How to do taxes better – getting rid of the tax authority

by Marek Helm, Head of Public Finance Advisory and Change Management at Nortal, August 31, 2017

The Estonian Tax Board is leading the global tax revolution by enabling businesses to pay taxes without any actual contact with the Tax Board themselves: just categorize an online bank transfer as salary and the rest will be taken care of.

Nobody likes paying taxes, and for many the procedure is just as uncomfortable as visiting the dentist. However, if a dentist can make things painless then transforming the payment of taxes into a simple, swift and enjoyable experience should be the aim of every tax office.

Estonia is well-known for its e-solutions. It has been developing e-services for citizens and businesses for more than 15 years and Estonians are used to a life where contact with the public sector is virtual. Estonians can declare their taxes on a smartphone, establish a company in minutes, receive their medication from any pharmacy using an e-prescription without even visiting the family doctor, or register vehicles, and renew driver’s licenses over the internet.

A tax authority’s actual task is not the collection of taxes.

ICT has made life a lot easier for citizens and businesses, helping save time and money. As a tiny nation starting out 25 years ago with little wealth or prosperity, Estonia had no other choice. The country was entrusted to young leaders who understood that to make it, you have to be innovative.

Today, the Tax and Customs Board in Estonia is again pioneering innovative e-services. As tax revenue has outpaced the economic growth expectations of recent years and the tax behavior of Estonian companies sets an example for other countries with a similar background, the Tax Board team has understood that its actual task is not the collection of taxes.

Sounds weird? It should. Otherwise, it would not be novel or new. As the Tax Board developed, it began to understand that it is in fact merely the recipient of the money that taxpayers grant to the state on a largely voluntary basis. The standing definition of tax collection is yesterday’s news.

But there’s more. What if the Tax Board’s task was to earn money? Not by engaging in business, but by extending the state’s support to businesses. Companies are not created to pay taxes. The purpose of any business is to make money and if the entrepreneur has no revenue, there clearly isn’t any hope to levy taxes on it

As a result, the Tax Board is now seeking to help businesses earn revenue. The easiest path to revenue is to cut the red tape – eliminating the bureaucracy that hinders the added value of any business. Reporting to the state should be eliminated if it serves no obvious purpose for the entrepreneur, and this also applies to tax declarations and accounting.

What if the Tax Board’s task was to earn money?

The Estonian Tax Board has taken the first steps. Income tax and social tax declarations – although easy to complete and submit for more than a decade now using the Tax Board’s e-service – are now becoming obsolete. These processes currently require an accountant, a location, and a computer, but even then they are expensive, especially for small businesses.

The Estonian Tax Board recently completed a solution for reducing this inconvenience. To date, income and social tax declarations were mandatory for paying salary taxes. However, the Tax Board does not actually need a declaration to calculate taxes on a salary – the Tax Board just needs the information. This information is available from the bank who transfers the salary from the company to the recipient.

Therefore, the Tax Board and the Estonian-based LHV Bank have created a solution that enables an undertaking to pay taxes automatically when making transactions at the bank. As an undertaking transfers the salary through the bank, the bank will automatically transfer the basic transaction data to the Tax Board. Using this data, the Tax Board’s system calculates the tax obligation, enters the data on the company’s tax declarations and automatically confirms them on its behalf. The company just needs to make the usual salary transfer at the bank. Taxes are declared and paid in the background.

The new innovative e-service for tax payments is especially suitable for smaller businesses who have chosen not to acquire accounting software – from now on, they won’t need to hire an accountant to “do the taxes”. Essentially, they will not even need to log into the Tax Board’s electronic system, thereby saving time on communications with the Tax Board. Everything is taken care of on their behalf, through the joint bank and Tax Board service.  

It’s a paradigm shift. The Estonian Tax Board and businesses can once more set an example for the whole world. While the Tax Board does not intend to make any of these services compulsory, they should be good enough that businesses will adopt them voluntarily. The Tax Board’s motivation is based on providing additional incentives to start a business and earn revenue.

Nortal has a history of helping governments plan and go through large-scale reforms to facilitate Ease of Doing Business. To learn how we helped Oman jump 127 places in Starting a Business category in the World Bank’s Ease of doing Business ranking, read our white paper.

 

Marek HelmMarek Helm, the Head of Public Finance Advisory and Change Management at Nortal, is a true opinion leader who has introduced tangible change and improvements in several countries. He was the Director General of the Estonian Tax and Customs Board for six years. During that time, the organization became one of the most trusted government organizations in Estonia, VAT fraud was almost eliminated and the OECD ranked it within the TOP 3 most efficient tax organizations. To go into more detail about how governments can digitize tax authorities and boost economy, get in touch with him via email.