SYSTEMIC DRIVERS OF CHANGE - A foresight report into the next decade for taxation
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SYSTEMIC DRIVERS OF CHANGE A foresight report into the next decade for taxation In late 2013 and early 2014, the ATO undertook a research study with thought-leaders and practitioners in both the tax/superannuation industry and the tax administration. The research sought to understand strategic drivers that will lead to important and sometimes fundamental shifts in the taxation environment. A number of themes emerged that, if they are realised as expected, will affect all parts of the taxation ecosystem. The Australian Tax Office (ATO), business, and the tax profession will need to respond to new these challenges and opportunities, and these responses will need a mix of evolved approaches and sometimes entirely new thinking to optimise compliance and ensure a healthy, effective taxation regime that delivers a fair revenue outcome.
Section 1 Key drivers affecting taxation in the next decade A more complex world Multi- A changing An COMPLEXITY Disruptive = country + technology + professional + engaged and a more sophisticated business capability public administration “The end of geography” “Everything is digital” “Evolve or die” “The amplified conversation” The trend towards business The next decade will be The tax profession will Public expectations on both that is unrestricted by borders characterised by continuing undergo fundamental shifts the tax system and corporate Complexity /kəmˈplɛksəti/ noun The number of will continue to intensify, innovation on conventional in both its business model contribution will continue to variables that have to be dealt with in a given time in a presenting new challenges approaches as result of and its workforce, resulting evolve, with an engaged public situation, the clarity and precision with which they can that typically go beyond the disruptive technology and the in a changing professional voice becoming increasingly be identified, and their rate of change (Jaques, 1996) boundaries of country and exponential growth of data, capability in Australia. enabled and amplified by new Tax is a complex system. It is part of a network of region. integration and technology- channels, information sources global social and economic systems that are inter- enabled business models and modes for formal and connected, non-linear, interdependent, and evolving. informal community-driven Over the next decade, this complexity is set to campaigns. intensify, affected by four major drivers of change that will create new tensions, opportunities and balance points. Some of these drivers are already emerging, others are strongly indicated by current trends and forecasts. By understanding how they converge and the shifts they will set in motion, we can gain a more sophisticated understanding of the future landscape of taxation.
The next decade promises a tax environment of increasing The pursuit of consistent Greater synchronisation complexity for all players. treatments across borders of law regionally Increased surveillance Innovative approaches to compliance This complexity will be driven by shifts right across the taxation ecosystem. Some of these shifts are already emerging, others are strongly Increasingly globalised indicated by current trends and forecasts. regulation (BEPS) Supply and Big data demand of New Business in the intangibles methods cloud Multi- of avoiding national/multi- tax company supply chains Pre-filling Increasing transparency Increased obligations business and tax Global and software regional tax Disruptive integration policy cooperation Multi-country technology business Low-burden report generation Global trend towards Increasing Macro shift from indirect tax mobility digital migrants Growing need for international A more complex world to digital natives know-how COMPLEXITY and a more sophisticated administration Changing Growth of Activist & expectations online empowered education communities Offshoring work New An Shifting political Harnessing new models of compliance A changing engaged priorities channels and the media to drive Key regulation professional public compliance behaviour Broadening of advisory beyond capability tax Tax vs. goodwill The size of each circle contribution Driver reflects the impact of Diminished Leakage of Economic Build and the driver/response, knowledge entry uncertainty support Tax workforce public value and the certainty/ model and experience Generation of tax frequency with which innovation change it was identified Focus shift to Possible ethics & corporate response governance
The end of geography: multi-country business The trend towards multi-country business will continue to intensify, presenting new challenges that typically go beyond the boundaries of country and region. The pursuit of Greater This trend will drive a range of challenges for tax administrations consistent synchronisation of treatments needing to tax increasingly globalised value chains and market across borders law regionally offerings. At the same time, new expertise will be needed to navigate the complexity of sophisticated international arrangements and the ongoing rise of intangible, Intellectual Property based goods and services. Increasingly globalised Supply and Big data regulation (BEPS) demand of intangibles Multi-national supply chains Increasing transparency obligations Global and regional tax policy Disru cooperation Multi-country techn Key questions business • How will we respond to an interconnected world to ensure that we Global trend collect our fair share of revenue and assure compliant behaviour in towards complex circumstances? indirect tax Increasing mobility Growing need for international A more complex world • How do we fairly tax new and emerging forms of value – from hosted know-how services to IP-based goods and from globally distributed COMPLEXITY manufacturing to global chains of supply? and a more sophisticated administration • Where will we get or grow the expertise and relationships we need to Growth of mange our response? online education Offshoring work New models of
