Georgia Stamatelou, Partner and Head of Tax and Legal at KPMG, talks to Business Partners about how technology and geopolitics are changing the world of tax as we know it.
Tax today is attracting attention like never before, not only among governments and the business world but also among the media and citizens. Why now? And which do you believe are the key drivers for this focus on tax?
First of all, let’s clarify one thing. It is not now. The focus we see in tax today is the result of the accumulation of forces and factors that go back decades. In the past 20 years, with the help of, and in some cases, because of technology, the world and the market have changed dramatically. Globalization, new business and consumer demands, new ways of living, and the emergence of previously unseen types of businesses are some of the most significant changes. As the economy transforms, it is inevitable that tax will follow. Meanwhile, in the era of social media, reputational risk around tax has reached new heights as governments and the general public have taken more interest in large corporations and how much tax they pay.
You mentioned technology. How is it disrupting tax?
Technology is affecting all aspects of tax. Tax authorities are investing in technology to improve how they assess risk and boost collections. Tax functions are investing in technology to enhance automation, improve the accuracy and visibility of their tax data and unlock their strategic value. Digitization is allowing governments to adjust policy to economic activity at the level of distinct transactions and to consider new forms of taxation of activity in the digital world. Technology is disrupting tax on each of these fronts, with all of them leading toward more extensive, real-time analysis of ever more tax data.
Digitization has been changing all aspects of taxation for some time, from tax collections and compliance down to the tax base itself
But what does digitization mean for tax?
The digitization of tax is an enormous topic that means different things to different people. For the tax authorities, it is the digitization of tax collection. We see governments investing heavily in technology, with the sole purpose of improving their ability to gather more tax information and gain more insight into the tax and financial positions of taxpayers. Companies are embracing tax technology, in part to comply with new electronic reporting requirements, but more importantly to leverage automation to make their tax functions operate more accurately and efficiently. And then there is the issue of taxation of the digital economy per se. From any angle, digitization has been changing all aspects of taxation for some time, from tax collections and compliance down to the tax base itself.
With the EU’s proposed digital tax plan, there has been a lot of discussion recently on digital economy. What are your views on the subject?
It is the new world, and it is a world that forces governments to adjust policies and change basic concepts of tax in order to be able to monitor and regulate financial activities efficiently. The current international tax rules allocate taxing rights on business profits on the basis of physical presence. But in the digital world, it is possible for businesses to reach markets in jurisdictions in which they may have no or little physical presence. It is possible for a company that is resident in China or the U.S. to generate significant revenues in Greece without paying a significant amount of corporation tax. And this is not an issue only for revenue collection, but a real issue for competition within a country’s economy. I believe that this situation is what has driven the EU and local governments to try and find a solution with a new form of tax such as the proposed digital tax.
Is it only technology that changes the world of tax?
Definitely not. One could say that it affects most changes one way or another, but tax also follows the changes in business models, as they continually evolve. Companies react to changes large and small, and they reposition themselves to avoid emerging risks and to seize opportunities. Further to the above, the world’s geopolitical environment is not stable; the volatility we see today is unprecedented, especially as geopolitics affect policies on taxation and trade. The uncertainty of the current political landscape is having a greater impact on businesses today, than anything they have seen in the past years.
Why is the current geopolitical situation so high on the business agenda?
One of the most disturbing aspects of the current geopolitical situation is that, in certain cases, rational economic logic is taking a back seat to other imperatives where tax and trade are concerned. This makes geopolitical analysis essential for today’s business. Many companies are taking steps to manage their exposure by consulting specialists to help them better understand potential threats. They are also spending time on scenario planning—considering what’s likely to happen, what alternatives are credible, what’s unlikely, and what the worst case scenario is—so they can chart their best course forward. Where broader geopolitical trends were once on the periphery of business thinking, they have now become a priority. And of course, tax factors are an important part of geopolitical analysis. How a country establishes its tax settings—what and how many economic activities are taxed and whether and how the tax system delivers social benefits—are fundamental to the long-term fiscal stability of a nation. These settings need to be considered in the context of demographics, cultural predispositions, and the structure of the economy, including its international exposure.
What about changes in business? How do these affect tax?
This is a highly interactive relationship. As business changes, tax changes and vice versa. We have seen, in the past two decades, fundamental shifts in all aspects of international businesses: from how they invest, through how they make money, to how they distribute profits and deploy capital. These changes required companies to continually change their tax strategies, which is increasingly tough as the international tax system itself has come under strain.
But how does tax fit to the new business model that you have mentioned?
Tax will undoubtedly remain one of the most important factors for companies thinking about a business model change and in some cases, it will even force the changes. The global effort to curb tax base erosion and profit shifting has been the key driver for many international businesses to rethink/redesign their operations around the globe over the past few years. As companies change their business models—for example, to seize opportunities in the digital domain—policymakers will likely, in turn, alter their application of taxes to respond to different ways of creating value. With this dynamic, your best bet is to look forward and outward by monitoring developments and anticipating possibilities.
So can the tax functions of today meet the challenges of the future?
No one can predict the future, but as the world of tax transforms, tax functions are changing. If the last few years have proven anything, it’s that you have to be prepared for surprises. Advances in artificial intelligence and robotics may move businesses in directions that are difficult to predict. The rising prevalence of VAT/GST worldwide has elevated indirect tax activities to key drivers of efficiency. Senior staff scattered across jurisdictions affects the location of decision making authority and value creation, with implications for corporate taxes. The rise of virtual organizations and more frequent business travel creates implications for payroll taxes and tax-effective employee compensation as well as corporate taxes (e.g., in creating permanent establishment issues). All of the above are putting pressure on chief tax officers to question their tax operating models and find new ways to structure their teams, processes, and technology to meet the demands of the future.
It is critical that we as tax professionals learn how to communicate complex technical issues in a manner that can be comprehended by all
What about the reputational risk?
This is a constant challenge/risk for all international corporations. Tax today is at the forefront of the debate. It is critical that we as tax professionals learn how to communicate complex technical issues in a manner that can be comprehended by all. And to me, this is the biggest challenge we have to face.
In closing, what do you think is the role of tax professionals in such a constantly changing environment?
As the world of tax transforms, tax professionals themselves are changing. Where the work used to require almost exclusively strong technical knowledge of both the law and accounting, now we need to add new skills to the mix. We need to understand technology and data analytics both for compliance and for strategic decision making. Understanding communications will be critical for managing and mitigating reputational risk. Understanding the business is now essential for ensuring the tax function adds its full potential value. The time when we, as tax professionals, would sit in our ivory towers and only talk amongst ourselves is long gone. We have to be part of the business world and learn to speak tax in a way that everyone will be able to understand us. Tax will continue to change, and it will continue to change all of us who work in this profession.
