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New technologies such as e-invoicing and digital identities are opening up new opportunities for small businesses and their advisers.
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The tax 3.0 overhaul is underway, thanks to new tech
03 January 2025
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12 minute read
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If you’re a small business owner without an accountant, you might feel like half of your revenue goes towards taxes and fees before you see a real profit. Even with the most skilled accountants, small businesses still have the administrative burden of taxes, regulations and operational expenses that seem to eat into every sale. Taxes may be certain, but they are no less painful.
In principle, taxes should be easy to calculate, pay and collect. However, many of today’s tax systems are marred with complexity and compliance issues, and they are visibly outdated. Current tax regimes were designed for economies focused on trading physical goods made and sold in physical locations, not a world where capital, intellectual prosperity and labour cross borders.
Tax systems worldwide need a modern overhaul to be fit for the 21st century. Governments and tax authorities recognise this and are moving towards a north star the OECD has coined ‘Tax Administration 3.0’. A vision where tax processes are seamlessly built into the everyday platforms and tools used by taxpayers in their daily lives and businesses to improve accuracy, reduce compliance burdens and ensure tax collection coincides with the taxable event.
As policymakers and experts acknowledge, this journey could take many years and many pieces to put together to realise the full vision. However, developments in digital identity, e-invoicing and AI are starting to show their potential today. And while tax systems vary from one economy to another, creating global best practices provides an opportunity for progress.
Let’s better understand a couple of pieces of technology that are helping to lay the foundations for overhauling our centuries-old tax systems and will underpin tax 3.0, and the opportunity that doing so could bring to small businesses and their advisors.
Digital Identity – your passport to a simpler tax life
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Imagine providing secure, verifiable digital credentials that serve as digital ID verifying your identity for tax purposes and other government interactions. No more juggling passports and driver's licences! In a digitally-connected world, a distributed, secure and citizen-focused system could help tax authorities determine exactly who and what is to be taxed, while allowing for privacy, control and reuse in other interactions and processes across government.
Countries like Singapore and Australia are exploring various digital ID initiatives, including the use of mobile-based identification and biometric recognition for accessing government services. The step change in taxation will come when different digital ID systems can interact seamlessly and securely across borders, to support identification of international taxpayers.
For a small business getting started or expanding overseas, this could mean an easier registration process, set up tax and payroll requirements, and secure authentication in other countries without the need to repeat registration and verification processes.
E-invoicing – from paper cuts to painless
Two decades ago, Chile pioneered electronic invoices, transforming the way businesses get paid and how they interact with tax authorities - and this is now a model that is gaining traction worldwide. Today, countries like Brazil and Mexico have mandated e-invoicing, requiring real-time, digitally signed invoices for all transactions. This shift, initially focused on large enterprises, is now expanding to include smaller businesses and previously exempt industries.
While countries are in various stages of implementing e-invoicing in one form or another, one day it will be as universal and ubiquitous as mobile payments. The focus in the next few years will be on creating and implementing international standards for data collection, transference and assurance (such as PEPPOL) which could reduce the tax burden for businesses operating in more than one location.
We’re also seeing new use cases emerge for blockchain technologies. In China, the Shenzhen Metro System deployed a blockchain-based system for issuing invoices for metro rides. When a passenger pays for their metro using a digital payment method like WeChat Pay, the transaction is recorded on the ledger. After the ride, the system automatically generates an electronic invoice based on the transaction data recorded on the blockchain. It is instant, variable and can’t be altered.
For a small business, this would be like purchasing new equipment from a store, and having a tax invoice generated, recorded and secured, the moment that you walk out the store door.
In his 1776 book The Wealth of Nations, the Scottish economist Adam Smith said taxes should be efficient, certain, convenient and fair. Today, many tax systems unfortunately fall short of these standards. But developments in areas such as digital ID, e-invoicing and assistive tax are helping to push us along the road to a modern and global tax regime.
Certainly, taxes will be a constant companion in businesses. Hopefully soon, a less taxing one.
James Bergin, executive general manager - technology research & advocacy at Xero
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