Multi-country business Readily available technology and a globalised economy means that countries will be more interconnected than ever over the next decade. Having to deal with global, in addition to local, competition stimulates businesses to globalise, both mobilising resources and providing goods and services across borders. Additionally, companies have sought to exploit opportunities to minimise their tax obligations by structuring themselves across often fragmented regulatory regimes. These trends have and will continue to grow as a significant force in shaping the tax system and policy/administrative priorities over the next decade. Growing need for international know-how Businesses with global subsidiaries, suppliers or customers will increasingly need a mixture local and foreign tax and business advisory services to navigate the complexity of multiple revenue systems. They will seek to minimise their cost of compliance and optimise their tax bill. In order to stay competitive, tax practitioners will increase their capability with both local and foreign tax systems, and with general (e.g. labour) or specialist (e.g. agriculture) business arrangements. Supply and demand of intangibles Technological innovation and the increasing ease of accessing new digitally-delivered services from cloud data hosting to 3D printing will fuel the demand for intangibles and present novel challenges for tax reporting, The pursuit administration and policy. of consistent treatments Multi-national supply chains across Greater In Foreign outsourcing and multi-national subsidiary arrangements have already and will increasingly emerge as a borders synchronisatio su staple business process. Value chains and transactions that span countries challenges the ability for countries to n of law regionally capture a fair amount of tax over the course of the value adding process that results in a good or service. Global and regional tax policy cooperation Governments will increasingly rely on global and regional solutions to taxation to reduce the opportunity for Increasingly companies to use multi-country supply chains and digital delivery to avoid paying tax. This may include new treaties, globalised regulation (BEPS) Big data harmonised policies, increased data sharing and other approaches driven by initiatives such as Base Erosion and Supply and Profit Shifting (BEPS). This will require new knowledge and skillsets within the tax industry and the ATO, and will demand of Multi- Increasing trigger market responses as businesses reshape their compliance and their tax strategies. transparency intangibles national obligations supply Increased mobility chains As it becomes easier for individuals to move across borders, taxation will become increasingly complex to manage. Global and Australians travelling overseas who earn a salary or business revenue will need to navigate multiple tax systems. regional tax Disru policy Foreigners in Australia who own foreign businesses but use Australian tax-funded public services may not make a cooperation techn contribution. To deal with these complexities and disparities, governments will need to develop strategies to respond Global trend Multi- appropriately (for example, by increasingly applying indirect taxation). towards country indirect tax business Increasin A more complex world g mobility Growing need for COMPLEXITY international and a more sophisticated know-how administration Growth of online
Global and regional tax policy Evolve or die: cooperation Multi-country Dis tech business a changing professional capability Global trend towards Increased indirect tax mobility Growing need for The tax profession will undergo fundamental shifts international A more complex world know-how in both its business model and its workforce, COMPLEXITY resulting in a changing professional capability in and a more sophisticated administration Australia. Growth of online These will be driven by a range of trends that include cross-border education Offshoring work outsourcing for both routine and, ultimately, more complex tax work, and generational shifts that will greatly change the industry’s profile. New A This creates an uncertain future position for the profession that will models of compliance A changing enga affect not just the industry but the tax administration that relies on it regulation pub as a trusted intermediary. professional Broadening of capability advisory beyond tax Diminished Leakage of Economic entry knowledge uncertainty Tax workforce and model experience Generation innovation change Key questions • How can we effect a meaningful compliance regime in an increasingly globalised tax preparation and advisory supply chain? • What is the appropriate administrative response to a potentially diminishing professional tax capability in Australia?
