Tax Administration of P2P Payments

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P2P Payments and Tax Authority Concerns

Peer-to-peer (P2P) payments refer to non-cash payment transactions between individuals within a country, including settlements for goods, services, and work. Organizations and individual entrepreneurs often act as sellers and can receive P2P payments into the personal accounts of individuals, such as seller accounts, director accounts, or company owner accounts. The primary issue with P2P payments lies in their use for financial assistance, account replenishment, and lending among individuals. Such transactions are not considered income and are not subject to taxation.

As a result, tax authorities view P2P payments with concern, recognizing that a significant portion of these payments constitutes a taxable base. Their concern arises from the understanding of the substantial potential for tax revenues; however:

1. There is a fear that all taxpayers may shift to cash payments instead of non-cash, potentially leading to a reduction in this sector.
2. Political risks must be considered, as increasing the tax burden on taxpayers can generate dissatisfaction among the country’s citizens.

In such a situation, tax administration can benefit from the following ideas.

P2P Payments via the Banking System

P2P payments can evolve through the banking system, which has a vested interest in advancing non-cash payments. If there is a substantial need for cross-border payments (e.g., in tourism) or receiving payments from abroad (from digital giants like Google, Booking, and Airbnb), international payment systems (e.g., Visa, Mastercard) can develop within the country, offering their payment tools.

Countries may restrict the development of international payment systems and establish local payment systems based on national or international standards. This may be driven by the desire to profit from transactions, control payments, and gain independence from external factors such as sanctions. Developed countries build tools based on international payment systems. Developing countries, like the Republic of Uzbekistan, may create their local systems, such as UzCard, in collaboration with international payment systems. In the face of imposed sanctions by international payment systems, the Russian Federation is developing its proprietary system, MIR.

P2P Payments via Mobile Operators and Other Systems

If, for some reason, the banking system is weak, mobile operators or their partners can take the lead and create payment systems based on mobile wallets. For example, in some African countries, the M-Pesa system is so well-developed that there is little room left in the market for payment cards.

In addition to card-based payment systems, convenient payment methods are constantly sought and implemented, such as Apple Pay/Google Pay or payments using a cell phone number as an identifier. Convenience for the payer becomes the primary driving force of progress.

Factors Driving Payment System Development

The explosive growth of payment systems becomes irreversible only when:

1. Customers begin to receive their salaries or other compensation in non-cash form.
2. Sellers can accept payments from customers in non-cash form. Until this point, customers simply cash out their funds at ATMs. Non-cash payment should be more convenient and advantageous for the customer than cash payment because they decide how and with what to pay!

Once a country reaches the point of no return, determined by the infrastructure of non-cash payments and the share of non-cash transactions, it is unlikely to revert to cash payments, especially if non-cash turnover exceeds 70 percent.

Tax administration usually does not influence the development of non-cash payments in a country. However, there are two examples worth noting.

In Kyrgyzstan, the sales tax for sellers conducting non-cash transactions is set at half the rate of cash transactions. In Azerbaijan, there is also a higher cashback for customers making non-cash payments. Historical experience shows that influencing customers can be an effective way for international payment systems to conquer a market. They motivate customers, while sellers simply follow the opportunity to generate more revenue.

A New Approach to Tax Administration of P2P Payments

When a country reaches a high level of non-cash payments, and the abandonment of cash becomes irreversible, tax administrations need to reconsider their approaches and strategies. While there may be a natural inclination to increase taxpayer audits and tighten controls, several factors need to be considered:

1. The number of individual taxpayers significantly exceeds the number of enterprises, requiring a large workforce to manage them.
2. Tax administrations do not have default access to bank data, and obtaining such information requires following procedures outlined in regulatory acts. This includes having a valid reason for requesting data, making the data request, and subsequently processing the obtained results.

Given these factors, the standard control work of tax administration becomes less effective. The potential for additional assessments and penalties is relatively small compared to the costs of organizing the process, making it financially insignificant.

Tax administrations should consider changing their tactics.

Engaging with the Community, Not Individual Taxpayers

Instead of dealing with each taxpayer separately, it’s essential to view them as part of a larger community of rational beings with motivations, desires, and actions that interact with one another. It’s crucial not only to rely on the tax administration’s opinion of this community’s behavior but actively conduct surveys and research involving sociological services to better understand their behavior. This will enable the tax administration to obtain more objective information and adapt its approaches and strategies to meet the community’s needs and preferences.

Motivation for Legalization

There’s a need to shift from punitive methods of dealing with taxpayers to motivating them toward legalization. Legalization is a complex process that involves implementing an attractive tax regime, removing barriers to legalization such as personal visits to tax authorities, document processing, and providing incentives for legalization, such as recognition by the state, health insurance, loans, and social assistance. The experience of some countries shows that when such infrastructure is created, taxpayers become ambassadors for the tax administration and recommend the legalization process to their friends.

Access to Electronic Payment Data by Tax Authorities

The government should simplify tax authorities’ access to electronic payment data. To achieve this:

1. Identify payment agents (banks, payment systems, mobile operators).
2. Establish a common customer identification system, ensuring that individuals have a taxpayer identification number (TIN), or another identifier shared with the tax authorities.
3. Develop a process for transmitting information electronically about open accounts and transactions related to bank accounts.
4. Prohibit or limit the use of anonymous accounts, wallets, and transactions.

While this work will require significant effort, it is very important.

Information Instead of Punishment

The strategy should shift from punishment to information. This strategy is much more scalable and can reach many taxpayers, even if it allows for some margin of error in identifying violations. Additionally, it can involve informational and psychological campaigns involving the mass media and opinion leaders, potentially maximizing the effect of taxpayer legalization.