How is digitalization changing tax control in the region?

The modern world is rapidly changing under the onslaught of information technology. This process affects all spheres of life, including public administration. Tax control is not an exception. Outdated paper methods are being abandoned everywhere in favor of automated digital systems. The global trend is aimed at creating a unified information space. It provides data on business transactions to fiscal authorities in almost real time. This fundamentally changes the approaches to tax administration, making it more accurate and less burdensome for bona fide companies.

For the Eurasian region, with its close economic ties and active cross-border movement of goods, such a transition is of particular importance. The harmonization of tax systems and the introduction of similar digital tools contributes to the creation of a transparent and fair competitive environment. This simplifies doing business within the Union and reduces risks for the entrepreneurs who work with partners from neighboring countries. When the rules of the game become uniform and understandable for all participants, the economic space functions more efficiently. A new tax reality is being formed, in which the main tool of the inspector is not a folder with documents, but an analytical program.

Main technologies in the control service

Digital transformation is based on several basic technologies that are already actively used by tax authorities. They form the foundation of the modern system of fiscal supervision.

Modern cash registers with online data transfer function have become one of the first elements of this system. Each check is instantly sent to the servers of the tax service. This gives the government a complete picture of retail sales across the country. Another significant element is electronic document management, in particular, the use of electronic invoices. Companies exchange documents in digital format, and the entire chain of movement of goods and services becomes visible to analytical systems.

It is the collection and processing of large amounts of data (Big Data) that is the essence of the new approach. Specialized software systems, for example, the Russian ASK NDS-2, automatically compare information from declarations, invoices, cash receipts and customs documents. They reveal discrepancies and the so-called “tax gaps” – the situations where one company claims a VAT deduction, and its counterparty does not reflect the corresponding transaction. Thanks to this approach, the focus is shifting from total on-site inspections to a remote and point-wise risk analysis.

Regional overview of digital initiatives

The processes of digitalization in the countries of the Eurasian Economic Union and neighboring countries have a common focus, but they differ in details and the pace of implementation. Each country adapts global trends to suit its national peculiarities. The Federal Tax Service of Russia demonstrates one of the most comprehensive and in-depth approaches to building a digital control system in the region.

Russian model: control and automation

Russia is one of the leaders in the field of digitalization of tax administration. The Federal Tax Service of the Russian Federation is actively implementing advanced solutions. The system of automated control of VAT refunds (ASK NDS) has practically eliminated fraudulent schemes with this tax. The introduction of online cash registers has provided a complete slice of retail sales data. Currently, the country is actively developing a product traceability system that will make visible the path of certain product categories from the importer or manufacturer to the end user. As a result, on-site inspections are becoming a rare occurrence and are carried out only if serious risks are identified during remote analysis.

The significant impact of technology on tax control methods can be seen in the example of tax monitoring. This is a form of interaction when large companies provide the tax authority with direct access to their information and accounting systems. Inspectors can see all operations in real time and promptly request explanations. This reduces the administrative burden on business, as there is no need to conduct traditional inspections in relation to the past periods.

Experience of Kazakhstan and Belarus

Kazakhstan has also made substantial progress in digitalization. One of the central elements of the system is the Electronic Invoices module. Its use has become mandatory for most taxpayers. The Electronic Invoices system is integrated with a “Virtual Warehouse” that tracks the movement of goods within the country. This creates a transparent environment and makes it more difficult to apply tax evasion schemes.

Belarus is moving in a similar direction. The country has a cash register equipment control system (SKKO), similar to Russian online cash registers. The mechanism of electronic invoices for the turnover of goods subject to labeling is being actively introduced. These measures are aimed at increasing tax collection and reducing the size of the shadow sector of the economy. The experience of neighbors, including the digitalization of the Federal Tax Service, is being carefully studied and adapted according to local specifics.

Development of systems in other countries of the region

Other post-Soviet countries are also involved in this process. Armenia and Kyrgyzstan, being members of the EAEU, are gradually introducing elements of digital control, in particular, electronic declaration and the use of modern cash registers. Uzbekistan is carrying out a large-scale tax reform, one of the directions of which is the widespread introduction of online cash registers and electronic invoices. The general vector of development is obvious: all countries in the region strive to create transparent and automated tax administration systems.

Consequences for entrepreneurs 

Transition to digital tax control has dual consequences for businesses. On the one hand, it incurs certain difficulties and costs. On the other hand, new opportunities are opening up and interaction with the state is becoming easier.

The main challenges include:

• • Need for initial investments in new equipment (online cash registers) and software.
• • Need for training the staff to work with electronic document management and new reporting systems.
• • Increased responsibility, because any error in the data becomes immediately visible to the analytical systems.

At the same time, a bona fide business gets tangible benefits from digitalization. Reporting procedures are being simplified. The number of on-site inspections and paper document requests is reduced, which saves time and resources. The transparency of doing business is increasing: companies can be sure that their counterparties are also working in a legal field. This reduces the risk of collisions with one-day firms. Such a comprehensive digitalization of tax services contributes to the improvement of the business climate in the region.

Prospects and recommendations for business

The future of tax control is linked to the further development of technology. We can expect a wider use of artificial intelligence and predictive analytics to identify risks even before an operation is performed. The systems will not only find errors, but also predict the likelihood of their commission by a particular taxpayer. One can also expect further development of cross-border information exchange between tax authorities of different countries in an automated mode. 

In these circumstances, businesses need to adapt to the new game rules. To work successfully in a digital environment, entrepreneurs should pay attention to several aspects. First of all, one needs to invest in modern accounting systems that are compatible with government information platforms. It is important to constantly improve the skills of accountants and financial specialists so that they are aware of the latest changes in legislation and technology. Finally, internal processes should be structured in such a way as to reduce the likelihood of errors when entering data.

In general, careful verification of counterparties and careful document management are becoming the foundation of a company’s financial security in the new digital age.