Global and regional tax Multi- policy country D cooperation business t Global trend A changing professional capability towards Increase A more complex world Growing The tax profession is undergoing considerable change at all levels. The median demographic of a indirect tax d need for COMPLEXITY mobility international and a more sophisticated tax practitioner is set to lower at the same time that globalised business, offshore advisory sourcing know-how administration and digital innovation challenge existing approaches. The shifts in the tax profession in turn will have an effect on the ATO, which relies on Australia’s intermediary population as a compliance strategy. Growth of Offshoring online New work Offshoring work education models of en There is currently a trend for tax practitioners to offshore low level routine tax processing work. Though this is an complianc A changing effective cost reduction method, it creates uncertainties in the long term as new tax practitioners will lack the experience p e professiona of basic tax work. It also drives the declining entry into the profession as employer demand for graduates slows. regulation Increasingly, driven by costs and the multi-country nature of business, it is expected that Australia will also see l capability offshoring of higher-order advisory services as well, particularly if other drivers such as generational change and diminished entry make it difficult to source appropriate skills locally. Economi Broadening of Leakage of Diminished uncertain New models of compliance regulation advisory knowledge entry beyond tax and There will likely be continuing and escalating expectations for Government agencies to reduce budgets, deliver Generation Tax experience efficiency dividends and further reduce regulatory burden. This will encourage regulators like ATO to explore and change workforce ultimately implement new models to reduce barriers to compliance and reduce regulatory cost. For the tax profession, model this could see an increased use of trusted intermediary services to effectively outsource certain regulatory functions into innovation the private sector, where this is a low risk proposition, stimulating the industry that services larger business segments. It could also place new impetus on the use of data and technology make tax regulation more efficient, requiring the industry to become competent at supporting changing reporting obligations and mitigate risk for their clients. Leakage of knowledge and experience A large cohort of older generation tax practitioners and government administrators will leave the workforce over the next decade, taking with them knowledge that may not have been transferred adequately to the younger generation. This includes in depth understanding of tax policies and historical rationales for certain practices. This has potential impacts to the effectiveness and quality of some intermediary services and some administrative decision-making, if it is not dealt with systemically. Generational change The tax industry is seeing and will continue to see a generational shift, with a significant amount of experienced practitioners retiring or otherwise leaving the industry, and a new generation, with new sets of values, native digital competency and new career expectations, entering. This will drive cultural and practice shifts in the industry, and also significant more movement of people across organisations and also into and out of the tax profession as employees become more “portable”. Diminished entry A reduced demand for tax advisory services in Australia will force tax practitioners to diversify their services beyond tax verticals. Tax practices will hire less graduates for tax, feeding the issue of declining entry into the profession. Additionally, tax is perceived as difficult work and a difficult career to advance in, and so may be less attractive to prospective students than other areas of financial specialisation. This may cause a scarcity of available resources in Australia and potentially see other financial disciplines widening to include (rather than specialise in) taxation to make up the gap.
Everything is digital: Disruptive technology The next decade will be characterised by continuing innovation on conventional approaches as result of disruptive technology and the exponential growth of data, integration and technology-enabled business Increased surveillance Innovative models approaches to compliance New technologies are a catalyst and enabler for all other trends – including the viability of multi-country business, offshoring of tax work and the empowering of Australian communities. They also carry a potential positive effect from a cost-of-compliance perspective on both sides of the regulatory boundary. The availability of Big Data and ply and Big data and of New growing sophistication of analytics makes possible new levels of Business in the ngibles cloud methods of transparency and risk mining that Australia may choose to harness to avoiding tax achieve its administrative outcomes more effectively and better Multi-national/ inform policy-making process. multi-company Pre-filling supply chains Increased business and tax software Disruptive integration ountry technology ness Low-burden report generation Key questions Macro shift from • How can we harness technology to reduce our footprint on digital migrants to digital natives business, and what risks will we need to manage? A more complex world COMPLEXITY • What capability will we need to run compliance in a rapidly and a more sophisticated administration evolving technology environment? Changing Activist & expectations • How do we influence or integrate with the technology market to empowered support our strategic directions? communities An Shifting political Harnessing new engaged
