Melissa Dejong, OECD Centre for Tax Policy and Administration
Tax has been a high profile topic in recent years. People may often think of large scale tax avoidance by huge multinationals – which the OECD has estimated at between USD 100 – 240 billion in lost revenue annually. However, tax evasion and fraud goes on every day, and may be happening right in your local restaurant, bar, grocery store or hairdresser.
In the digital world, every day tax evasion can be facilitated even more, with taxpayers using readily available technology to evade tax. Previously, tax evasion in small businesses could be undertaken simply by accepting cash under the table, or keeping a separate set of books.
Now, the same outcomes can be achieved even more efficiently, using software such as “zappers” and “phantomware.” Zappers physically prevent sales appearing on the records. Phantomware creates virtual sales terminals for the same purpose. Both allow businesses to selectively delete or reduce their sales figures, without leaving a trace of any alteration. The taxpayer reports lower sales and lower taxable income, all the while retaining the actual profit. This type of evasion and fraud (called “electronic sales suppression”) makes it hard for tax authorities to detect any discrepancies. These types of tax evasion technologies are also now becoming available over the internet – which can make it harder for tax authorities to control and penalise.
Not only that, but taxpayers can also evade tax by over-reporting their deductions. This can occur by creating false invoices that look genuine, but where no outgoings have actually been paid. This fraudulently reduces taxable income, causing substantial revenue losses to the government. For example, in the Slovak Republic, during the years 2014 and 2015 the amount of risky VAT detected in domestic invoicing fraud was more than half a billion euro.
Tax authorities also face challenges in the online sharing economy, through ride-sharing or home-sharing online marketplaces. These online sharing platforms – which are of course legal – can generate taxable income for taxpayers, but which may not be reported and stay under the radar of the tax authority.
However, tax authorities are catching up.
The OECD’s new report Technology Tools to Tackle Tax Evasion and Tax Fraud shows how technology is being used by tax administrations around the world as a powerful tool to swiftly identify and tackle tax evasion and tax fraud. The report details countries’ technical experience and revenue successes from implementing technology tools, particularly to counter electronic sales suppression and false invoicing.
It demonstrates how easy and effective these technology tools can be. For example, a number of technology solutions to combat electronic sales suppression are available, which can include a tamper-proof black box installed in point of sales machines as well as real-time transaction reporting to the tax authority. The results are impressive, such as:
- Sweden has experienced increased tax revenue by EUR 300 million per annum.
- Mexico brought 4.2 million micro businesses into the formal economy as a result of e-invoicing.
- Rwanda saw a VAT increase of 20% within two years of introducing its solution.
- Hungary saw VAT revenue increase by 15% in the first year of operation, which more than covered the implementation costs.
- In Quebec in Canada, not only was substantial revenue recovered, but the solution also increased the efficiency for the tax authority to conduct audits, with the number of inspections being increased from 120 to 8000 per year.
The report also shares successes in using technology to tackle false invoicing. Countries have already shown that using electronic invoicing solutions can prevent and reduce tax evasion, such as where invoices can be verified as authentic using digital signatures and online verification tools. It can also make tax compliance easier for businesses where electronic documentation can replace paper-based audits or reporting obligations.
Finally, the report describes the emerging tools tax authorities are using to detect online business activity, and notes that this is likely to be a growing area for tax authorities in the digital world.
As well as detailing the technical features of these solutions, the report also explains best practices for effectively implementing these solutions. By sharing these successes and best practices, it is hoped that other tax authorities can leverage this information and give consideration to how they might quickly implement similar solutions. Not only can this mean more revenue for public services, but it has a preventative and deterrent effect, and levels the playing field for compliant businesses that have already been paying their fair share of taxes.
This report is part of an ongoing series of reports on tax and technology, which is produced by the OECD’s Task Force on Tax Crime and Other Crimes. The Task Force furthers the work of the Oslo Dialogue, which promotes a whole of government approach to fighting tax crimes and illicit flows.
Glenda Quintini and Alastair Wood, OECD Directorate for Education, Employment and Social Affairs
What do you want to be when you grow up? As young girls and boys learn about space and the cosmos they may dream about being an astronaut. Building a beautiful Lego construction might lead them to declare their desire to be an architect. These days however, rather than catching a young boy or girl playing with Lego or a toy space rocket, they might be learning how to write computer code, aspiring to change the world through technology. Even 3-year-old children scroll through photos on an iPad with an ease and dexterity that stun many adults. That our children are so comfortable using new technologies is encouraging given where our societies are heading. The Internet of Things, Big Data, artificial intelligence (AI) and other new technologies are expected to create new and different jobs, substantially change many existing jobs, and make others obsolete. Adapting to and benefiting from these profound changes requires new skills, now and in the future.
