Importance of Banks in the Tax Administration

Table of Contents

Benefits of Interaction Between Tax Authorities and Banks

Banks have a significant role to play in the tax administration system. The depth of integration of banks and banking services into the daily life of the population differs in different states, as does the share of cash turnover in the economy. Cash is the fuel for the gray economy and the source of many risks for governments, retailers, and consumers.

But progress is unavoidable, and gradually many countries, as digitalization develops, replace cash flows with non-cash transactions. Non-cash turnover is more transparent to the tax system, makes it easier to control the tax base and properly calculate taxes. Therefore, the tax administration is the principal beneficiary of any reform that increases the share of non-cash circulation.

It is also beneficial for banks to conduct non-cash services as it is cheaper and it is easier to take higher fees from the client, increasing the overall profitability.

To motivate businesses to use their services more often, banks ensure the confidentiality of the personal data of their customers and of their calculations. Financial institutions are in no hurry to share this information with tax authorities, as they understand that this will cause an outflow of customers and their transition to cash payments, which will negatively affect the bank’s income.

Banking structures are usually subordinate to the national or central bank, which independently analyzes the activities of banking institutions and uses this information for banking supervision. Therefore, it is quite difficult for tax authorities to find leverage to force them to share the data.

Now, let us discuss in more details the tasks and advantages of the interaction between banks and tax authorities, as well as corresponding challenges and problems.

Why do Tax Authorities Need Cooperation with Banks?

The standard interaction of banks with tax authorities is to manage the following issues:

Getting information about the opening or closing of a bank account by a taxpayer.

Suspending (blocking) or resuming operations on a bank account. They apply this measure in the event of any violations to motivate a taxpayer to take corresponding corrective actions. For example, if a taxpayer has not filed a tax return in a timely manner, tax authorities block the taxpayer’s account they submit the required documents.

Issuing a collection order for automatic write-off of debts to tax authorities from a taxpayer’s accounts.

Gathering data regarding activity in a taxpayer’s bank accounts.

The sharing of information may take place automatically or at the tax authorities’ request, such as during an audit. Banks can either answer directly or through a central bank’s infrastructure.

Integration with Banking Infrastructure

Banks have more points of contact with customers than tax authorities. Banking applications and the options provided to the user carry more weight for the taxpayer than any applications and digital products of tax authorities. Often, tax authorities deny this obvious fact and invest huge budgetary funds in the development of personal accounts for taxpayers, as well as reporting programs and mobile applications.

Money comes to the taxpayer’s bank account much more often than tax liabilities arise, i.e., not every receipt of funds entails the obligation to pay tax. This is a fact and to fight it is to fight the wind and waves—it might be exciting, but pointless.

Banks are subject to stringent requirements to comply with Know Your Client (KYC) procedures^[1]. Financial institutions already use these standards for many decades, and for the tax authorities it is quite costly and unjustified to create an own framework.

Practice has shown that it is unnecessary to force a taxpayer to use the tax information systems. It is more rational to integrate tax systems into financial ecosystem and allow taxpayers use it through the familiar and convenient tools.

The banking sector is closely monitoring all changes and innovations on the financial market. All examples of integration of any bank with the tax administration will quickly spread to other market participants.

Integration of tax and banking systems will allow taxpayers to perform:

Registration of entrepreneurial status and tax registration of taxpayers.

Reflection of personal account transactions to understand the completeness of accruals, payments, and debts.

Payment of accrued taxes, debts, fines, and penalties.

Filling out tax returns.

How to Keep Communication with the Taxpayer

When switching to a digital model of tax administration, it is important to automate communication with the taxpayer.

In the traditional format, taxpayers call or visit tax administration to clarify disputed circumstances, deliver paper documents, receive consultations, et cetera. The activity of majority of tax administration is based on the risk minimization model. Since they have constrained audit resources, it is based on the development of a pool of the riskiest taxpayers, with whom they conduct the primary control job.

Transferring the functions of analysis and detection of violations to the digital administration system can significantly reduce the burden on inspectors and improve the quality of work with unscrupulous taxpayers. Digitalization of communication scales the activities of a tax administration and increases tax collections without additional labor costs. Since the banking sector has already implemented digital communication tools with its customers, it makes sense to use the established channels, instead of wasting resources on creating new own ones.

The availability of simple and convenient payment of taxes is the key tool in the taxpayer’s interaction with the tax authority. The completeness of receipts and the amount of debt directly depend on the convenient payment methods. To optimize the costs of developing tax payment functionality, tax authorities can use the experience of the banking sector by offering taxpayers a variety of modern tools:

Payment of taxes with banking cards.

Payment to a single personal account (and not by type of tax, as often happens).

AAuto payments and many other popular methods.

The Banking Sector as a Guarantor of the Fulfillment of Tax Obligations

The banking sector plays significant role in the interaction of the tax system with taxpayers. It makes perfect sense to assign the function of a tax agent to banks so they can automatically pay the accrued taxes on behalf of taxpayers.

A valuable achievement would be the participation of the banking sector in the processing of property and social deductions for taxpayers. Banks have all information on expenses that taxpayers can claim as income deductions. If it becomes necessary to return funds to the taxpayer, the bank may also function as a paying agent.

Based on the information from the banking system, tax administration can perform an automated calculation of the tax payable without tax return preparation and submission by the taxpayer. The cancelation of a tax return submission process, as discussed earlier in our articles, is a radical change in the principles of tax administration, which significantly reduce the costs for the taxpayer and the tax authorities.

Benefits for Taxpayers

When opening a bank account or issuing a loan, banks ask their customers to submit multiple documents to assess their reliability, the risks of their activities, and make an informed decision. But at the same time, the taxpayer independently provides a lot of information to tax authorities while doing business and submitting returns.

This information is a tax secret, but if the taxpayer agrees to share it with the banks and if the state can provide a digital automatic assessment of the taxpayer’s reliability, this may significantly speed up and reduce the cost of issuing loans. This will also lower interest rates, because of the reduction of banking risks and processing costs.

Thus, tax authorities should develop a separate strategy for working with credit institutions in their country. This will help increase the efficiency of tax administration, reduce taxpayer costs, and improve the quality of their service.

[1] KYC (Know Your Client)—is a standard in the investment industry that ensures [financial organizations and] advisors can verify a client’s identity and know their client’s investment knowledge and financial profile. URL: https://www.investopedia.com/terms/k/knowyourclient.asp