Title of Study

3 PE 695.458

Exploring the

opportunities and

challenges of new

technologies for EU

tax administration

and policy

Policy Department for Economic, Scientific and Quality of Life Policies

Directorate-General for Internal Policies

Authors: Jeffrey OWENS, Ivan LAZAROV, and Nathalia OLIVEIRA COSTA

PE 695.458 - September 2021

STUDY

Requested by the Economic and Monetary Affairs

subcommittee on tax matters (FISC)

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PE 695.458 4

5 PE 695.458

Abstract

This research paper explores the opportunities and challenges

faced by the EU from the rapid emergence of new technologies

such as Artificial Intelligence, Machine Learning, Data Analytics

and Blockchain in the area of taxation .These technologies enable

a transformation of the way that tax administration interact with

taxpayers and can move tax compliance into real time. At the

same time they raise practical and legal challenges for both the

Member States and the European Union.

This document was provided by the Policy Department for

Economic, Scientific and Quality of Life Policies at the request of

the Sub Committee on Tax Matters (FISC).

Exploring the

opportunities and

challenges of new

technologies for EU

tax administration

and policy

PE 695.458 6

This document was requested by the European Parliament's Economic and Monetary Affairs’ Sub

Committee on Tax Matters (FISC).

THORS

Jeffrey OWENS, Head of WU Global Tax Policy Center

Ivan LAZAROV, Senior Researcher at the WU Global Tax Policy Center

Nathalia OLIVEIRA COSTA, Research Associate at the WU Global Tax Policy Center

MINISTRATOR RESPONSIBLE

Dirk VERBEKEN

DITORIAL ASSISTANT

Irene VERNACOTOLA

INGUISTIC VERSIONS

Original: EN

OUT THE EDITOR

Policy departments provide in-house and external expertise to support European Parliament

committees and other parliamentary bodies in shaping legislation and exercising democratic scrutiny

over EU internal policies.

o contact the Policy Department or to subscribe for email alert updates, please write to:

Policy Department for Economic, Scientific and Quality of Life Policies

European Parliament

L-2929 - Luxembourg

Email: Poldep-Economy-[email protected]

Manuscript completed: September 2021

Date of publication: Month 2021

is document is available on the internet at:

http://www.europarl.europa.eu/supporting-analyses

DISCLAIMER AND COPYRIGHT

The opinions expressed in this document are the sole responsibility of the authors and do not

necessarily represent the official position of the European Parliament.

Reproduction and translation for non-commercial purposes are authorised, provided the source is

acknowledged and the European Parliament is given prior notice and sent a copy.

For citation purposes, the publication should be referenced as: Owens, J., Lazarov, I., Oliveira Costa, N.,

Exploring the Opportunities and Challenges of New Technologies for EU Tax Administration and Policy,

Publication for the committee on Economic and Monetary Affairs’ Sub Committee on Tax Matters

(FISC), Policy Department for Economic, Scientific and Quality of Life Policies, European Parliament,

Luxembourg, 2021.

Exploring the opportunities and challenges of new technologies for EU tax administration and policy

7 PE 695.458

CONTENTS

LIST OF ABBREVIATIONS 8

LIST OF BOXES ERROR! BOOKMARK NOT DEFINED.

LIST OF FIGURES 10

LIST OF TABLES 10

EXECUTIVE SUMMARY 11

INTRODUCTION 13

THE INTERNAL MARKET DIMENSION 14

1. Fiscal autonomy of the Member States 14

2.2. The digital transformation of Member States 14

2.3. The need for EU coordination 17

2.4. Legal basis for EU action 18

2.5. The policy interest of Member States 18

INITIAL AREAS OF ACTION 20

1. Withholding taxes 20

3.2. Value Added Tax 21

3.3. Exchange of information 22

3.4. Dispute resolution 23

LEGAL CHALLENGES 24

1. The legal basis, proportionality and subsidiarity 24

4.2. Protection of taxpayers’ rights 25

4.3. The obligations upon intermediaries and legal responsibility 25

NEW AND EMERGING TECHNOLOGIES AND THEIR TAX APPLICATIONS 27

1. Opportunities deriving from emerging technologies 28

5.2. Risks deriving from emerging technologies 32

CONDITIONS FOR A SUCCESSFUL DIGITAL TRANSFORMATION OF TAX ADMINISTRATION 36

1. How can Member States get from where they are to where they want to be in terms of

digitalisation? 36

6.2. What roles do the EU institutions have in the digitalisation efforts of Member States? 39

CONCLUSION 40

EFERENCES 41

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PE 695.458 8

LIST OF ABBREVIATIONS

AEOI

Automatic exchange of information

Artificial intelligence

AML

Anti-money laundering

Beneficial ownership

CBDC

Central Bank Digital Currency

CCCTB

Common Consolidated Corporate Tax Base

CJEU

Court of Justice of the European Union

DAC

Directive on Administrative Cooperation

ECB

European Central Bank

EOI

Exchange of information

European Parliament

European Union

GDPR

General Data Protection Regulation

IAAS

Infrastructure as a service

IOT

Internet of things

Information technology

KSI

Keyless signature infrastructure

KYC

Know your customer

Machine learning

MNE

Multinational enterprise

PAAS

Platform as a service

SAAS

Software as a service

SII

Spain's system on Immediate Supply of Information on VAT

Exploring the opportunities and challenges of new technologies for EU tax administration and policy

9 PE 695.458

SME

Small and medium size enterprise

TFEU

Treaty on the Functioning of the European Union

VAT

Value Added Tax

WHT

Withholding tax

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LIST OF FIGURES

Figure 1: Radar for application of technologies 30

Figure 2: VAT treatment of virtual currencies in EU Member States 34

Figure 3: Different stages of a digital tax administration roadmap 37

Figure 4: Data quality is key 38

LIST OF TABLES

Table 1: Countries’ experiences 15

Table 2: Technologies and their practical applications for tax purposes 28

Table 3: Blockchain and the Distributed Ledger Technology 32

Table 4: Levels of digital maturity of tax administrations 36

Exploring the opportunities and challenges of new technologies for EU tax administration and policy

11 PE 695.458

EXECUTIVE SUMMARY

Background

A digital and sustainable transformation is one of EU’s top priorities. The European Commission, in its

action plan for fair and simple taxation supporting recovery strategy, recognizes the importance of

efficient taxation as the EU and global community seek to recover from the economic consequences

of the COVID-19 crisis. In a digitalized era, the drivers of the next stage of tax reforms will be based on

the need for sustainable and inclusive growth, and tax revenues to finance budget deficits.

Governments will also strive to ensure a level playing field between digital and non-digital companies

and that all companies paid tax in the place where value is created

The transformation in the tax area relates not only to exploring the opportunities of making the

national revenue collection more efficient but also to aligning the tax treatment in the internal market

with the one under the domestic markets of the Member States both with respect to the compliance

burden and the enforcement mechanisms available. To do so, there is a number of technologies that

have the potential of transforming the tax systems as we know them, some of which are already being

explored by the Member States, and might be at the centre of coordinated action by the EU. Among

these are the blockchain, the internet of things, artificial intelligence and data processing, as well as

cloud and quantum computing.

Aim

This research paper aims at:

• demonstrating the negative impact on the internal market of unilateral actions by Member

States as regards the digitalisation of tax administrations and procedures;

• outlining the potential areas where coordinated action at EU level seems desirable and feasible;

• addressing some of the legal challenges that might arise from such coordinated action;

• discussing the key emerging technologies that are already used by certain Member States and

that might be underpinning a coordinated EU approach;

• exploring the necessary steps that domestic tax administrations should undergo for their

digital transformation and the role Union institutions might have in assisting them.

Key Findings

Due to the existing fiscal autonomy regarding the digitalisation of tax administrations, Member States

develop technological solutions unilaterally and in parallel to one another. These solutions perform

similar tasks but are not necessarily compatible across Member States. The lack of interoperability puts

cross-border taxpayers at a disadvantage since their tax liability cannot be subjected to an automated

assessment due to the lack of structured real-time data that is equivalent to the one collected

domestically.

Hence, a certain level of intra-EU coordination with respect to the interoperability of the domestic

digitalisation efforts by the Member States is desirable especially in the context of achieving a single

digital market. The Member States would also have an interest in greater coordination due to the

expansion of their tax bases with taxes that rely upon accurate cross-border information in real time.

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PE 695.458 12

Moreover, the fight against tax evasion and avoidance depends upon an ever-increasing cooperation

between the authorities of the Member States, with the ultimate goal of having no difference in the

information flows between purely domestic and intra-EU dimension.

In this sense, the coordination of the digitalisation efforts should result in a single EU-wide space for

sharing tax information where the internal market is having the characteristics of a domestic market.

The successful coordinated implementation of new technologies and automation of processes

depends upon two main factors: (i) the existence of standardized data and (ii) a sufficient level of

harmonisation of the underlying rules. Therefore, in the context of EU law, possible first areas of action

might be: withholding taxation and VAT as far as automation of processes is concerned; and exchange

of information and dispute resolution, as regards the creation of a communication channel for sharing

real-time standardized tax-relevant data.

A number of legal challenges arise in the context of a coordinated action at EU level with respect to

digitalisation. These challenges relate to: (i) the legal basis and the need to demonstrate obstacles to

cross-border mobility or appreciable distortions to competition in the absence of harmonisation; (ii)

the need to protect taxpayers’ rights, especially with respect to privacy of natural persons; (iii) the role

of intermediaries such as banks, digital platforms, or advisors in providing structured data that allow

for automatic calculation of tax liability.

The process of coordination might encompass a range of digitalisation possibilities for tax purposes,

from process optimization to identification of risks and automation of processes. Different tax

authorities are at different stages of their domestic digitalisation journey, but a number of technologies

are already being explored and implemented by governments. This is something that the common EU

approach might build upon.

Emerging technologies give rise to opportunities but also to some challenges. In particular,

cryptocurrencies are digital assets that are outside of government control to a certain extent, which

may result in the possibility of its use for criminal activities, exchange rate volatility, manipulation and

tax challenges. Addressing these concerns uniformly in all Member States would prevent jurisdiction

shopping and ensure level playing field in the EU.