But how well are countries prepared for the digital economy? OECD evidence paints a disturbing picture. Today, 95% of workers in large businesses and 85% in medium-sized businesses have access to and use the Internet as part of their jobs (OECD, 2013). Yet over half of the adult population (56%) have no ICT skills or can only fulfil the simplest set of tasks in a technology-rich environment. Even among young adults, those between 25 and 34, only 42% can complete tasks involving multiple steps and requiring the use of specific technology applications, such as downloading music files or looking for a job online (Level 2 or 3); among people aged 55-65, only 10% can do this. And not only the workplace is changing; interactions between citizens and governments, between businesses and clients, and within personal networks also rely more and more on digital, mobile or social-media tools (OECD, 2009, 2011). Obviously, workers who can code and develop applications are in high demand; but digitalisation also means that everyone needs to be quite proficient using ICT, even those in low-skilled jobs: today, a factory worker often has to interact with an entirely automated chain of production and a waiter might be taking orders on an iPad.
Being good at ICT pays off. Workers with strong ICT skills are paid almost 30% more, on average, than those who cannot do much more than type or use a mouse (i.e. with skills at or below Level 1). These pay gaps exceed 50% in England, Singapore and the United States. Like in other sectors, there are also gender gaps in ICT: ICT specialists account for 5.5% of all male workers but only for 1.4% of female workers (OECD, 2016a). And this gap is likely to persist in the future: more than twice as many boys currently expect to work in science and engineering jobs when compared to girls, as stated in the latest OECD PISA survey, despite the fact that ICT jobs are in high demand, well-paid and offer promising careers.
But while tech skills are crucial, more is needed to succeed in the new world of work. In addition to ICT skills, workers also need entrepreneurial and organisational knowhow and the right social skills to work collaboratively. Workers also need the flexibility to adapt as technologies evolve (Spitz-Oener, 2006; Bessen, 2015). As Einstein put it “The measure of intelligence is the ability to change.” Our children will likely have a whole range of different jobs and even a range of careers over their lifetime – an exciting prospect but also a challenging one.
New OECD work on Skills for a Digital World calls on governments to ensure that digitalisation brings good quality jobs and that both employers and workers have the means to benefit from new opportunities that open up. Skills policies should strengthen initial learning; anticipate and respond better to changing skill needs; increase the use of workers’ competences; and improve incentives for further learning along with greater recognition of MOOCs (massive open online courses) and OERs (open educational resources). Our challenge today is that we have to educate people for jobs that don’t exist yet and the only way to do this is to be flexible and adapt education and training continuously. Then there is no reason to be worried if kids have no idea what they want to be later in life. Being open-minded and making sure that one remains open to learning and using new skills is likely the best attitude to adopt.
Arntz, M., T. Gregory and U. Zierahn (2016), “The Risk of Automation for Jobs in OECD Countries: A Comparative Analysis“, OECD Social, Employment and Migration Working Papers, No. 189, OECD Publishing, Paris
Autor, D. (2015), “Why Are there still so many Jobs? The History and Future of Workplace Automation”, Journal of Economic Perspectives, Vol. 29, No. 3, pp. 7-30.
OECD (2016), PISA 2015 Results (Volume I): Excellence and Equity in Education, OECD Publishing, Paris.
OECD (2016a), “Skills for a Digital World: 2016 Ministerial Meeting on the Digital Economy Background Report”, OECD Digital Economy Papers, No. 250, OECD Publishing, Paris.
OECD (2015b), Adults, Computers and Problem Solving: What’s the Problem? OECD Publishing, Paris.
OECD (2013), OECD Skills Outlook 2013: First Results from the Survey of Adult Skills, OECD Publishing, Paris.
Spitz-Oener, A. (2006), “Technical Change, Job Tasks, and Rising Educational Demands: Looking Outside the Wage Structure”, Journal of Labor Economics, Vol. 24, No. 2, pp. 235‑270.
Markus Schuller, founder of Panthera Solutions
The OECD Financial Roundtable on October 27 gathered together 20 representatives from the banking industry, fintech companies, and other financial services, as well as trade unions and other experts, in addition to the OECD delegations. The topic Fintech: Implications for the shape of the banking sector and challenges for policy makers allowed for an intense debate, especially among the 20 mostly private sector participants.
Ironically, both Fintechs and big banks lobbied for level playing fields, arguing that the respective “other” benefits from a regulatory advantage. It also became evident that the big banks try to justify their existence by highlighting their large capital and client base, expressing interest in cooperating with Fintechs by offering scalability. The latter is claiming to add a moment of disruption to financial services, opening it to a wider audience by democratising financial services. Whether the race is decided through competition or cooperation, regulatory “sandboxes” were presented as appreciated tools to level the playing field for both.
At Panthera, we are asset allocation specialists. As such, the Fintechs named Robo-Advisors in the field of asset management are of most interest for us. Inspired by the OECD FRT, we looked at whether Robo-Advisors deliver on the promise of adding a disruptive moment to our market segment. For that purpose we introduce two asset allocation penalties as indicators of disruption.
