Discussions on Return-Free Tax Regimes

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Tax authorities employ various regimes and systems to regulate tax payment and reporting. One such traditional regime is the preparation and filing of tax returns. Experts, governments, and international organizations consistently engage in discussions regarding the possibility and benefits of return-free tax regimes.

During a conversation about return-free regimes with the head of a tax authority, he expressed the view that declarations are advantageous for taxpayers as they help reduce expenses. He was referring to the deduction of expenses permitted by legislation, which lowers the tax liability. However, it is worth noting that in this country, simplified tax regimes are solely based on income, and expenses are not deductible. Individuals can only declare a limited list of goods and services as expenses to claim deductions.

In response, several counterarguments can be presented:

1. Tax authorities require documentary evidence to claim deductions for taxpayers. Contracts, receipts, seller licenses, and numerous other documents are mandated by tax legislation. Collecting this information can be a hassle for taxpayers. The deduction amount is often small, and taxpayers prefer to avoid the paperwork for such insignificant amounts. Let us take the example of a former Soviet Union country. The maximum tax deduction for expenses on medicine or education is $200 per year, whereas deductions for real estate and mortgage interest enjoy much higher demand in that country, reaching $5,000.
2. Tax authorities verify the legitimacy of deductions based on taxpayer information and purchase records at the seller’s end. This complex and expensive process consumes significant resources for tax authorities when dealing with the manual processing of paper returns with deductions. Selective auditing leaves room for abuse, while simplification and automation of primary documentation processes provide complete information regarding deductions.
3. Tax authorities that have automated data collection and obtained the necessary primary data can automatically generate deductions for each taxpayer, reducing the tax base in calculations without the need for tax returns. This approach reduces costs for both taxpayers and tax authorities in terms of tax administration.

In addition to the tax authorities’ habit of using declarations, the position of the Ministry of Finance is also important. Sometimes, the Ministry may agree to deductions in tax legislation but then be unwilling to allocate funds from the budget, raising requirements for justifying the right to a deduction. Such well-intentioned guidance only complicates the lives of taxpayers.

For instance, we once encountered a situation where, to justify the right to a deduction for medication expenses, taxpayers were required to provide not only the fiscal receipt but also a doctor’s prescription. This requirement was unnecessary, and the process could be easily simplified. The purchased medication can be verified from the receipt, and this information can be cross-referenced with the registry of prescribed drugs. However, the Ministry of Finance decided that the number of deduction claims would dramatically increase, leading to a substantial budget refund, and thus blocked the simplification.

Therefore, the position of tax authorities in favor of tax returns contains an element of deceit. To support taxpayers, the government should expand deductions, simplify justifications, and automate calculations and the provision of deductions. Ideally, the complete abolition of tax returns is possible because, in today’s digital reality, they serve no real purpose and provide no benefit to anyone.