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The world of taxation is on the cusp of seismic change, instant (or natural) taxation is on the lips of architects of tax administrations across the globe. What is it? How and when will it happen? Well, it is the giant leap where real-time transactions (made possible by the evolution of the internet) connect with real-time administration platforms to arrive at a place where “tax just happens”. The ‘how’ and ‘when’ are topics that are currently being discussed at the highest levels. When it happens, and it will, then some of the most burdensome barriers to international trade are removed. The goal is transformational change where all interactions are digitalised, becoming seamless and frictionless. Such change will incorporate new and evolving technologies such as machine learning and artificial intelligence (AI).

Today, the friction between taxpayers and tax administrations are multiple and processes such as manual, or cumbersome online, registrations; invoicing; manual filing; foreign exchange complexities, and poor third-party software integrations (to name just a few) are significant barriers to efficient tax collection systems.

Before we sink our teeth into the future of tax, what came before?

The Executive Summary of the OECD’s Tax Administration 3.0 and the Digital Identification of Taxpayers document touches on this point:

Tax Administration 1.0, the OECD documents states, can be characterised as “largely paper-based with many manual and siloed processes.” Meanwhile, 2.0 can be described as the world where the use of digital data and analytical tools led to improved efficiencies in tax administration processes for both taxpayers and tax authorities. The 3.0 version of tax administration aims to modernise further using new data analysis tools such as artificial intelligence and machine learning. The aim will be to further improve tax compliance as well as to improve the effectiveness of tax collection systems while also enhancing the overall effectiveness of tax administration itself.

The utopian vision of Tax Administration 3.0, where “tax just happens”, of course, is also not without risks and burdens. In a February 2024 address, Australia’s Commissioner of Taxation Chris Jordan stated that the Australian Tax Office’s (ATO) advanced systems “monitor, detect and respond to cyber threats facing the ATO. On average, we defend against 4.7 million attempted cyber-attacks each month targeting our websites, services and infrastructure.”

This threat of a cyber-attack is a nightmarish scenario for Australia, and tax administrations around the globe, as the amount of data hosted balloons every year. Today, the ATO holds “about 50 petabytes of data, equivalent to 1 billion tall filing cabinets.”

On the flip side, AI was central to the ATO’s push to recover “almost $45 billion in unpaid taxes owed by Australians”. Using AI, said the ATO’s deputy commissioner of smarter data Marek Rucinski “balances growing data and digital capabilities with a measured approach to ensure tech smarts are deployed in a safe and responsible manner.”

To move towards a world of secure tax systems connecting and working together in real-time tax administrations requires technological improvements (e.g. the use of APIs to allow different systems to communicate) on the tax authority side but also, crucially, collaboration from businesses.

The key ingredient in this move to Tax Administration 3.0 is the transfer of data. This is encapsulated in the world of new requirements: e-reporting and e-invoicing. Why are tax authorities rapidly rolling out such initiatives (despite delays and postponements in implementation dates)? Well, the key reason is to improve the transfer of data from taxpayers to tax authorities and in the end to eliminate manual filing and reporting requirements.

On the tax authority side many are preparing for the changing world where tax authorities handle data at a greater scale and equip their organisation for the efficient collection and parsing of the information received.

A recently released document titled ‘Preparing a digital transformation for the Office of the Revenue Commissioners in Ireland’ shows how tax authorities will prepare for the world of tax admin 3.0.

The ‘North Star Vision’ of this document is described in two parts: built-in compliance and collaboration. The first step is to obtain the data (e-reporting and e-invoicing) this is the evolution of real-time payments where taxation is embedded within transactions, or seamless taxation as it is described in the document. The move towards increased e-reporting and e-invoicing is an unstoppable train as it is that crucial first step in obtaining the necessary data. These initiatives will quickly become the norm for taxpayers across the globe.

The collaboration part comes into play where there is expanded partnership that relies on an “extensive ecosystem with connected businesses and software companies to engage in real-time” with tax authorities (in this case the Irish Revenue Commissioners).  Another part of the collaboration element is continued digital government leadership. This is where there is a commitment from government to create an infrastructure that supports real-time taxation. Characteristics of such an infrastructure include “shared digital identities, integrated transactions where multiple government entities are concerned, shared digital infrastructure, shared ecosystem engagement and digital policy initiatives focused on national competitiveness and security.”

Now, think for a moment about a future where tax calculation and collection, as we know it, disappears.

Can you imagine such a world? Well, it already partially exists in the world of income tax and that is the direction we are heading. The initial indicators of this profound shift are evident with the worldwide quick adoption of e-reporting and e-invoicing. The shift will transcend tax calculation, manual reporting, and filing. Instead, it will be about instant data collection and real-time validation. Welcome to Tax Administration 3.0.