At the start of the coordinated digitalisation process, the EU institutions and Member States should

focus on developing an EU-wide digital tax administration roadmap which could guide Member States’

tax administrations as they digitalise their tax administrations and which would take into account the

different stages of development in the 27 Member States. The EU can play a necessary modest role in

the digitalisation efforts of the Member States by: (i) taking coordinated action at EU level in terms of

ensuring the interoperability of the technological systems employed, especially with respect to the

standardization of data collection and sharing; (ii) providing a common infrastructure for the

automation of tax outcomes in harmonized areas; (iii) assisting the tax administration of the Member

States by issuing soft-law instruments and providing the necessary framework for training and

cooperation; (iv) providing regular updates to Member States on emerging technologies and their

potential use in the tax area.

The ultimate shared goal between the Union and its Member States would be the creation of a more

competitive digital internal market while fostering the revenue generating capabilities of the Member

States from cross-border activities.

Exploring the opportunities and challenges of new technologies for EU tax administration and policy

13 PE 695.458

INTRODUCTION

A digital and sustainable transformation is one of EU’s top priorities

. The European Commission, in its

action plan for fair and simple taxation supporting recovery strategy

, recognizes the importance of

efficient taxation as the EU and global community seek to recover from the economic consequences

of the COVID-19 crisis. In its effort to step up the fight against tax fraud and base erosion, the

Commission highlights challenges arising from the digitalisation of the economy and emphasizes the

need to help tax administrations to keep pace with a continually evolving technologies.

The matter of digital transformation has also an internal market dimension. In the absence of a

coordinated action at EU level, the domestic digital transformation of tax procedures by the Member

States would eventually diverge leading to the creation of domestic technological systems that lack

cross-border interoperability. This would disadvantage taxpayers that operate cross-border, as they

would be unable to rely on the ease of compliance burden that automation of tax processes offers. It

would be also to the disadvantage of tax authorities as they would lack the same type of standardized

real time data in order to evaluate tax risks and assess tax liability that would be otherwise available

domestically. The latter would undermine the coordinated effort to combat tax evasion and avoidance.

However, adopting a coordinated approach is only possible when there is a common understanding

of new technologies. For instance, only after knowing that the successful deployment of Artificial

Intelligence for risk analysis is dependent upon standardized data, one can move towards measures

ensuring this standardization in a cross-border context. The same holds true for other technologies

such as the blockchain that allow for automating the tax consequences of cross-border transactions

only as long as sufficient coordination of the underlying substantive rules exists. Thus, developing a

common understanding of the technologies and the need for common action at EU level are

intertwined.

For this reason, this paper addresses both issues. First, it examines the status quo, demonstrating that

by relying solely on the fiscal autonomy of Member States when designing their digital tax procedures,

the cross-border situations are put at a disadvantage. This necessitates common action. Second, it

envisages this common action in several areas that seem as the natural starting point due to the already

existing harmonisation at EU level. Third, it looks at a number of the legal challenges that would arise,

should a coordinated approach be pursued by the Union institutions. Fourth, it discusses some of the

emerging technologies that might be the tools of such common measures, their relevance for tax

purposes, as well as their particular utility in EU context. Finally, it assesses the practical dimension of

digital transformation in the tax area by exploring the necessary steps that domestic tax

administrations must undergo and the role Union institutions might have in assisting them.

Council conclusions on shaping Europe's digital future, available at https://data.consilium.europa.eu/doc/document/ST-8711-2020-

INIT/en/pdf; European Parliament News, Digital transformation: importance, benefits and EU policy (2021), available at

https://www.europarl.europa.eu/news/en/headlines/society/20210414STO02010/digital-transformation-importance-benefits-and-eu-

policy .

Communication from the Commission to the Council and the European Parliament An Action Plan for fair and simple taxation supporting

the recovery strategy, COM(2020) 312 final, 15 July 2020

https://ec.europa.eu/taxation_customs/system/files/2020-

07/2020_tax_package_tax_action_plan_en.pdf .

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PE 695.458 14

THE INTERNAL MARKET DIMENSION

2.1. Fiscal autonomy of the Member States

The principle of national procedural autonomy determines that each Member State is at liberty to

design its own procedural rules, subject to the principles of equivalence (no less favorable treatment

than similar domestic situations) and effectiveness (gaining the benefit must not be impossible or

excessively difficult)

. This principle applies even if an area is covered by EU law rules

This is even more so whenever an area is not covered by secondary law rules. It is a conventional

wisdom stemming from the principle of conferral that, in the absence of harmonizing Union measures,

the Member States are at liberty to design and levy taxes as long as they do so in a non-discriminatory

fashion

The process of digital transformation relates predominantly to procedural rather than substantive

matters (i.e., how taxes are levied, instead of which taxes are levied). Hence, the initial starting point of

the analysis must be that, in principle, the matter of digital transformation falls within the sphere of

competence of the Member States and the principle of their fiscal autonomy

. In principle, the Union

has no competence to regulate domestic procedural matters

2.2. The digital transformation of Member States

Based on national procedural autonomy, countries have been implementing technology tools in

several ways and in different areas of tax, such as value added tax (VAT), wage taxes, transfer pricing

and customs. Table 1 illustrate some examples of countries’ experiences with the application of

technology for tax purposes. These examples are illustrative and not meant to be a comprehensive

comparative study, but serve the purpose of highlighting two points: (i) countries are looking at

possibilities for digitalizing their tax systems; and (ii) they do so unilaterally, in uncoordinated fashion,

and are naturally at different stage of development. This will have an impact on the need and nature

of coordinated action at the EU level.

DE: CJEU, 16 December 1976, Case C-33/76, Rewe-Zentralfinanz, EU:C:1976:188.

For example, the Parent-Subsidiary Directive (Council Directive 2011/96/EU of 30 November 2011) exempts qualifying dividends from

source taxation (substantive right derived from EU law by private parties), but each Member State can decide the procedural rules for

gaining access to this exemption.

See CJEU, 28 January 1986, Case 270/83, Commission v France (‘Avoir Fiscal’), EU:C:1986:37, para. 13.

See for example CJEU, 9 October 2014, C-326/12, van Caster, EU:C:2014:2269, para. 47.

The soft-law framework introduced by Article 197(2) TFEU underlines this conclusion: see S. Gaben, “Article 197” in The EU Treaties and

the Charter of Fundamental Rights: A Commentary [Kellerbauer/Klamert/Tomkin], OUP (2019), p. 1561.

KEY FINDINGS

In principle, Member States have fiscal autonomy regarding the digitaliza

tion of tax

administrations. This leads to the development in parallel of technological solutions that perform

similar tasks but are not necessarily interoperable. While such technological solutions have the

potential of easing the tax compliance burden greatly in domestic scenarios, the lack of

interoperability leads to putting cross-border transactions at a disadvantage. Thus, it is in the

interest of the internal market to move towards a coordinated approach. The Member States would

also have an interest in greater coordination due to the expansion of their tax bases with taxes that

rely upon accurate cross-border information in real time.

Exploring the opportunities and challenges of new technologies for EU tax administration and policy

15 PE 695.458

Table 1: Countries’ experiences

Country Main technology Use of technology

Italy

E-services (including pre-filled tax

returns); data mining and analysis.

he Italian tax administration is active in

tackling the challenges and risks of the digital

economy and takes a holi

stic and

comprehensive approach

The tax

administration’s institutional structure was

reorganized to centralize the responsibilities

related to the measures connected to the

digital economy.

The Italian tax adm

inistration uses data

mining to identify discrepancies between

data available to tax administration and tax

returns, tax payments or cross-border data

and information from AEOI. Based on this, the

authorities developed benchmarks on

industrial, commercial

and professional

activities, based on individual data to perform

risk-analysis.

Moreover, tax authorities rely on available

data to model relationships among

individuals and/or companies and apply

Social Network Analysis tools and techniques

to establish existing networks among parties.

The aim is to identify individuals or

companies involved in recurring high-risk

behaviors and build chains of transactions

based on e-invoice to detect recurring VAT

frauds patterns. In addition, automate

extraction of data

from the web (web

scraping and text mining) enhances available

data with “fresh” information and to

complement the available data sets.

Spain

Artificial intelligence; e-services

Spain implemented a real time VAT reporting

system – Immediate Supply of Information on

For more information on the Italian tax administration digital transformation, see Fisco Oggi, L’Agenzia sempre più digital – 1 diventa un

modello da seguire, available at

https://www.fiscooggi.it/rubrica/analisi-e-commenti/articolo/lagenzia-sempre-piu-digital-1-diventa-

modello-seguire

The legislations already implemented in Italy include MOSS (Mini One Stop Shop, effective as of 1 January 2015), Short term rentals

withholding and reporting obligations for intermediaries and digital platforms (Decree Law n. 50 of 2017, article 4 paragraphs 4, 5, 5-bis

and 6), Reporting obligations for e-commerce platforms (Law Decree 30 April 2019, n. 34, article 13, paragraph 1), Digital services tax (Law

n. 145 of 30 December 2018, article 1, paragraphs 35 to 50, modified by Law n. 160 of 27 December 2019, article 1, paragraph 678).

See the explanation provided by the official website of the Spanish tax authorities on New VAT management system based on

Immediate Supply of Information, available at

https://www.agenciatributaria.es/AEAT.internet/en_gb/Inicio/Ayuda/Modelos__Procedimientos_y_Servicios/Ayuda_P_G417____IVA__

Llevanza_de_libros_registro__SII_/Informacion_general/Nuevo_sistema_de_gestion_del_IVA_basado_en_el_Suministro_Inmediato_d

e_Informacion.shtml.

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PE 695.458 16

VAT (SII). SII is a bookkeeping system

maintained in the electronic office of the

Spanish Tax Authorities, where billing records

must be forwarded to the Tax Agency

electronically. The result of SII has reduced

the administrative burden on ta

xpayers as

well as reduced mistakes as the systems can

cross check self-information with other third

parties.

In addition, Spain developed a Virtual

Assistance tool for VAT based on artificial

intelligence. Taxpayers can access the portal

and ask question

s in the chatbot about

information about registration and

rectification of invoices, obligations related to

foreign trade, chargeability, taxable amount,

tax rate, exemptions and deductions on real

estate transactions, etc. The AI tool provides a

homogeneo

us, logic response with the

necessary information and is available

instantly and 24/7.

Estonia

Blockchain

Estonia launched digital services such as e-

Business and e-

keyless signature infrastructure (KSI

Blockchain). The use of KSI Blockchain allows

the citizens and government to verify the

integrity of their records on government

databases.

Slovenia

E-services

Slovenia introduced eDavki, an electronic tax

management system that enables paperless

communication fulfilling tax obligations from

anywhere in the world.

