people add their personal tax number to receipts, the state can see everything an individual earns and everything spent.
"The tax authorities have information about literally everything you've done," says Prof de la Feria, although she adds that initial public concern has been quelled by a lack of leaks and a view that it is now just part of tax compliance.
This is the area where the OECD is seeking to draw up core standards so that, at least in complying countries, the data remains secure and is not misused. Even so, Saint-Amans says that the evidence does not suggest the public are too worried about privacy. "Remember, people have given up data for free to Google, Amazon and other big tech companies," he adds.
In some jurisdictions — especially those which have not suffered the sort of revenue crisis that might have forced rapid change — there are concerns over whether the public will accept that such intrusive new state technology is needed when the tax systems already work reasonably well.
Edward Troup, the head of the UK's HMRC until 2018, says that in countries such as the UK it could prove difficult to implement a blanket-style system that makes little or no allowance for more complex cases.
"Mature democracies find it more difficult to ride roughshod over exceptions than Russia or China might — both from an unwillingness to apply heavy-handed enforcement and from a social expectation of humane treatment of difficult cases," he says.
He still sees technology as a long-term answer to more efficient tax collection. Referring to the UK's "making tax digital" programme that requires only that companies submit their VAT returns electronically, he says that once in place, it could be integrated with well-managed corporate cash register and sales systems to feed data directly to HMRC.
"I strongly believe that this is the answer," he adds, "but would want to avoid a botched launch which sets back progress by decades."
If these problems are resolved and many countries move into digital and automatic tax administration and collection, Prof de la Feria says the next step would be to improve the efficiency of tax systems in ways currently thought impossible. Most countries have horribly inefficient VAT systems, for instance, because they have lots of exemptions and zero rates for items such as food or children's clothes which are justified because they help poorer families.
This is very inefficient redistribution, she argues, since "we don't tax a bunch of people who could pay VAT on these items and know the vast majority of consumption of food, for example, is done by high income customers".
Once people's individual tax numbers are matched automatically with receipts, she envisages a system where poor families would automatically be given a VAT rebate through social security and "this way you get a targeted protection for low income households".
Automated and individualised tax payments according to household income are still in the realms of science fiction. Yet the need to raise more revenue without increasing tax rates is an acute problem faced by many economies and it will only grow as pressure on public budgets intensifies in ageing societies.
Even if a tax authority does not yet see where its citizens are spending all of their money today, the technology already exists, and is spreading rapidly around the world.
Written by: Chris Giles
© Financial Times
