Data analytics: Have tax authorities unleashed the genie?


Posted by Jan van Trigt, Deloitte Global Leader – Tax & Legal Data Analytics and Beth Mueller, Deloitte U.S. Tax Analytics leader on September 5, 2017

Business use of big data analytics has flourished for years, but little has been known until recently about adoption of analytics by tax authorities around the world. A 2016 OECD report, “Advanced Analytics for Better Tax Administration”,1 changes that. Highlighting results of a survey among representatives of 16 OECD member countries, the report sheds new light on current tax authority use of analytics and how they may utilize it in the very near future.

Key findings about analytics adoption among OECD member countries include:

  • Some tax authorities are already using robust analytics solutions, such as SAS, SQL, R, Stata and IBM’s SPSS.
  • Others are experimenting with parallel processing platforms and Hadoop clusters to enable massive data processing and predictive modeling, but most are in the early stages of implementing advanced analytics.
  • Talent acquisition is an issue as tax authorities struggle to attract the technical skills they need in sufficient numbers.
  • In some cases, regulations constrain authorities’ ability to experiment with analytics.

Also interesting is where tax authorities currently apply analytics. The report suggests five main areas:

Audit case selection. The most common use of analytics is to guide audit resource allocation by identifying VAT fraud risk, VAT compliance errors, elevated taxpayer-risk groups, and individuals who are linked, for example, by tax agent.

Tax filing and payment compliance. Using analytics, authorities try to predict which taxpayers are likely to be in noncompliance and then model ways to communicate effectively with them.

Debt management. Again, predictive analytics help identify taxpayers at highest risk of having bad debt, those that are most likely to respond to intervention, and effective ways of approaching them.

Taxpayer services, such as helpdesks. Inquiries from, and communications with, taxpayers are analyzed to segment taxpayers and provide insights into how they might be assisted.

Evaluation of tax policies and proposed legislation. Analytics are helping identify and measure tax gaps, the potential impacts of tax policy changes, and possible effects on tax revenue.

Currently, few agencies use analytics for corporate income tax purposes, because that involves consolidation of transactions, which complicates development of analytics models. However, with the spread of mandatory Country-by-Country Reporting, it is highly likely that tax authorities will start using analytics for audit case selection relating to direct taxes and transfer pricing where, for example, analysis of taxpayer data reveals aggressive corporate tax planning. In addition, as more countries implement the Standard Audit File for Tax (SAF-T), tax authorities will have large amounts of high-quality data for analytics purposes. The OECD report may guide more authorities to take advantage of these opportunities.

Tax departments in multinational businesses should acknowledge that the genie is out of the lamp. Tax authorities are already embracing analytics and deriving new insights from available taxpayer data. This trend is likely to accelerate as new tax laws compel businesses to submit even more data.

Businesses may be able to accelerate their own use of analytics to identify inconsistencies in their tax data before tax authorities do so. Becoming increasingly familiar with new technologies and developing necessary skill sets will be vital steps, too. Taking action now can help businesses take precautionary measures, stay in control, and add value while addressing tax risks.

How far along the tax analytics maturity curve is your company? I’d like to hear from you.

1 “Advanced Analytics for Better Tax Administration, Putting Data to Work,” Organization for Economic Co-Operation and Development, May 13, 2016, http://www.oecd.org/publications/advanced-analytics-for-better-tax-administration-9789264256453-en.htm

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