Source: Authors’ own elaboration.

The above overview demonstrates that EU Member States develop different platforms for achieving

similar goals. This approach brings the risk of the majority of the platforms not being interoperable

from a technological perspective. The following section looks at the possibilities for EU institutions to

encourage a more coherent approach.

OECD (2020), Tax Administration 3.0: The Digital Transformation of Tax Administration, OECD, Paris.

Find more information on the platform developed at https://e-estonia.com/solutions/security-and-safety/ksi-blockchain/ .

Find more information on the possibilities provided by the e-services portal at the official governmental website:

https://www.fu.gov.si/en/business_events_businesses/edavki_electronic_tax_management_system/

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17 PE 695.458

2.3. The need for EU coordination

The national procedural autonomy might be limited whenever the lack of procedural coordination has

an impact on the internal market. For instance, the cross-border procedural cooperation between the

tax authorities of Member States is subject to extensive harmonisation as otherwise the proper

functioning of the internal market would have been jeopardized

Until now, the harmonisation of administrative cooperation has been mostly focused on the need to

provide the tax authorities with accurate information for assessing the taxes due by taxpayers that have

activities in more than one Member State. This is the natural consequence of a tax system that relies

predominantly on self-reporting as a mean for calculating taxes due: tax authorities must have a way

to verify the accuracy of the self-reporting, independent of where the taxpayer is resident and her/his

assets are located. Thus, the administrative cooperation until now is predominantly focused on

enforcement.

The process of digitalisation of tax procedures adds a further layer of need for coordination. As will be

discussed in greater detail in section 5 below, employing new technologies in administering taxation

has a two-fold benefit: on the one hand it provides for an opportunity of better risk-analysis (the

enforcement element), while on the other – it automates tax compliance making it easier and cheaper

for taxpayers and tax administrations (the service element).

The implementation of both the enforcement and the service elements of digitalisation ultimately

depend upon having high-quality structured data of taxable events in real time. The output of any

digital process is as good as the data input that it receives. Ensuring the consistency and quality of this

data input is easier in domestic situations and it is done by each Member State. However, as far as cross-

border situations are concerned, the quality and structure of data depends ultimately on the

interoperability of the different systems. The longer Member States develop separately and unilaterally

their domestic systems, the further apart the interoperability of these systems would be.

As a result, in the absence of a coordinated action at EU level, two parallel compliance systems exist:

one more efficient for purely domestic situations and a second, much more burdensome, for cross-

border situations. The data on taxable events occurring domestically would be available to tax

authorities in real time and in a structured manner, while the data on taxable events that occur across

the border would not. As a result of the difference in the tax compliance burden, taxpayers may be

dissuaded from conducting cross-border economic activity which has a negative impact on the internal

market

. This is especially relevant for individuals and SMEs.

At the same time, the different compliance burden does not result from discriminatory treatment by

any Member State but rather from the lack of coordination of the national approaches and the

disparities that stem therefrom. Therefore, it is not the fundamental freedoms (that function as non-

discrimination rules in the area of taxation) but harmonisation of the domestic approaches that can

provide remedy to this unequal treatment between domestic and cross-border situations.

Adopting a coordinated approach to digitalisation is a matter of improving the competitiveness of the

internal market. The main premise of the latter is that engaging in cross-border activities should not be

more burdensome than staying purely domestic. As was demonstrated above, many Member States

aim at delivering a more efficient, user-friendly and simplified tax system by relying on digital

See for instance Recital (1) to Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and

repealing Directive 77/799/EEC, OJ L 64, 11.3.2011 or Council Directive 2010/24/EU of 16 March 2010 concerning mutual assistance for

the recovery of claims relating to taxes, duties and other measures OJ L 84, 31.3.2010.

The Court has already had the chance to rule on the fact that non-residents might be put at a disadvantage as regards the compliance

burden related to producing evidence: see CJEU, 30 January 2020, Case C-156/17, Köln-Aktienfonds Deka, EU:C:2020:51, para. 61.

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PE 695.458 18

technologies. In the absence of coordinated action, however, such simplification is destined to remain

available only to purely domestic situations. Hence, the digitalisation of tax systems has a profound

internal market dimension.

2.4. Legal basis for EU action

In the absence of general competence of the Union to act in the area of tax law, all harmonizing

measures should be adopted on the internal market legal bases (Article 113 and Article 115 TFEU). That

being the case, any measure would eventually be aimed at pursuing not fiscal objectives per se (and

unlike the domestic tax measures) but the objective of removing obstacles to cross-border movement

or appreciable distortions to competition that arise from this movement

. As an area of shared

competence and in accordance with the principle of conferral, all the tax measures are constrained by

the principles of proportionality (they must not go beyond what is necessary to attain their objectives)

and subsidiarity (the Union must act only as long as the objective cannot be attained at national level

to a sufficient degree). This paper will examine in more details the legal challenges posed by this

approach below in section 4.

As long as the supporting elements to successful implementation of a coordinated digital

transformation are concerned the appropriate legal basis might be Article 197 TFEU

. Naturally, the

Commission may also adopt soft-law recommendations based on Article 292 TFEU or

guidelines/notices.

2.5. The policy interest of Member States

It is in the nature of the legal bases in the area of taxation that successful harmonisation depends upon

aligning the interests of the Union and its internal market with the interests of each individual Member

State

. The question of the coordinated digitalisation of (certain) tax procedures is among these

matters where such alignment is feasible: it is to the best interest of both tax administrations and

taxpayers that the cross-border and domestic tax compliance burdens are sufficiently equivalent.

Digitalisation created new business models, which resulted in new tax challenges. In the last years, the

possibility of companies to scale without mass resulted in tax enforcement challenges. There are a

number of topics being discussed among the international tax community in order to address various

concepts that are currently outdated in light of the evolution into a digitalisharmonisation

ed economy. For example, the nexus rule of permanent establishment, traditionally linked to the

physical presence of a non-resident company in a country, faces the need of a revision as digital

progress allows businesses to operate in a jurisdiction through an online presence

There is a growing consensus that the current tax system, designed many decades ago, is not suited to

deal with the challenges presented by the digitalized economy. Stakeholders are currently addressing

these issues. The international community is witnessing the implementation in several countries of

new tax bases (e.g., digital services taxes, environmental taxes, upcoming fees and levies), tax base

As to the meaning of the wording “directly affect the establishment or functioning of the internal market” see the interpretation provided

by the CJEU, 5 October 2000, Case C-376/98, Tobacco Advertising I, EU:C:2000:544.

In its relevant part, Article 197(2) TFEU provides: The Union may support the efforts of Member States to improve their administrative

capacity to implement Union law. Such action may include facilitating the exchange of information and of civil servants as well as

supporting training schemes.

This is due to the required unanimity in the Council for bringing forward a successful action.

The EU, of course, has not been a by-stander in these debates: see for example, Proposal for a COUNCIL DIRECTIVE laying down rules

relating to the corporate taxation of a significant digital presence, COM/2018/0147 final - 2018/072 (CNS).

Exploring the opportunities and challenges of new technologies for EU tax administration and policy

19 PE 695.458

broadening measures

and new ways of applying old tax concepts (e.g., digital permanent

establishment concept). All of these culminates in the discussion currently held by the G20 and the

OECD on a comprehensive international tax reform

Additionally, the COVID crisis led to an unprecedented increase in income inequality in most European

countries. The discussion on inequality and its side effects, however, is not new. The historical

concentration of wealth by a small number of people has many adverse implications in the social and

political spheres, whether it is a disproportionate concentration of power in the hands of a small group

of people, leading to their capacity to influence public decisions, or the popular belief that this results

in a moral affront

Even though wealth taxes have long been levied around the globe, their relevance within modern

systems has been considered fairly limited. Historically, the application of taxation of wealth has been

linked to the increase of use of international tax planning tools

. This is especially true in an internal

market where the free movement of people is guaranteed. However, the recent developments on

international tax transparency and effective exchange of information, paired with renewed political

interest, brought taxes on net wealth, inheritance, real estate and capital gains – to name a few – back

to governments’ agendas. This culminates in a different challenge: while in the past, little information

was available to fight offshore non-compliance; nowadays governments have access to a range of

databases and the technology to process the high quantity of data. As explored in section 5, digital

tools have a key role to play in data analytics. Thus, the technology developments allow governments

to rethink their attitude when it comes to the policy choices and implementation of these taxes.

The abovementioned tax bases - on MNEs that operate digitally or on high net worth individuals - have

one thing in common: they depend upon accurate real time cross-border information. In this sense,

any expansion of the tax base of Member States would be conditional upon fostering international

coordination.

Some examples include: Hungary introduced a one-off tax on banks and credit institutions and a special retail tax temporarily in 2020.

France introduced a temporary tax on private healthcare in 2021. Luxembourg introduced a 20% WHT on income derived from real estate

located in Luxembourg by certain Luxembourg investment funds. Sweden announced a new tax on the financial sector from 2021

onwards. See OECD (2021), Tax Policy Reforms 2021: Special Edition on Tax Policy During the COVID-19 Pandemic, OECD, Paris, p. 44

See the OECD Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy, available

at https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-

the-economy-july-2021.pdf .

R. S. Rudnick & R. K. Gordon, Taxation of Wealth in Tax Law Design and Drafting vol. 1, ch. 10, V. Thuronyi, ed., International Monetary

Fund 1996

M. Lang et al., Trends and Players in Tax Policy, ch. 1, General Report

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INITIAL AREAS OF ACTION

The digitalisation of tax administrations has been understood predominantly by governments in its

procedural aspects – i.e., the measures impact mostly the tax procedure that puts the substantive rules

into action. However, a meaningful digitalisation of tax procedures requires also an intervention at the

level of substantive rules in order to ensure that these rules can be applied with a sufficient ease on a

binary basis – i.e., the substantive conditions for gaining a tax advantage must be objective and

quantifiable so that they can be successfully subjected to automation (or at the very least rebuttable

presumptions must be relied on).

Keeping the aforesaid in mind, a few preliminary observations are worth noting. First, the different

substantive areas of tax law within the EU are subject to very different levels of harmonisation. While

VAT is subject to material level of harmonisation

, corporate taxation is scarcely harmonized

and

personal income tax that is not harmonized at all.

If the substantive rules of a particular area are not subject to harmonisation, then implementing an EU-

wide digital automation process seems unlikely due to the divergent rules that are hard to account for

under a common technological umbrella. In such cases, the coordinated action would likely remain

only at the level of exchange of structured data.

