Preparing tax operations for new technologies

with Professor Dennis Weber
and Dr. Dennis Post

On this episode, host Olivia Neal meets Prof. Dennis Weber and Dr. Dennis Post. They share insights from the CPT research project on the impacts and opportunities for tax operations of emerging technologies.

Episode 47: Preparing for a cashless, platform-based and technology-driven society

Public Sector Future

Episode summary

On this episode, host Olivia Neal meets Prof. Dennis Weber and Dr. Dennis Post. They share insights from the CPT research project (cashless, platform-based and technology-driven) on the impacts and opportunities for tax operations of emerging technologies, such as cryptocurrencies, blockchain and artificial intelligence.

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How can tax operations prepare for a cashless, platform-based technology-driven society?

On this episode, host Olivia Neal meets Prof. Dennis Weber and Dr. Dennis Post. They share insights from the CPT research project (cashless, platform-based and technology-driven) on the impacts and opportunities for tax operations of emerging technologies, such as cryptocurrencies, blockchain, and artificial intelligence.

What is the CPT Project?

“Some years ago, I realized that the world is getting more cashless. That’s the C of CPT project.” Dennis Weber is a Professor at University of Amsterdam. He’s the Founder of the Amsterdam Center of Tax Law of the UvA, and the Founder of the CPT (Cashless, Platform Based and Technology Driven Society) Project.

“We do more online. We’re buying stuff on platforms. And technology is becoming more and more important, also for taxation. So that’s why we started the CPT, a cashless platform technology, and the influence of that on taxation. When we teach, when we study, we always take the current law into account, but I think it’s also really important that we look to the future. And that’s why we started this project.”

Weber added, “The interesting thing is that we were working on this project to establish it before the pandemic, but also during it. Then everything got more cashless. More people were buying everything online. And technology, we saw also with the blockchain and cryptocurrencies becoming more and more important. We see more a world that is driven by cashless, platform and technology developments, and we also see that the legislation is lacking.”

But with new technology, comes a new set of challenges.

“So, we are focusing on specific issues. One of the issues is platform reporting, because we see that there’s legislation coming next year, that platform has to report several tax information from the taxpayers.”

“Another one is the fact that workers are getting more and more dependent on platforms. Cryptocurrencies, and crypto assets is really important. What are the consequences for taxation? Another thing is the question if you can use blockchain for tax administration. The tax authorities are using AI to detect fraud,” Weber explained.

Dr. Dennis Post is a Partner at EY and is working with Dennis Weber on the CPT project. Post explained his interest: “I did my PhD during my professional career. I was always actually at the interplay of scientific research and practice to really to get the best of both worlds.”

“I was in my blockchain role at EY, really looking for what are universities doing at on this topic specifically. I did some research, and I actually came to the conclusion that up to a few years ago, there wasn’t any university across the globe that was actually focusing on this. And then all of a sudden, I see Dennis coming out with the CPT project, and this could not be any better. The best university in the world, University of Amsterdam, so close to my house, and focusing on the topic that I’m so passionate about.”

“And, I have to say, it’s not just focusing on the Netherlands or anything else. These topics are relevant across the globe. And so, this is where I became very, very passionate about the research project,” Post added.

Why is this a relevant topic for tax agencies?

Post continued “We clearly see, you know, some of the opportunities in relation to blockchain. And at the same time, we see challenges that both tax administrations, as well as tax functions with multinational companies are facing, paper processes, manual reconciliations, fraud and wrongful use of data, increasing use of data, obviously.”

“And if you think of all, let’s say, the potential benefits of blockchain being, transparency, immutable data potentially, and there are clearly also pitfalls there. Is there a framework that we can actually develop from a scientific perspective? What are the fundamental elements to actually develop such a system to really create more robust tax systems?”

Post continued, “So, on the one hand, focusing on the opportunity, and at the same time, also focusing on the challenges, what are the challenges from a legislative perspective? We clearly see that the legislative process is typically lagging with technology. You may need to think about how does legislative need to change ultimately to make this happen. So, a really great upside opportunity, and at the same time, we’re clearly not there yet.”