The world of taxation is on the cusp of seismic change, instant (or natural) taxation is on the lips of architects of tax administrations across the globe. What is it? How and when will it happen? Well, it is the giant leap where real-time transactions (made possible by the evolution of the internet) connect with real-time administration platforms to arrive at a place where “tax just happens”. The ‘how’ and ‘when’ are topics that are currently being discussed at the highest levels. When it happens, and it will, then some of the most burdensome barriers to international trade are removed. The goal is transformational change where all interactions are digitalised, becoming seamless and frictionless. Such change will incorporate new and evolving technologies such as machine learning and artificial intelligence (AI).

Today, the friction between taxpayers and tax administrations are multiple and processes such as manual, or cumbersome online, registrations; invoicing; manual filing; foreign exchange complexities, and poor third-party software integrations (to name just a few) are significant barriers to efficient tax collection systems.

Before we sink our teeth into the future of tax, what came before?

The Executive Summary of the OECD’s Tax Administration 3.0 and the Digital Identification of Taxpayers document touches on this point:

Tax Administration 1.0, the OECD documents states, can be characterised as “largely paper-based with many manual and siloed processes.” Meanwhile, 2.0 can be described as the world where the use of digital data and analytical tools led to improved efficiencies in tax administration processes for both taxpayers and tax authorities. The 3.0 version of tax administration aims to modernise further using new data analysis tools such as artificial intelligence and machine learning. The aim will be to further improve tax compliance as well as to improve the effectiveness of tax collection systems while also enhancing the overall effectiveness of tax administration itself.

The utopian vision of Tax Administration 3.0, where “tax just happens”, of course, is also not without risks and burdens. In a February 2024 address, Australia’s Commissioner of Taxation Chris Jordan stated that the Australian Tax Office’s (ATO) advanced systems “monitor, detect and respond to cyber threats facing the ATO. On average, we defend against 4.7 million attempted cyber-attacks each month targeting our websites, services and infrastructure.”

This threat of a cyber-attack is a nightmarish scenario for Australia, and tax administrations around the globe, as the amount of data hosted balloons every year. Today, the ATO holds “about 50 petabytes of data, equivalent to 1 billion tall filing cabinets.”

On the flip side, AI was central to the ATO’s push to recover “almost $45 billion in unpaid taxes owed by Australians”. Using AI, said the ATO’s deputy commissioner of smarter data Marek Rucinski “balances growing data and digital capabilities with a measured approach to ensure tech smarts are deployed in a safe and responsible manner.”

To move towards a world of secure tax systems connecting and working together in real-time tax administrations requires technological improvements (e.g. the use of APIs to allow different systems to communicate) on the tax authority side but also, crucially, collaboration from businesses.

The key ingredient in this move to Tax Administration 3.0 is the transfer of data. This is encapsulated in the world of new requirements: e-reporting and e-invoicing. Why are tax authorities rapidly rolling out such initiatives (despite delays and postponements in implementation dates)? Well, the key reason is to improve the transfer of data from taxpayers to tax authorities and in the end to eliminate manual filing and reporting requirements.

On the tax authority side many are preparing for the changing world where tax authorities handle data at a greater scale and equip their organisation for the efficient collection and parsing of the information received.

A recently released document titled ‘Preparing a digital transformation for the Office of the Revenue Commissioners in Ireland’ shows how tax authorities will prepare for the world of tax admin 3.0.

The ‘North Star Vision’ of this document is described in two parts: built-in compliance and collaboration. The first step is to obtain the data (e-reporting and e-invoicing) this is the evolution of real-time payments where taxation is embedded within transactions, or seamless taxation as it is described in the document. The move towards increased e-reporting and e-invoicing is an unstoppable train as it is that crucial first step in obtaining the necessary data. These initiatives will quickly become the norm for taxpayers across the globe.

The collaboration part comes into play where there is expanded partnership that relies on an “extensive ecosystem with connected businesses and software companies to engage in real-time” with tax authorities (in this case the Irish Revenue Commissioners).  Another part of the collaboration element is continued digital government leadership. This is where there is a commitment from government to create an infrastructure that supports real-time taxation. Characteristics of such an infrastructure include “shared digital identities, integrated transactions where multiple government entities are concerned, shared digital infrastructure, shared ecosystem engagement and digital policy initiatives focused on national competitiveness and security.”

Now, think for a moment about a future where tax calculation and collection, as we know it, disappears.

Can you imagine such a world? Well, it already partially exists in the world of income tax and that is the direction we are heading. The initial indicators of this profound shift are evident with the worldwide quick adoption of e-reporting and e-invoicing. The shift will transcend tax calculation, manual reporting, and filing. Instead, it will be about instant data collection and real-time validation. Welcome to Tax Administration 3.0.

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Disclaimer: The views, statements or opinions expressed in this article are solely those of the author and do not represent tax advice and are not to be designated to be the views, statements or opinions of any other person, group, association or company.