On the other hand, what is practically more desirable and legally possible is a deeper harmonized

action in a limited number of key areas, where the substantive rules have already been harmonized but

the national procedural autonomy produces sub-optimal results in the context of an internal market.

Having this in mind, the following potential areas appear suitable for initial coordinated-EU action in

the field of taxation.

3.1. Withholding taxes

The first potential area where the system would benefit from a coordinated EU action on the

digitalisation of tax procedures is the entitlement to reduced withholding tax (WHT) rates. Currently,

although the Parent-Subsidiary Directive, the Interest-Royalties Directive and Double Tax Treaties

essentially eliminate or greatly reduce WHT on qualifying dividends, interests and royalties, the

underlying domestic procedural rules in the Member States are generally burdensome and costly,

Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, OJ L 347, 11.12.2006.

With the exception of qualifying withholding tax situations and the anti-avoidance. See: Council Directive 2011/96/EU of 30 November

2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, OJ L

345, 29.12.2011 [Parent-Subsidiary Directive]; Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable

to interest and royalty payments made between associated companies of different Member States, OJ L 157, 26.6.2003 [Interest-Royalties

Directive]; and Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the

functioning of the internal market OJ L 193, 19.7.2016.

KEY FINDINGS

The successful coordinated implementation of new technologies and automation of processes

depends upon two main factors: the existence of standardized data and a sufficient level of

harmonization of the underlying rules.

Therefore, in the context of EU law, possible first areas of action might be: withholding taxation

and VAT as far as automation of processes is concerned; and exchange of information and dispute

resolution, as regards the creation of a communication channel for real-time standardized tax-

relevant data.

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21 PE 695.458

thereby undermining the internal capital market

. The situation is especially burdensome for small

investors where the compliance costs would often outweigh the reduction of the withholding tax

due

. An estimate calculated by the EU Commission suggests that the cost of WHT refund procedures

in the EU alone was EUR 8.4 billion per year, which refers to foregone tax relief, costs of reclaim

procedures and opportunity costs

It is for this reason that the European Commission has committed to launch a legislative initiative in

2022/2023 “for introducing a common, standardized, EU-wide system for withholding tax relief at source,

accompanied by an exchange of information and cooperation mechanism among tax administrations”

When drafting this initiative, the European Commission should take into account already existing

technologies that might transform the intra-European withholding tax system

In this sense, the limited area of WHT is an appropriate starting point for coordinated technological

advancement of the tax administrations of the 27 Member States. As mentioned above, such step

would require not only the introduction of a common procedural framework and technical standards

but also a review of the underlying substantive tax rules related to the entitlement to reduced WHT

rates

3.2. Value Added Tax

The area of VAT is a good opportunity for further harmonisation of technologies in the EU context, as

it has significant cross-border impact, and the Member States are already operating in a coordinated

fashion within the VAT area for a number of years.

Thus, it is no surprise, that the VAT is high on the Commission’s agenda in terms of digital reforms. The

planned update of the VAT rules in light of the digital economy, the Eurofisc 2.0, the single VAT

registration and expanding the One-Stop-Shop are a few examples in this regard

. The main objective

of these changes is to lower the VAT compliance burden on taxpayers that operate in multiple Member

States, and to improve the resilience of the system against abuse and fraud.

Achieving these goals requires a great degree of integration and interoperability of the technical

infrastructure behind the VAT systems of the Member States. Some of the technologies that might

underpin such a system, such as blockchain, were already discussed at length within the framework of

Report from the Commission to the Council and the European Parliament Accelerating the Capital Markets Union: addressing national

barriers to capital flows, COM(2017) 147 final, pp. 10-11.

This is part of the more general issue of higher (in relative terms) compliance costs for SMEs: see Communication from the Commission

to European Parliament and the Council - An action plan for fair and simple taxation supporting the recovery strategy, p 6.

Report from the Commission to the Council and the European Parliament Accelerating the Capital Markets Union: addressing national

barriers to capital flows, COM(2017) 147 final, p. 11.

Communication from the Commission to European Parliament and the Council - An action plan for fair and simple taxation supporting

the recovery strategy, p 10.

See for example the already completed pilot study on the possible utilization of the blockchain technology in the area of WHT:

https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/tax/tax-pdfs/ey-withholding-tax-distributed-ledger-report.pdf

One example in this respect would be the rules on beneficial ownership and anti-avoidance that are based on vague standards, varying

to a degree in the Member States based on their legal tradition. The need to apply such varying standards to a WHT relief entitlement

makes its automation a difficult task. A possible way forward in this regard might be the introduction of preliminary (and binary) criteria

that trigger a rebuttable presumption of abuse/lack of beneficial ownership status, thereby leaving only a limited proportion of red-

flagged taxpayers outside the scope of automatic WHT entitlement. A proposal in similar terms was made by

Pistone/Nogueira/Turina/Lazarov, Abuse through shell companies and structures in the EU internal market: Feedback to the EU

consultation, ITAXS (forthcoming). The current initiative of the EU Commission on the fight against shell arrangements might be a suitable

occasion in outlining such criteria. See the developments on the future proposal of such a directive here:

https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12999-Tax-avoidance-fighting-the-use-of-shell-entities-and-

arrangements-for-tax-purposes_en

Annex to the Communication from the Commission to the European Parliament and the Council an Action Plan For Fair And Simple

Taxation Supporting The Recovery Strategy, COM(2020) 312 Final.

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PE 695.458 22

the VAT in the Digital Age conference organized by the European Commission

. However, when

implementing such technologies, one must be wary of the challenges that may arise. Section 4

discusses some of these challenges in more details.

3.3. Exchange of information

The current framework of exchange of information within the EU (including the newly proposed DAC

) is based upon the premise that all reporting obligations of private parties – including of those that

act as intermediaries for the taxpayer (e.g., financial institutions, advisors, or digital platforms) – are

fulfilled when the private party reports to its domestic tax administration. The domestic tax

administration in turn (usually under an automatic exchange of information regime) transmits that

information to the tax authorities of the country where a taxable event has allegedly occurred. The

main downside of this system design is that it prevents the possibility of real-time tax compliance in a

cross-border setting: information is exchanged between the Member States on a periodical basis – for

instance quarterly

While the automatic exchange on a periodical basis poses no significant issues in a system of reporting

that is also periodical (i.e., the tax systems of today), it would be a significant hurdle in a digital tax

system where information flows real-time, leading to pre-filled tax returns and significantly lowers

compliance burden while ensuring greater resilience to fraud

Bearing this in mind, there are two possible courses of action for making the exchange of information

system more efficient in the future:

• The first possibility is to introduce the digital infrastructure and legal framework that makes the

automatic exchange of information immediate upon receipt by the tax authorities of the

transmitting Member State

• The second (and more ambitious) possibility is the introduction of a common technical

infrastructure that moves from a system of tax-administration-to-tax-administration

information exchange to a system of direct cross-border information sharing between private

parties and foreign tax administrations.

A permissioned blockchain system encompassing all 27 tax administrations and EU intermediaries

under a reporting obligation with respect to their clients would be a possible way forward in this

respect. To the extent such a system guarantees not only the real-time prevention of abuse and fraud

but also the automatic tax compliance in a cross-border setting, it would be a welcomed development

in terms of the facilitation of the internal market.

See https://ec.europa.eu/taxation_customs/vat-digital-age_en

See Article 8ac(2) of Council Directive (EU) 2021/514 of 22 March 2021 amending Directive 2011/16/EU on administrative cooperation in

the field of taxation, OJ L 104, 25.3.2021.

See for example Article 8ab(2) para. 18 of Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards

mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements, OJ L 139,

5.6.2018.

Often fraud is possible because of timing differences and lack of information.

This should not face substantial issues as far as taxpayers’ rights are concerned due to the principle of mutual trust and automatic

recognition between the Member States. See for example (in the tax area) ES: CJEU, 20 January 2021, Case C-420/19, Heavyinstall,

EU:C:2021:33.

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23 PE 695.458

3.4. Dispute resolution

While the integration of the technical infrastructure of the Member States in the areas governed by EU

law would lead to a simplified compliance in a cross-border setting, instances would nevertheless

persists where cross-border disputes and double taxation would occur. However, even if not fully

eliminating disputes, the employment of standardized technology would greatly benefit the

possibilities for swift resolution. In the context of the aftermath of the Covid-19 pandemic leading to

an increase usage of digital interaction, the reliance on technologies for dispute resolution is already

being considered

, including exclusively in a digital environment

. There is no reason why tax MAP

and arbitration procedures should not follow, especially given the already existing uniform EU

framework under the Dispute Resolution Directive

that can benefit from a common technical

infrastructure guaranteeing thereby the efficiency of the procedure and adherence to the minimum

EU standards on the protection of taxpayers’ rights.

The resolution of any legal dispute (including in international tax) goes through two main phases: first

– a factual one, where evidence is gather, and a second one – legal – where the established factual

circumstances are subsumed under a legal norm. While the employment of technology at its current

state would scarcely help when there is a disagreement between two jurisdictions as to the

interpretation of a provision (besides the fact that as mentioned earlier it might serve as a drive towards

simplifying the tax systems), it would greatly reduce the timing of the fact-gathering phase. This is so

because the blockchain technology in particular allows for a real time, time stamped, common

understanding of the truth.

See the UNCITRAL conference on Dispute Resolution in the Digital Economy,

accessible at https://uncitral.un.org/en/disputeresolutiondigitaleconomy

See for instance the new Swiss Arbitration Platform at https://www.swissarbitration.org/asa-launches-new-swiss-arbitration-platform/

Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union, OJ L 265, 14.10.2017.

For the utility of blockchain in international tax dispute resolution see Christina Dimitropoulou, Sriram Govind, Laura Turcan, Applying

Modern, Disruptive Technologies to Improve the Effectiveness of Tax Treaty Dispute Resolution: Part 1 and Part 2, (2018), 46, Intertax.

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LEGAL CHALLENGES

Implementing digital technologies to tax procedures and administrations comes with a set of

challenges. This section will highlight the general elements that need to be considered in the context

of implementing EU-wide digital tax administration reforms. The section is not meant to be an

exhaustive list of the issues that might arise or to address them at too much length, as the intricate

details would necessarily relate to the specificities of the area where the action is taken.