Disruptive technology Technology is disrupting current models of business and taxation. As our world becomes more connected, tasks more automated, data handling more sophisticated, business-to- business/government/consumer channels more diverse and software more integrated, flow on effects to every aspect of the business ecosystem will not simply continue but intensify. Both businesses and Government will be continuingly responding to new developments – both opportunities and challenges – that emerge from the accelerating pace of technological disruption. Big Data With increasing amounts and availability of information and the lowered cost of storage, the use of big data will become more prevalent both for and between businesses and the ATO. However, managing the vast amount of data, and creating actionable insight and meaning from it, is a complex process requiring investment and the development of new skill sets across the tax sphere. Business in the cloud Businesses are increasingly breaking the link between their physical location and services they offer and consume by exploiting the internet and other digital channels. Businesses outside Australia are transacting with Australia at every level of the economy without maintaining a presence here. This has implications for Innovative taxation, and is a trend that is increasing and will continue to increase over time. Increased surveillance approaches to New methods of avoiding tax compliance Rapid innovation and the availability of new technologies mean that some segments of the individual or corporate sector may develop new and unforseen ways of lower their tax bill at the fringes of or outside of the ATO’s compliance boundaries. Responses to these may need to be imaginative and novel, particularly given lead times for policy and treaty change. upply and New emand of Increased business and tax software integration Big data Business in methods ntangibles Multi- The development of Government digital services and taxonomies, and the recognition of the value of data the cloud of national/ avoiding supply chains within and across business, will stimulate business and tax software to better integrate with multi- tax other software, provide sophisticated analysis, and supply lower-overhead reporting as standard. This will company in turn have effects on the tax profession, and also increase the amount of data that the ATO could feasibly supply Pre-filling and usefully expect to receive. chains Increased business and Macro shift from digital migrants to digital natives ountry tax software As generational change drives a shift in demographics, we will see a higher proportion of “digital natives” integration moving into decision making roles in both the tax administration and the tax profession. ness Disruptive technology Low- burden report generation Macro shift from digital A more complex world migrants to digital natives COMPLEXITY and a more sophisticated administration Changing Activist & empowered expectation
Disruptive ountry technology ess Low-burden report generation Macro shift from The amplified conversation: digital migrants to digital natives An engaged public A more complex world COMPLEXITY Public expectations on both the tax system and and a more sophisticated administration Changing corporate contribution will continue to evolve, with Activist & expectations empowered an engaged public voice becoming increasingly communities enabled and amplified by new channels, information Shifting sources and modes for formal and informal An engaged political Harnessing new community-driven campaigns. nging priorities channels and the media to drive sional public compliance A public that is informed, values driven and willing to act now has the behaviour bility tools to be an effective force in shaping corporate and tax industry Tax vs goodwill culture. In the future, public awareness and its effect on market contribution demand has the potential to slow revenue erosion. This is particularly the case when seen in the context of other strategic drivers (e.g. Diminished Economic Build and transparency emerging from disruptive technology, and the notion of entry uncertainty support public value revenue fairness in multi-country business taxation). ional of tax ge Focus shift to ethics & corporate governance Key questions • What values drive the public with respect to corporate tax compliance and fairness? • What strategies could the ATO consider to harness public perceptions and values to support a fair taxation outcome for Australia?
Disruptive technology ntry s Macro shift A more complex world from digital migrants to COMPLEXITY digital natives An engaged public and a more sophisticated administration The level of public participation promises to increase such that tax as an issue moves beyond Activist & one’s tax bill to influence consumer market behaviours, shape perception, and contribute empowere Changing d expectatio social pressure to the compliance landscape. communiti ns An es Activist and empowered public Shifting There is currently a surge of engagement and activism from the public about the perception of large business engaged political and high-wealth individuals not contributing fairly to Australia’s revenue, enabled by social media and a growth anging public priorities Harnessing of new news and opinion sources. This creates an less predictable policy and economic environment, and a new channels ssional and the media stronger opportunity for the public to participate influentially in the national conversation and as consumers, in bility to drive the market. Tax vs compliance behaviour Shifting political priorities goodwill Economic Both global and national trends, and the electoral cycle, will continue to drive frequent and unpredictable change contribution Diminished uncertainty in the business environment and the tax system. Policy outcomes delivered through significant tax instruments entry such as the carbon price, mining tax, business tax incentives etc. will be created, redesigned or halted, causing Build and support periodic and potentially costly adjustments for tax regulators and intermediaries. rational public ange value of tax Economic uncertainty Focus shift to Although Australia performed strongly in the credit crisis, the changing face of Australian industry and the ethics & impacts of growth or decline in some influential industries, and the strong linkage of the health of the Australian corporate economy to regional and global trends will create ongoing uncertainty for businesses and consumers, in turn governance having an effect on revenue and tax compliance behaviours. Changing expectations There is currently a revival of the importance of ethics and corporate citizenship in discussions relating to tax. In part driven by public digital participation, and in part driven by global effort to manage imbalances and weaknesses in global taxation (e.g. the Base Erosion and Profit Shifting initiative), corporate citizenship including revenue contributions promises to be an increasingly common discussion point at the board table. Tax vs goodwill contribution Tax will continue to compete with other forms of contribution in the mind of the public. For example, business (particularly large business) will argue that the benefits they provide in terms of economic injection and goodwill contribution should be recognised by Government in the form of lower business taxation. Public opinion will be a key factor in the level of influence this point of view has on tax policy.
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