Have we entered the era of biomimicry in indirect tax?
Having access to technologies that could render clunky, ineffectual relationships more seamlessly and organically does not mean that they will. As compliance automation professionals, we must play our part to make sure things evolve in the right direction. Can nature provide guidance?
Definition: Biomimicry: the imitation of the models, systems and elements of nature for the purpose of solving complex human problems.
Many years ago, when I started my career as a lawyer and policy nerd, I had the privilege of working with a very experienced regulatory affairs professional who represented business interests in a number of international organisations. This gentleman was a lobbyist, but one of the things that made him different from his peers was that he had trained as a biologist.
One of the last times I saw this senior colleague, I mentioned to him that I’d become interested in the interplay between tax and technology. When I remarked how clumsy many governments were in their definition of requirements in this space he said, without any hesitation: “Yeah, it’ll take a long time before governments realise that the only sustainable model for extracting indirect taxes from businesses is through positive symbiosis. Instead of trying to dictate how businesses should shape their processes so as to enable audit afterwards, governments should find the least harmful way to tap into the life juices of businesses as they transact”.
Now, I am no biologist but this image has stuck with me as I started to get increasingly interested in in this field. In the years that followed, as I learned more about the methods that governments design to enforce indirect tax law in the Internet era, I could only conclude that my colleague’s intuition had been spot-on. This was the key lesson to be learned, and it did indeed take a very long time before tax administrations started learning it.
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Now, more than fifteen years later, I believe that the time of biomimicry as a force in indirect tax has finally arrived. After a period of experimentation, modern governments are now almost without exception investing in ways to make transaction taxes more effective. They’ve started to use technology to tap into transactions as they happen, rather than torturing businesses – and themselves – by trying to piece together historical evidence of such transactions during audits years later. In my view, this concept of real-time controls is the first significant step towards an entirely different kind of relationship between taxpayers and governments, with considerable potential benefits for both sides.
Let me emphasise the word ‘potential’ here. It’s way too early to declare victory over the clumsiness of retroactive audits – there are still ample opportunities for tax administrations to mess this opportunity up. As they move towards observing business transactions in real time, the key question is what kind of symbiotic relationship governments are pursuing. Wikipedia distinguishes six main types of symbiotic relationships. Below I’ve reclassified the ones that are useful in this context, ranged from the most positive to the terrible.
“Mutualism or interspecies reciprocal altruism is a relationship between individuals of different species where both individuals benefit.”
This must be the ideal model. Until very recently, I would have said that it is unrealistic to expect there to be any regulatory model that simultaneously benefits such different but interdependent species as tax administrations and businesses. However, I’m increasingly convinced that real-time indirect tax controls can in certain cases actually benefit the private sector by removing market failure through a modern version of enlightened despotism – for example through the imposition of structured invoice data standards on companies of all sizes and sectors. Another example is emerging from some LATAM economies where real-time control platforms, which were initially set up for taxation purposes only, are becoming transactional data banks that can also be used as an industry trust anchor for certain invoice financing methods.
“Commensalism describes a relationship between two living organisms where one benefits and the other is not significantly harmed or helped.”
This is probably what most tax administrations have historically tried to achieve – they have just not been very successful at it due to the high transaction costs that are intrinsic to the limitations of paper as a data carrier medium. However, real-time controls make achieving this scenario much more realistic and I believe it’s the minimum use of modern information and communication technologies that we should require from our governments.
“Parasitism: one member of the association benefits while the other is harmed.”
In the past I’ve jokingly used the analogy of virus scanning software to illustrate the need for regulatory monitoring and compliance maintenance. Please don’t get me wrong, I’m not claiming that one can fairly draw a parallel between viruses or parasites and tax administrations. This is not a model any finance ministry wants to pursue. However, the net effect of their methods can in certain cases get scarily close. And while real-time transaction controls have the potential to be mutually beneficial for businesses and law enforcement, I see some examples of countries that have implemented such ‘clearance’ models in such a one-sided and inept manner that the comparison would not be entirely without merit.
“Synnecrosis is a type of symbiosis in which the interaction between species is detrimental to both organisms involved.”
I understand from Wikipedia that this is a highly unusual, tragic ‘failure’ of evolution. However, our world of nation states and their political processes aren’t necessarily organised as effectively as nature is to avoid catastrophic outcomes. When it comes to real-time transaction tax controls, I believe that if tax administrations and businesses do not urgently start cooperating towards some kind of best practice-based convergence, this lose-lose scenario may become a reality. We risk ending up using powerful new technologies to make online indirect tax controls and e-business more complex and expensive than paper. One sure-fire way to miss the opportunity of modern technology is if tax administrations start insisting on delivering the tax invoice received from the buyer to the supplier. By trying to become B2B transaction management hubs instead of tax control platforms only, tax administrations would effectively undo the massive value that modern B2B transaction management service providers add to the economy.
As compliance automation professionals, perhaps one of our New Year resolutions for 2018 should be to become more proactive in shaping our market. More concretely, maybe we should all start 2018 by reading up on the ways in which nature has used the past billions of years to refine productive ways for different organisms to interact in a world with finite resources. I’d be interested to hear if you find more examples beyond symbiosis.
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Christiaan van der Valk, Company President, TrustWeaver