4.1. The legal basis, proportionality and subsidiarity

As outlined above, all EU (hard-law) actions related to the digitalisation of tax administrations and

procedures must be based on an appropriate legal basis (Articles 113-116 TFEU) and in accordance

with the principles of subsidiarity and proportionality. To the extent the actions taken by the Union

institutions are confined to the areas covered above (WHT, VAT, EoI, and dispute resolution), meeting

this legal standard should be generally possible. There are three reasons for that.

First, there is already sufficient data to support the impact assessments that would need to be

performed by the Commission in demonstrating obstacles to cross-border movement or appreciable

distortions to competition, necessitating common action

: e.g., both the inefficiencies in the cross-

border WHT regime and the VAT are well documented

Second, as far as the internal market legal basis is concerned, the Court has adopted an approach

whereby the Union institutions have a considerable margin of discretion, with the CJEU interfering only

when a measure is manifestly inappropriate

Third, in practical terms it seems unlikely that a measure in the above mentioned areas would be

challenged in light of its legal basis: unless Article 116 TFEU is relied upon, the Member States would

need to agree unanimously. It comes without saying that, to the extent that the Commission decides

to rely on Article 116 TFEU as indicated in its action plan

, the conditions for its application would also

need to be met and the possibility of facing a legal challenge becomes much greater

On the importance of these impact assessments when relying on the internal market legal bases see CJEU, 7 Sept. 2006, Case C-310/04,

Spain v. Council, EU:C:2006:521; UK: CJEU, 8 June 2010, Case C-58/08,Vodafone, EU:C:2010:321.

Report from the Commission to the Council and the European Parliament Accelerating the Capital Markets Union: addressing national

barriers to capital flows, COM(2017) 147 final, pp. 10-11; VAT Gap: EU countries lost €140 billion in VAT revenues in 2018, with a potential

increase in 2020 due to coronavirus (accessible at https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1579

PL: CJEU, 7 March 2017, Case C-390/15, RPO, EU:C:2017:174, para. 54.

Communication from the Commission to European Parliament and the Council - An action plan for fair and simple taxation supporting

the recovery strategy, p. 2.

See for an elaboration in this respect Englisch, Article 116 TFEU–The Nuclear Option for Qualified Majority Tax Harmonization?, EC tax

review 29.2 (2020). See Nouwen’s reaction to Englisch’s article in M. F. Nouwen, The Market Distortion Provisions of Articles 116-117 TFEU:

An Alternative Route to Qualified Majority Voting in Tax Matters?, (2021), 49, Intertax, Issue 1; M. Nouwen, Inside the EU Code of Conduct

KEY FINDINGS

A number of legal challenges arise in the context of coordinated action at EU level with respect to

digitalization. These challenges related to: (i) the legal basis and the need to demonstrate obstacles

to cross-border mobility or appreciable distortions to competition in the absence of harmonization;

(ii) the need to protect taxpayers’ rights, especially with respect to privacy of natural persons; (iii)

the role of intermediaries such as banks, trading platforms, or advisors in providing structured data

that allow for automatic calculation of tax liability and their legal responsibility should they fail to

provide information with sufficient accuracy.

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25 PE 695.458

4.2. Protection of taxpayers’ rights

If the Union institutions enjoy a wide margin of discretion in balancing the internal market objective

against social, economic or political interests, they enjoy much narrower discretion whenever the

fundamental rights of private parties are concerned

. Thus, when designing secondary law, specific

attention should be given on establishing a sufficient protection of fundamental rights. As far as digital

tax processes and administrations are concerned, the following fundamental rights should be

contemplated.

First, the right to privacy has a specific manifestation in EU context, entailing among others the right

not to be subjected to automated decision-making, including profiling

. An exception to this right is

permissible only as far as it is provided by law and such law includes “suitable measures to safeguard

the data subject's rights and freedoms and legitimate interests

.” In other words, the outcome of an

automated system must not be definitive. For example, when applying smart contracts within a

blockchain system, the system would need to be designed in a way that allows the results to be

reviewed (upon request of the taxpayer within a reasonable time frame), including at a judicial level. In

addition, the right to privacy requires that any data sharing must take place on a need-to-know basis

and, therefore, excludes having personal data shared directly on a blockchain with multiple

participants

Second, although the cross-border information exchange within the EU takes place on the basis of

mutual trust (i.e., all Member States are deemed to provide a sufficient minimum standard of

fundamental rights protection), this trust is nevertheless based on a rebuttable presumption. Thus, in

exceptional circumstances, where a Member State manifestly acts contrary to a minimum fundamental

rights standard, there is an “emergency brake” allowing other Member States to deny cooperation

when it would put the fundamental rights of taxpayers in jeopardy

. Hence, any digital system for real

time data sharing between tax authorities (and especially between private parties and foreign tax

authorities) must have a tool allowing for continuous monitoring of the fundamental rights protection

in the Member States in case of manifest inadequacies. This would allow for swift decisions on

temporary suspension of the cooperation with some Member States.

4.3. The obligations upon intermediaries and legal responsibility

One of the main venues for intra-EU coordination is the standardization of data and technical standards

for its processing. Thus, having a system in place that guarantees the data quality is of crucial

importance. Key players in such a system would be those businesses that act as intermediaries for

taxpayers

, have sufficient knowledge of their customers, and therefore might provide valuable data

input. EU law is already moving in that direction by obliging digital platforms to share data on their

clients for better assessing the income and VAT tax liability

. There are two sets of legal issues that arise

Group: 20 Years of Tackling Harmful Tax Competition, Doctoral Thesis submitted to the University of Amsterdam; I. Lazarov, Anti-Tax-

Avoidance in Corporate Taxation under EU Law: The Internal Market Narrative, IBFD Doctoral Series, section 3.2.2. (forthcoming).

47 IR: CJEU, 8 April 2014, Case C-293/12, Digital Rights Ireland, EU:C:2014:238, para. 47-48.

48 Article 22 of Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons

with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (GDPR).

Article 22(3) of the GDPR.

50 There are potential solutions to this problem whereby all personal data is stored off-chain, while the system relies on Zero-Knowledge

Proof for validating outcomes. See What happens when government, industry and investors seek common digital ground?, available at

https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/tax/tax-pdfs/ey-withholding-tax-distributed-ledger-report.pdf p. 21.

51 IR: CJEU, 26 April 2018, Case C-34/17, Donnellan, EU:C:2018:282.

52 For example, these would be banks, advisors, digital platforms, etc.

53 Council Directive (EU) 2021/514 of 22 March 2021 amending Directive 2011/16/EU on administrative cooperation in the field of taxation,

ST/12908/2020/INIT, OJ L 104, 25.3.2021.

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PE 695.458 26

with respect to the role of such intermediaries: (i) the limits to their obligations; and (ii) the legal

responsibility when data of poor quality is provided.

Regarding the limits to the obligations of intermediaries, legal professional privilege and the right

against self-incrimination (when the reportable actions amount to tax evasion) are relevant to consider.

Professional privilege is key to the efficiency of the system and there are two approaches possible. One

possibility is to move forward by adopting an approach similar to the one under DAC 6, whereby the

scope of the privilege depends on the domestic laws of the Member States

. The downside of this

approach is that it creates an uneven playing field within the EU, putting legal professionals from

Member States with broad legal professional privilege at an advantage compared to legal professionals

in Member States where the scope of privilege is narrow. The advantage of referring to the domestic

standard, however, is that the scope of legal professional privilege would not differ within a single

Member State depending on whether it is applied to a situation covered by EU law or not.

A second possibility would be to refer to a common EU-wide standard of legal professional privilege.

Such a standard has already been developed by the CJEU under the general principle of Union law

Hence, it is conceivable to adopt a measure of secondary law that codifies this standard for areas of

cross-border cooperation between the Member States. The benefit of the second approach is that it

would guarantee the equality between the Member States (no matter what their domestic stance on

legal professional privilege is), as well as equivalent data streams from the same type of intermediary,

no matter where in the Union it is established.

Another potential issue that arises regarding the data quality relates to the legal responsibility in case

the intermediary provides inaccurate information. This raises the question of the legal standard of care

that the intermediary should have exercised. In order to account for the differences between the

different business sectors and in order to not set the compliance burden too high, this might be the

required standard of care applicable to the activity in question (e.g. banking, accounting, financial

intermediary, etc.). If this standard is not met, resulting in sharing data of poor quality, the Member

States should in turn consider applying penalties that are effective, proportionate and dissuasive.

54 Article 8ab (5) of Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic

exchange of information in the field of taxation in relation to reportable cross-border arrangements.

55 CJEU, 18 May 1982, Case 155/79, AM & S Europe Limited v Commission, EU:C:1982:157; CJEU, 14 September 2010, Case C-550/07 P, Akzo

Nobel Chemicals and Akcros Chemicals v Commission, EU:C:2010:512.

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NEW AND EMERGING TECHNOLOGIES AND THEIR TAX

APPLICATIONS

The first three sections of this paper focus on the need for common EU action, what the potential areas

for such action might be, and the legal challenges that arise. This section will explore the technologies

that might be at the centre of the coordinated EU approach. Understanding the nature and functioning

of these technologies will inform the framework that is necessary for their implementation in a

coordinated fashion. Moreover, the legacy already created at the level of the Member States in their

effort to digitalize tax processes must also be taken into account.

At the early stages of the digitalisation process, tax administrations generally focus on reducing costs

and improving tax collection. The steps include the digitalisation of paper-based and manual

processes, the incorporation of third party data and the use of enhanced analytical tools. Even though

these steps contribute to achieve common overarching goals of tax administrations, they face the

structural limitations of the current system, thereby limiting the possible outcomes that can be

achieved

The widespread digitalisation of society now offers new opportunities for EU institutions and tax

administrations to tackle some of these structural limitations and go several steps further. A deeper

transformation entails that the tax system will be embedded within taxpayers’ existing systems, digital

platforms will become agents of tax administration, processes will be increasingly operating in a real-

time fashion and the system will be more transparent and trustworthy.

Taking a prominent role in this process would be essential for the EU institutions as far as the internal

market is concerned. To the extent that the digitalisation of tax processes would make it possible for

tax compliance to become an integral real-time element of transactions, the interoperability of cross-

border systems would be key. Otherwise, the compliance in a cross-border setting would be by

definition more burdensome as it would need to rely on the ‘old’ compliance mechanisms. The section

above explored a range of specific areas of EU law that can be a natural starting point in the process of

transformation: where the compliance burden in the internal market matches the compliance burden

in a domestic market

OECD (2020), Tax Administration 3.0: The Digital Transformation of Tax Administration, OECD, Paris.