What has the response been so far?

Weber explained that one of the areas of research through the project is around Explainable AI, “Governments are using more and more AI tools to detect fraud. But of course, they have to balance there also the taxpayer rights, so it cannot be discrimination, and you also have to explain why you think there is fraud.”

“We are organizing a conference in March, that we have asked also a lot of governments to join. And now for instance, we also work really closely with the Buenos Aires Tax Administration, also with them to develop a system that is also explainable, and that you can really use it in practice to detect fraud. And we see in that conference that tax administrators from Poland, Italy, Estonia, Germany, they all come to talk, all come together, and you got to discuss that issue. So when we did that invitation, we saw that a lot of governments were really interested in it.”

Weber added, “We discussed with governments, with academics, but also with tech companies like Microsoft, they’re also part of that conference, what is a good AI tool, but how can you balance that with taxpayer rights? And then at the end, we will publish a paper in which we will try to come with Explainable AI guidelines for taxations that everybody can follow, especially governments, but also, of course, the companies who actually are building those rules. But what we see there is that governments are sometimes on their own, and the tech world is really strong in that respect. So we see that they work together on those issues.”

“We definitely see some governments across the globe that are experimenting with this. And obviously, Estonia always pops up as one of the countries because they’re so digitalized in general. But also, I think, in the EU, we see some countries there, UK being actually very active in this space. But also, I would say more the emerging countries that are looking into blockchain, simply because they don’t necessarily deal with these legacy systems, so they can really, you know, leapfrog this technology and use it for to actually get, well, more benefits faster.”

Post added, “I also have to say that ideally, I would like to see governments to do a little bit more in this space. But I think sometimes they’re actually looking at industry, at private parties, and also looking at academics, what are, let’s say, some of the challenges that we need to be thinking about.”

“So I think we need to have public sector, private sector, but also academia really come together and also work together to make this happen.”

Avoiding potential pitfalls and offering advice

“When you look at the upside potential of blockchain and focusing on some of the typical challenges in the tax world, the first reaction – well, at least from our side was, this has so much opportunity all over it. And then if you dig a little bit deeper, you really need to be thinking about, well, maybe blockchain is not the solution for all problems that we’re trying to solve in the world of tax, and maybe there are better solutions that actually solve for the same.”

Post continued, “So, what we started actually doing is say, okay, what are some of the critical questions you need to assess as a government, but also from private sector, to really understand whether there’s a use case, there’s a valid use case for blockchain. So that’s one. We actually addressed a couple of questions in our paper to actually tick the boxes to come up, well, is blockchain a potential solution to actually solve this?”

“And then, of course, what you need to do is also build that business case around it, and that business case is, what is the potential return on investment that I can actually get, both from a governance perspective in terms of, maybe create more revenues or have faster tax audits, but also from a taxpayers perspective to have faster certainty on your tax consequences of certain transactions. So you really have to get very granular in trying to identify that business case.”

And then there’s the legislative framework…

Post added “And you need to be thinking about how could that ultimately play out? What is the legislative framework that you actually need for this? So all in all, I think so many critical elements coming together, and I would just encourage governments to really look into these questions and start addressing them and really build that use case before they start actually building the technology. Because we’ve also seen quite some examples where we say, okay, blockchain is a great fit, but at the end of the day, it turned out, you know, that the projects fail, simply because the business case was not valid enough,” Post explained.

Weber concluded “I think if we look at the future of where tax professionals and governments need to be thinking about in terms of the knowledge, it’s a bit of a hybrid animal, if you will, because you really need to understand how technology plays out, in order to understand the tax consequences. And also, vice versa, you really need to understand, you know, the problems that you’re trying to solve, and at the same time, how we can actually use and facilitate the technologies.”

“So, that really requires for tax professionals of the future, to really collaborate with these technologies, but also at the same time, understand both the technology, as well as the tax consequences surrounding it. And I think that doesn’t make life easier, but it does make life more interesting.”

To find out more:

Learn more about how Microsoft can support digital transformation in Public Finance organizations

Learn more about the CPT Project on their website