Big data and taxes – the next big thing or a big mistake?
This blog explains how the trendy concept of Big Data is used in the context of taxation. There's a general perception that the more data companies reveal, the more difficult it will be for them to shift profits using sophisticated tax planning strategies.
Big Data is the next big thing. Some years ago, no one had heard of it, but now Big Data seems to affect all parts of our lives. In simple terms, Big Data refers to benefits that may be derived through the use of data analysis and statistics in different areas (for example, to monitor consumer behaviour). Due to the massive hype around Big Data, this concept has started to be used in many scientific disciplines. Recently, Big Data has also entered the tax world.
In the context of taxation, this trendy phrase has become associated with the OECD project on Base Erosion and Profit Shifting (BEPS). The aim of the BEPS project is to prevent multinationals from using tax planning strategies that result in low taxation of their profits. For this purpose, the OECD suggests that “taxpayers should disclose more targeted information about their tax planning strategies”. Such information could be used to give the tax authorities a global picture of a taxpayer’s operations and to verify data in a tax return. To measure the scope of BEPS and to evaluate the effectiveness of the actions taken to counteract, it is necessary to identify “new types of data that should be collected”.
It is understandable that tax authorities want information that helps them prevent the erosion of tax revenue. In general, the more information tax authorities have and the more disclosure obligations are imposed on taxpayers, the harder it is to hide and shift profits. Tax avoidance and tax evasion result from information asymmetries: the taxpayer knows all the relevant facts surrounding its business operations, whereas the tax authorities need to obtain this information either from the taxpayer itself or third parties – a difficult task given the limited budgets and resource constraints.
However, the question that necessarily must be asked is: are tax authorities able to benefit from collecting “Big Data”? Analysis of large amounts of data inevitably requires the presence of additional personal and technical resources. It is a complex task, and there is a risk that, without sound specialist knowledge, data will be misinterpreted or not used to its full benefit. Too much data implies greater complexity and this in turn translates into information overload that may paralyse the functioning of the tax administration.
It is understandable that there is a call for more transparency regarding the operations of multinational enterprises. However, this objective will not be achieved by disclosing more and more information and presenting it in different formats. Big Data alone will not solve the problems. It is only meaningful if it is properly interpreted and analysed.