The convergence between the internal and the domestic markets is the ultimate goal of the European economic integration: CJEU: 5 May

1982, Case C-15/81, Schul, EU:C:1982:135, para. 33.

KEY FINDINGS

There is a range of digitalization possibilities for tax purposes, from process optimization, to

identification of risks and automation of processes. Different tax authorities are in different stages

of their domestic digitalization journey, but a number of technologies are already being explored

and implemented by governments.

Emerging technologies give rise to opportunities (e.g., possibility of providing better and more

efficient e-services, ability to analyse high amounts of data, improve risk management, automate

tax processes, etc.), but also to some challenges. In particular, cryptocurrencies are digital assets

that are outside of government control to a certain extent, which may result in the possibility of

its use for criminal activities, exchange rate volatility, manipulation and tax challenges.

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5.1. Opportunities deriving from emerging technologies

Regarding the emerging technology tools, an important aspect of digital transformation is how to

choose among different combination of technologies. A set of factors should be considered by tax

administrations, such as the already established processes, the quality of the data available, the

technical skills of the relevant staff and the potential use of each technology.

There is a range of digitalisation possibilities, from process optimization, to identification of risks and

automation of processes. While different tax authorities are in different stages of the digitalisation

journey, these are some of the current technologies being explored and applied by tax administrations:

Table 2: Technologies and their practical applications for tax purposes

Technology

tool

Definition Practical application for tax purposes

Cloud

computing

Cloud computing is the shared use

of storage, computational capacity

and application software provided

externally and interconnected by

internet.

It allows for the remote delivery of

on-demand comp

uting services

over a network, usually on a pay-for-

use basis

The models of service

provision include Infrastructure as a

service (IaaS), Platform as a Service

(PaaS) and Software as a Service

(SaaS).

Some examples of cloud service

providers are Oracle, SAP, Microsoft

(

Azure) and Google (Cloud

Platform).

The cloud concept has the potential to reduce

the costs and increase the institutional agility

by allowing tax administrations to not depend

solely on IT equipment (e.g., specific

computers, data centres, etc.), since the cloud

does not depend on a specific physical

equipment and can be accessed from

different locations. This provides for the ability

to release computer resources that are no

longer being used and the availability of the

same information in different computers

From an EU perspective, the possibilities of

cloud computing would result in greatly

reducing the costs for each Member State as

there would be no need for substantial

hardware and software costs. A single system

might be developed and made available to

the Member States via the cloud.

Big data

and data

analytics

Big data involves the concept of

volume, variety, velocity, veracity

and value of data.

Data analytics allows for

autonomous examination of data or

content using sophisticated

techniques or tools to discover more

profound knowledge, make

forecasts, or generate

recommendations.

ax administrations have access to a large

amount of data collected through tax returns,

assessments, tax collection, automatic

exchange of information (AEOI), EU DAC,

external sources (utility contracts, bank

information, insurance contracts), etc.

Processing the immense amount of

information collected is a major challenge for

most jurisdictions. The approach taken by

some tax authorities focuses on a risk analysis

and selection of relevant information through

adv

anced analytics techniques, such as

machine learning and AI. These techniques

allow for a faster and more accurate analysis.

Artificial

intelligence

(AI)

AI is a key technology that allows for

the application of advanced analysis

and logic techniques, including

machine learning and natural

International Tax Review, Cloud computing and international tax issues, available at

https://www.internationaltaxreview.com/article/b1fyg9xg9h94pq/cloud-computing-and-international-tax-issues

Seco, Antonio (CIAT), Cloud Computing in Tax Administrations (i), 18 April 2018, available at https://www.ciat.org/cloud-computing-in-

tax-administrations-i/?lang=en

Exploring the opportunities and challenges of new technologies for EU tax administration and policy

29 PE 695.458

language processing, to interpret

events and support automated

decisions.

In that sense, an increased investment in tools

and skills, as well as the IT infrastructure of a

government is determinant. It is also

important to put together a tax team, which

includes professionals with different

backgrounds (such as IT professionals,

economists and statisticians). Other advanced

tools may be considered as well, such as

network analysis, text mining and web

scraping.

From the perspective of the need for

coordination so that the internal market

reflects the characteristics of a domestic

market, the data exchanged via the DAC

system should be structured and with a similar

intensity as the one shared domestically.

Blockchain

Blockchain is a distributed ledger of

network nodes maintaining a list of

registries or transactions gathered

in data blocks. What the blockchain

does in practice is to allow for

establishing an immutable version

of the truth (based on a consensus)

in a network of participants without

the need for an intermediary (i.e.,

creating a distributed ledger).

Smart contracts in turn allow for the

consequences of an event that has

been recorded to automatically

occur.

In particular, this is one of the key

technologie

s that have the potential to

disrupt the way tax systems operate and is

already being implemented as a way of

modernizing the existing tax systems.

The technology has several potential

applications in tax and businesses in general,

eliminating the need for intermediaries and

allowing for real-time information sharing, tax

collection and more efficient administration

This is one of the key technologies in an EU

context since it requires a certain level of

harmonisation

of the underlying rules

internatio

nally (so that smart contracts can

operate) while allowing for sufficient

decentralization.

Internet of

things (IoT)

IoT refers to a category of devices

(i.e., objects, vehicles, and other

items) that contain electronic

sensors and software with online

connectivity, allowing the devices to

collect and exchange data. The

technology generates data for real-

time monitoring and measuring

(services carried out through apps).

The IoT is another key component in an EU

setting as it allows for connecting the physical

world (the ‘things’) with its virtual

representation on the blockchain thereby

ensuring that what is recorded as an event on

the blockchain corresponds with the objective

reality.

The importance of this for matters such as

intra-Community supply and

acquisition of

goods can hardly be overstated.

Quantum

computing

Quantum computers are

supercomputers that have the

capacity to rapidly process a high

amount of data that traditional

computers do not. Thus, quantum

Quantum computing can be applied in the

context of tax impact theory, a subject that

studies how changes imposed by

governments in tax systems affect taxpayers’

observations and responses. This study is

See Owens, J. and De Jong, J. 2017. Taxation on the Blockchain: Opportunities and Challenges. Tax Notes International. Volume 87,

Number 6.

IPOL | Policy Department for Economic, Scientific and Quality of Life Policies

PE 695.458 30

computers solve complex problems

quickly, regardless of the number of

variables involved.

As a highly theoretical and subject

study, not many technologies have

a role to play in this analysis.

Quantum computers, however,

have the potential to measure the

amount of “activity” a company

conducts in an individual Member

State and better inform the

implementation of the formula to

split the consolidated taxable

profit

useful to address matters of fair taxation or

international tax issues. For example, tax

impact theory can better inform the decision-

making process related to EU initiatives such

as the Common Consolidated Corporate Tax

Base (CCCTB).

It is likely that quantum computers would also

play a role in the complex calculations

required for the attribution of profits under

the upcoming OECD Pillar 1.

Therefore, quantum computing can help

solve challenges arising in a domestic or cross

border scenario by modeling hypothesis or

performing a more robust tax impact analysis

before enacting legislation

Source: Authors’ own elaboration.

As seen above, digital tools can be applied in many ways: to deliver better and more efficient services

to taxpayer (the so-called “e-services”); to assist in analysing the high amounts of data collected by tax

authorities, i.e., through the application of data analytics technologies, and thereby improve risk

management; to nearly fully automate tax processes and make them more efficient; and to facilitate

the cooperation between different government bodies. The figure below demonstrates some relevant

tax areas for relying on digital technologies.

Figure 1: Radar for application of technologies

Source: Risse, Robert; Gries, Matthias, Der Einsatz von Blockchain-Technologie in der Steuer- und Zollfunktion, (2020)

Beckdigitax

See EY, How quantum computing will improve tax administration and compliance, available in https://www.ey.com/en_us/tax/how-

quantum-computing-will-improve-tax-administration-and-compliance

Ibid.

Exploring the opportunities and challenges of new technologies for EU tax administration and policy

31 PE 695.458

In relation to e-services, tax administrations have been investing time and resources in the past decades

towards the creation of digital applications with the aim to facilitate compliance and interaction with

taxpayers. The earliest examples of e-services are online service portals (e.g., for online tax return filings

and payments), which are now available to taxpayers in many EU countries. Other examples of e-

services include mobile apps and compliance communications tools. More recently, pre-filled tax

returns and electronic invoicing services (“e-invoicing”) were introduced in some jurisdictions.

Naturally, however, the pre-filling of tax returns depends upon having the data of transactions that is

necessary. While this data can be made relatively easily available in a domestic setting by having real-

time access to e-invoicing information, cross-border transactions would be outside the scope if the

systems of the Member States involved do not ‘talk’ to one another.

Technology can also be applied in the core tax functions of tax administrations, including taxpayer

registration (collection, recording and maintenance of basic identifying taxpayer information), filing

and processing of tax declarations and tax payments, audits, taxpayers objections and appeals,

enforcement measures, tax fraud investigations and debt management.

In fact, considering the rapid growth and relevance of digital platforms and e-commerce in Europe,

there is a paradigm shift in the role of digital platforms in the collection of VAT and income taxes on

online sales. The role of platforms should move from a voluntary intermediary regime to a full liability

regime, where digital platform providers would disclose information on all individual platform sellers

and withhold tax on payment to individual platform sellers

. The DAC 7 in the context of EU law is a

move precisely in that direction

Opportunities to use technology for transfer pricing purposes include detecting deviations from

expected prices, finding comparable transactions more efficiently, obtaining relevant information and

exchanging it with other countries, and resolving cross border disputes (i.e., joint audits, mutual

agreement procedures, advance pricing agreements more efficiently).

Moreover, technology can help facilitating cooperation between the different government bodies:

customs, tax, social security, financial intelligence units, ministry of justice, and ministry of finance. To

achieve a whole of government approach, the technical platforms used by these departments should

be interoperable internally, but also in a cross-border setting. Moreover, they should target

comprehensive intra-agency cooperation between tax authorities and financial intelligence units with

DAC 5 (on sharing of information between AML units and tax authorities)

already providing ‘fertile

soil’ for a more effective EU actions in combating money laundering, bribery, tax evasion, and other

financial crimes.

Lastly, technology offers the opportunity to create open and more comprehensive registries of the

ultimate physical owners of opaque offshore vehicles as trust, shell entities, foundations and holding

companies, thereby preventing such entities from exploiting tax benefits (e.g. reduced withholding tax

rates) and opportunities for fighting offshore non-compliance. Blockchain can help in moving towards

registries that are transparent and updated regularly and in which the data is verified nationally and is

made available at EU level to the authorities of other Member States in real time, thereby serving as an

See OECD (2019), The Role of Digital Platforms in the Collection of VAT/GST on online sales, OECD, Paris. Available at:

https://www.oecd.org/tax/consumption/the-role-of-digital-platforms-in-the-collection-of-vat-gst-on-online-sales.pdf

Council Directive (EU) 2021/514 of 22 March 2021 amending Directive 2011/16/EU on administrative cooperation in the field of taxation,

ST/12908/2020/INIT, OJ L 104, 25.3.2021.

Council Directive (EU) 2016/2258 of 6 December 2016 amending Directive 2011/16/EU as regards access to anti-money-laundering

information by tax authorities, OJ L 342, 16.12.2016.

IPOL | Policy Department for Economic, Scientific and Quality of Life Policies

PE 695.458 32

EU-wide digital register. If other digital technologies are used instead, these may nevertheless offer

more opportunities than paper based systems to link up these registers in Member States.

The interoperability of the technologies employed by EU countries is therefore crucial to accurately

perform these tasks (some of which are mandated by EU law, e.g., exchange of information).

Table 3: Blockchain and the Distributed Ledger Technology

Source: Authors’ own elaboration.

BLOCKCHAIN AND THE DISTRIBUTED LEDGER CONCEPT

Several technologies play a role in establishing the common technical infrastructure within the

EU in the tax areas discussed in the section above. However, special attention should be paid

to blockchain, a type of distributed ledger technology.

Figure 2: Distributed Ledger Technology

Source: Presentation of the World Bank Conference in March 2021

The concept of distributed ledger in which blockchain is based [see figure 2 above] has several

benefits in a cross-border scenario as it eliminates the need for a central authority. While in a

domestic tax setting such central authority is readily available (e.g., the tax administration), a

blockchain based system allows for smooth cooperation in the absence of a centralized

authority in a cross-border context. Hence, in a cross-border setting, blockchain acts as a self-

governing network of authorities and a secure communication channel between them.

Moreover, it is important to consider that the output of any technology, including blockchain,

is largely dependent on the quality of its input data. If the information initially fed into the

blockchain were factually wrong, then the results it produces would also be legally wrong. For

example, a blockchain system that calculates and automatically applies reduced WHT rates at

source would apply the wrong rate if it receives the wrong information on the tax residency of

the taxpayer (because for example a fraudulent Certificate of Residence was relied upon). The

role of intermediary that are acting under a Know Your Customer obligation, such as financial

and credit institutions, is therefore crucial. To the extent such intermediaries are parties to the

blockchain, they might be bound by law to supply accurate information.

Thus, a permissioned blockchain with controlled participation may improves the integrity of

the system, as it allows not only tax data, but also anti-money laundering and beneficial

ownership information to be shared in a secured environment. EU law harmonizes both and

establishes a connection between them under DAC 5.

Exploring the opportunities and challenges of new technologies for EU tax administration and policy

33 PE 695.458

5.2. Risks deriving from emerging technologies

New and emerging technologies bring opportunities for the transformation of tax processes that

would advance the internal market by making it more competitive and resilient to tax fraud and

avoidance. At the same time, the implementation of these technologies bring some challenges that

should be considered.

Particular attention should be given to the development of cryptocurrencies, i.e., virtual currencies

secured by cryptography. Most cryptocurrencies are based on a blockchain (decentralized) system and,

thus, are not issued or controlled by a centralizing authority. This intrinsic characteristic brings many

benefits (portability, transparency, less costs, etc.), but also some risks that are mostly associated with

the fact that these digital assets are outside of government control to a certain extent, which may result

in the possibility of its use for criminal activities, exchange rate volatility or manipulation

A key challenge relates to the tax treatment of virtual currencies. In many countries, guidance has not

yet been provided or it only covers a limited number of issues. Potential taxable events during the life

cycle of virtual currencies include (i) the moment of creation, (ii) the storage and transfer, and (iii) the

exchange of the crypto-asset. Some countries impose tax upon receipt of a cryptocurrency; others

focus on the event of disposal, while it is not common for storage to give rise to a taxable event

The characterization of the cryptocurrencies for tax purposes varies: while the majority of jurisdictions

treat them as property (which englobes intangible assets, commodities or financial instruments),

others take a different approach and consider virtual currencies as foreign fiat currencies

or as “digital

representation of value”

. Different tax treatments arise depending on how the asset is characterized

in a particular State. Below is a description of the VAT treatment of virtual currencies in EU Member

States.

For more information, see Investopedia, Cryptocurrency, available at https://www.investopedia.com/terms/c/cryptocurrency.asp

OECD (2020), Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues, OECD, Paris.

Few countries consider these virtual assets to be a type of currency for tax purposes (the decentralization, lack of backing, price volatility

and limited use as a means of exchange are the reasoning behind this approach).

Ibid.

IPOL | Policy Department for Economic, Scientific and Quality of Life Policies

PE 695.458 34

Figure 2: VAT treatment of virtual currencies in EU Member States

Source: OECD Secretariat, based on the Hedqvist decision and European Commission Value Added Tax Commission (2016),

Issues arising from recent judgement of the Court of Justice of the European Union, 135(1)(e) and (d) SUBJECT : CJEU

Case C-264/14 Hedqvist : Bitcoin, No. 892.

Notes: *The supply of the good or service remains taxable under normal VAT rules. The Figure should be read as considering

the VAT treatment of virtual currency in the case of (i) exchange for fiat currency, for other virtual currency or for

goods or services, (ii) mining resulting in transaction fees or reward in new tokens, and (iii) the related services

provided to the virtual currency holder such as wallets or intermediate services via exchange platforms.

Other emerging developments in the crypto-asset environment are worth noting. With the aim to

minimize volatility, stablecoins combine the features of both fiat and virtual currency by maintaining a

stable price based on a fiat currency, a commodity another virtual asset or an algorithm. Policy

challenges associated with stablecoins are high in the international agenda

. Similar challenges to

traditional cryptocurrencies arise: risk of money laundering, effect on the integrity of payment systems,

challenges related to tax compliance, legal and regulatory framework, among others. In particular, the

European Central Bank (ECB) considers that the asset management function of stablecoins poses

significant risks to financial stability

. The tax treatment of stablecoins is not clear and there is no

international consensus on whether they should be treated as classic virtual currencies (e.g.,

considered as asset and treated as property) or as a security or foreign currency

Moreover, cryptocurrencies can pose a threat to monetary policy and money issuance monopoly. For

this reason, central banks have been among the first public authorities to issue a statement on crypto-

assets and propose to define and regulate digital assets

The G7, Bank for International Settlements and the IMF are investigating the impact of global stablecoins. See G7 Working Group on

Stablecoins (2019), Investigating the impact of global stablecoins, October 2019, available athttps://www.bis.org/cpmi/publ/d187.pdf

European Central Bank (2020), A regulatory and financial stability perspective on global stablecoins, available at

https://www.ecb.europa.eu/pub/financial-stability/macroprudential-bulletin/html/ecb.mpbu202005_1~3e9ac10eb1.en.html

OECD (2020), Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues, OECD, Paris.

Cambridge Center for Alternative Finance (2019), Global Cryptoasset Benchmarking Study, available at

https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/3rd-global-cryptoasset-benchmarking-study

Exploring the opportunities and challenges of new technologies for EU tax administration and policy

35 PE 695.458

A number of countries (e.g. China, Singapore, U.K.) are now considering issuing their own virtual

currencies (referred to as Central Bank Digital Currencies, or CBDC), which is a digital form of currency

that is issued by a central public authority and denominates in the currency of that country. CBDC

would co-exist with physical cash, and not necessarily replace it. Different CBDC designs are currently

being explored, but most projects are at early stages

The ECB launched a project in July 2021 to explore the possibility of issuing a digital euro

. The project

is in its first stages and the ECB is investigating how to design and distribute it to merchants and

citizens, as well as the impact it would have on the market and the changes to European legislation

that might be needed

. The FISC may at the same time wish to consider how a CBDC would impact on

the operations of EU tax systems.

OECD (2020), Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues, OECD, Paris.

European Central Bank, Eurosystem launches digital euro project, available at

https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210714~d99198ea23.en.html

See more information in European Central Bank, A digital Euro, available at

https://www.ecb.europa.eu/paym/digital_euro/html/index.en.html

IPOL | Policy Department for Economic, Scientific and Quality of Life Policies

PE 695.458 36

CONDITIONS FOR A SUCCESSFUL DIGITAL TRANSFORMATION

OF TAX ADMINISTRATION

6.1. How can Member States get from where they are to where they

want to be in terms of digitalisation?

EU tax administrations are at different stages in their digital development. This should be taken into

account when designing a common approach to digitalisation, especially with respect to its time frame:

it will need to account for those Member States that are relatively behind in their digital maturity.

Digital maturity refers to the sophistication of the technology being applied in a certain public body

(for example, the range of technologies used by tax administrations: from the implementation of a web

portal and online filing of tax returns to a more complex and advance implementation of systems such

as advanced analytics and blockchain-based applications). Several organizations came up with

benchmarks to assess the digital maturity level of different governments

According to one study

, the digital profiles of national tax administrations can be generally grouped

under six levels, as laid out below:

Table 4: Levels of digital maturity of tax administrations

Level 1 Level 2

Paradigm shift

Level 3 Level 4

Transformatio

nal

Level 5 Level 6

“E-file” “E-

accounting”

“E-match” “E-audit” “E-assess” “E-

government

”

Use of

standardized

electronic

form for

filing tax

returns

required or

optional;

other income

Submit

accounting or

other source

data to

support

filings (e.g.,

invoices and

trial balances)

in a defined

Submit

additional

accounting

and source

data;

government

accesses

additional

data (bank

Level-2 data

analysed by

government

entities and

cross-

checked to

filings in real

time to map

the

Government

entities using

submitted

data to assess

tax without

the need for

tax forms;

taxpayers

allowed a

All

government

interaction

with citizens

and

enterprises

digitalized;

seamless

international

See, for example, OECD (2016), Technologies for Better Tax Administration.

See EY, Tax Authorities are Going Digital (2017), available athttps://assets.ey.com/content/dam/ey-sites/ey-

com/en_gl/topics/digital/ey-tax-authorities-are-going-digital.pdf; EY, How Tax Administration is Going Digital (2019), available at

https://www.ey.com/en_gl/tax/how-tax-administration-is-going-digital

KEY FINDINGS

Even before starting the process of digitalization, Member States should focus on developing a

digital tax administration roadmap, having in mind the long-term goals of the domestic

administration and the digital internal market.

The Commission can assist the Member States in their digitalization efforts by: (i) taking coordinated

action at EU level in terms of interoperability of the systems; (ii) providing a common infrastructure

for the automation of tax outcomes in harmonized areas; (iii) assisting the tax administration of the

Member States by issuing soft-law instruments and providing the necessary framework for training

and cooperation; and (iv) acting as an EU-wide observatory of emerging technologies and their

potential use in the tax area.

Exploring the opportunities and challenges of new technologies for EU tax administration and policy

37 PE 695.458

data (e.g.,

payroll and

financial)

filed

electronically

and matched

annually

electronic

format to a

defined

timetable;

frequent

additions and

changes at

this level

statements)

and begins to

match data

across tax

types, and

potentially

across

taxpayers

and

jurisdictions,

in real time

geographic

economic

ecosystem;

taxpayers

receiving

electronic

audit

assessments

with limited

time to

respond

limited time

to audit

government-

calculated tax

digital

exchange of

information

between law

enforcement

and tax

authorities in

different

countries

Source: EY research

In order to ensure a successful digital transformation, one should take a strategic rather than

opportunistic approach. This means that even before beginning the process of digitalisation, the focus

should be on developing a digital tax administration roadmap, having in mind the long-term goals of

the administration. This is important in light of the cross-temporal interoperability of systems: while

the initial effort will likely be in a limited area, the underlying technology and infrastructure should

allow for scalability and comprehensive digital transformation in the future. Hence, when the EU

institutions design a common strategy in the narrow fields outlined in Section 3 above, this should be

done by keeping the longer-term goal of a digital internal market in mind.

When drafting a digital roadmap, Figure 3 describes several aspects that must be considered.

Figure 3: Different stages of a digital tax administration roadmap

Source: Authors’ own elaboration.

Stage 1: Understand the current status

• In this stage, the focus should be on understanding what the challenges and limitations of the

established processes are, which of these processes are still meaningful in a digital environment, how

technology can be applied to address the existing challenges and how to engage stakeholders in the

discussion. In addition, regulations and procedures that were built up in an analogue age (and might

be dispensed in a digital age) must be reviewed.

Stage 2: Ensure data quality

• In the next stage, ensuring the data quality is the key focus. Duplicated data should be avoided, as

well as inconsistent formats and incomplete information, the use of multiple units and languages,

and inaccurate data. If the data is poor or not comprehensive, the technology is unlikely to provide

usable outputs. This element is key in an EU context as it relates to the interoperability of systems

across the border. This interoperability eventually depends upon data standards coordination.

Stage 3: Digitalize existing processes

• During this stage, the focus should be in getting processes digitalized. It is important to involve the

private sector (e.g., MNE, SME, technology companies, advisors) and ideally build upon their existing

systems in order to make the transition as smooth as possible.

Stage 4: Consider other determinent factors

• Another important stage is ensuring that the human factor is considered with respect to the skills of

the existing staff and ensuring that management is aligned with the digitalization efforts. In fact,

often when digitalization processes fail is because the strategy was not successful in focusing on the

human element. Ideally, tax administration should have one person in charge of the digitalization

effort and a support team (HR, task compliance, etc.) under the manager. Moreover, legacy issues,

such as outdate cultural mindset, should be considered and addressed.

Stage 5: Engage taxpayers

• A strategy to communicate and engage with taxpayers in the digital transformation process is

essential. A level of trust from taxpayers is required for the digitalization efforts to be effective.

IPOL | Policy Department for Economic, Scientific and Quality of Life Policies

PE 695.458 38

During the digitalisation process, tax administrations must ensure that:

• senior management understands the importance of data driven approaches and regularly and

effectively communicates this to staff;

• there is effective collaboration between data officers and enforcement / administrativ

ecialists;

• a structured training program exists to supports skills building in the areas defined by the

competency profiles covering key job streams;

• a change managment paradigm in in place

• databases have been inventoried, fields described, data owners identified, etc.;

• data quality is being regularly assessed and improved and there is a central repository with red

flags for subsequent improvement (in this regard, see Figure 4 below)

;

• a

nalytics and visualization software is routinely used to analyze complaints, cases and

investigative performance;

• the enforcement unit has effective partnership with frontline staff (i.e., tax administration and

procurement staff) necessary to understand their data, reflect red flags, etc.;

• effective data sharing arrangements have been established with other agencies such as the

police, tax administration, procurement, financial-intelligence units, etc. and

• information security strategy and control framework are in place and legal risks (e.g., those

related to GDPR) are well understood, and responsibilities are assigned and monitored.

Figure 4: Data quality is key

Source: Presentation of the World Bank Conference in March 2021

Thus, tax administrations will need to adapt to this new digitalized economy by restructuring their

organizations and the way they operate in order to keep up with the developments in the tax

landscape. With emerging technologies, a new potential to outsource much of routine compliance and

assessment burdens emerges. A number of tasks that were once fulfilled by the employees of tax

administrators (e.g., registration of taxpayers, tax assessments, verifications to tax collection and

assessment of dispute) will likely be included in a fully automated digital system in the future. In this

scenario, the role of tax authorities would no longer be as verifiers of the outcomes, but rather certifiers

of the digital systems that are put in place for the purposes of tax compliance.

Exploring the opportunities and challenges of new technologies for EU tax administration and policy

39 PE 695.458

6.2. What roles do the EU institutions have in the digitalisation efforts of

Member States?

Undergoing each of the steps mentioned in Section 6.1 above would predominantly be an obligation

for the tax administrations of the Member States. Yet, the EU institutions can have a three-fold role in

light of the impact on the internal market, outlined above in section 2. First, they can set the area of

coordinated action at EU level in terms of interoperability of the systems as regards standardization of

data and its automatic real-time sharing in a cross-border context. Second, the EU might provide a

common infrastructure that ensures automation of tax outcomes in a limited number of areas that are

within the scope of already existing harmonisation – withholding taxes and VAT. Finally, the Union

might assist the tax administration of the Member States by issuing soft-law instruments as well as by

providing the framework for training and cooperation necessary for being successful in the

digitalisation efforts.

The EU Commission could also play a useful role in monitoring the emergence of new technologies

and in assessing where they can be used in the tax area. The Commission could also assist the Member

States in capacity building and maybe provide the technical infrastructure for some of the measures –

e.g., an agreed upon blockchain design, potentially in close cooperation with business. Hence, in

designing the intricate details of any technical measure (for example, in an implementing piece of

secondary legislation based upon a framework set by a Council directive), the Commission might find

itself in the position of having to set, alongside the legal standards, the technical standards that go with

the legal framework. The Commission might also have a role to play in helping the Member States in

preparing for these technical standards

n this sense, the future legislative process would be a process that simultaneously sets the necessary

technology that puts the newly adopted legislation in motion (for example, by relying on blockchain

and smart contracts). The technology (almost) becomes the law: therefore, the process of

“implementing” relates to having technical capacity as much as it relates to amending the domestic

legal framework.

IPOL | Policy Department for Economic, Scientific and Quality of Life Policies

PE 695.458 40

CONCLUSION

The EU and Member States must seek scenarios that integrate existing technology with the vision of

future in which digital compliance is designed as a natural part of business operations for both small

and large business, in a domestic and cross-border context. Blockchain, machine learning, IoT, big data

and AI are at the core of this transformation. These opportunities can be best realized by integrating

design compliance solutions into business existing processes and using new technologies to create

compliance proof systems within those areas where the EU law sets a common framework that can be

used as a basis. The EU Commission should take the lead to ensure the technical interoperability and

EU law compatibility of such a system.

To sum up, technologies - those which we know today and those which we have not even anticipated

- offer exciting opportunities for EU tax administrations and policy makers to provide a business friendly

environment which stimulates growth, increases revenue, reduces the deadweight loss associated with

tax and at the same time reduces inequalities in the distribution of income and wealth.

In order to achieve its policy objectives, the Union should make sure that the areas covered by EU

measures are not only harmonized from the point of view of substantive rules but also in terms of

technical infrastructure: e.g. digitalizing the VAT system will be difficult if the Union has no common

technical VAT infrastructure. The same would be true for more and more areas of taxation as the

economic integration of the internal market expands. Customs duties, withholding taxes, exchange of

information or dispute resolution are examples that already exists, but future carbon taxes, wealth

taxes, digital services taxes or rules on shell entities are other instances that are likely to occur. In this

sense, the EU could play a leading role in ensuring that the procedural and technical aspects of the

digitalisation of tax administrations are coordinated to avoid barriers to interoperability of national

technical platforms recognizing that greater coordination in these areas may also have unintended

spillover effects in areas where the Union has not exercised its competence.

Exploring the opportunities and challenges of new technologies for EU tax administration and policy

41 PE 695.458

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ab - references should

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• Belt and Road Initiative Tax Journal, Digital Transformation: BRITACOM perspective, vol. 1, no. 2

(2020), pp. 55 and 83-84, available at P020201229609118824967.pdf (britacom.org).

• C

. Dimitropoulou, S. Govind, L. Turcan, Applying Modern, Disruptive Technologies to Improve the

Effectiveness of Tax Treaty Dispute Resolution: Part 1 and Part 2, (2018), 46, Intertax.

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ambridge Center for Alternative Finance (2019), Global Cryptoasset Benchmarking Study,

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IP/A/XXXX/2020-XX

Print ISBN XXX-XX-XXX-XXXX-X | doi:10.2861/XXXXX | QA-XX-XX-XXX-EN-C

PDF ISBN XXX-XX-XXX-XXXX-X | doi:10.2861/XXXXX | QA-XX-XX-XXX-EN-N

This research paper explores the opportunities and challenges faced by the EU from the rapid

emergence of new technologies such as Artificial Intelligence, Machine Learning, Data Analytics and

blockchain in the area of taxation. These technologies enable a transformation of the way that tax

administration interact with taxpayers and can move tax compliance into real time. At the same time

they raise practical and legal challenges for both the Member States and the European Union.

This document was provided by the Policy Department for Economic, Scientific and Quality of Life

Policies at the request of the Sub Committee on Tax Matters (FISC).