As we concluded in our article “Man at the centre of the investment decision”, the underperformance of professional investors versus the market portfolio is dominated by two structural factors, cost penalty and behavior gap penalty. Cost penalty is defined as the amount of under-performance caused by transaction costs, management fees, distribution fees, etc. Behavior gap penalty is the contribution of the human factor to a biased perception of reality caused by cognitive dissonances. Indicators of the penalty along the investment process can be certain market timing techniques, the application of flawed portfolio optimisation techniques, minimising career-risk as primary objective, and other expressions of cognitive biases.
As highlighted in a previous article, professionals managing other people´s money like regional banks, private banks, wealth managers, investment companies, (multi-) family offices, etc. are confronted for the first time in decades with a situation that forces them to:
- either grow aggressively in size to play a shaping role in the industry´s concentration process
- take on the competition with Robo-Advisor Fintechs in offering low-cost, fully automated wealth management solutions
- position themselves as leaders in an investment management niche via an innovation-driven competitive edge
- or accept to be squeezed out of the market.
Options 1 and 2 are out of reach for most of the investment service providers listed above as they are too small, too conservative, and/or too loaded with overhead costs. Assuming they want to survive, Option 3 is the only one left for the vast majority of professional money managers.
If Option 3 it is, getting trapped in pseudo-innovations like risk parity will be insufficient. Consequently, a learning organisation with a continuous improvement cycle is a prerequisite for establishing and maintaining the innovation-driven competitive edge of an investment process in the chosen niche. Many will not manage to reinvent themselves.
Like Big Pharma during the 2000s, which benefitted of windfall profits due to rent-seeking oligopolies, the asset management industry is increasingly dominated by a handful of multi-trillion-dollar players like Vanguard, BlackRock or State Street. Big Pharma was compensating its lack of innovation ability by re-investing its windfall profits into biotechs, refilling its product pipeline with the ideas of promising start-ups.
We see similar patterns occurring in the asset management industry, where Robo- Advisors convert from stand-alone B2C (business to consumer) providers to either white-label B2B2C providers or useful take-over candidates for the big players. With Vanguard launching its Personal Adviser Service already mid 2014, Charles Schwab following with its Schwab Intelligent Portfolios in 2015 and BlackRock taking over FutureAdvisor shortly after, the big players benefit from the momentum of digitalisation.
Here, the weakness of the Robo-Advisory start-ups become obvious. Their offering is lacking the disruptive element. All they offer is a more compelling user interface as improved distribution channel, lower production, and end-consumer costs compared to traditional money managers. In that, they are powerful enough to put pressure on the small-to-medium sized money managers, but have no leverage on disrupting the industry’s oligopoly. The explanation lies in four reasons:
- Robo-Advisors help investors to minimise their cost penalty. By still relying on traditional portfolio construction techniques of the first generation (Mean-Variance Optimization, MVO, etc.), they are offering identical services like thousands of established money managers. As such, they don’t offer disruptive innovation at the head of the asset management industry, but simply an evolution of presenting those methods – user interface – and distributing them differently – cheaper fee-model and no intermediaries along the distribution channel. Having talked to several Robo-Advisor executives, their responses can be summarized as: “we definitely have other issues than the portfolio construction methods used”. They consciously ignore, that, although their traditional techniques have been performing well since 2009 through a historical anomaly, they failed in raising significant assets under management because they lack competitive edge in portfolio construction.
- Related to reason 1 – neither the big players nor their emerging rivals are significantly reducing the behaviour gap penalty. Their rebalancing and cost average techniques are helping investors to apply some self-discipline. Though this does not hold investors back from overruling those techniques in times of turmoil, when the pro-cyclical temptation is shown to be the highest. This blind spot on the behaviour gap penalty is explained by the first generation portfolio construction models used, as for those, the human factor in investing does not exist. Unsurprisingly, this is less of a problem for the big players, given that the start-ups are not challenging them with taking the lead.
- The big players remain more competitive than Robo-Advisors because, while applying identical portfolio construction techniques, they can offer their advisory services even cheaper by still making money on the investment products chosen or through transaction fees. Charles Schwab, for instance, manages to charge zero fees for their Robo-Advisory service. It cannot get cheaper than that. Furthermore, the big players can scale their Robo-Advisory business through their enormous asset base.
- Both the big players with their Robo-Advisory front-end and the Robo-Advisor start-ups acknowledge in the meanwhile that retail and institutional investors need to have a human client advisor as back-up. By responding to that need, both are either hiring client advisors themselves or offering white label solutions of their platforms to RIAs/IFAs (registered investment advisors/independent financial advisers). Given the stronger balance sheets and better scalability of brand and existing customer base, the big players with Robo-Advisory front-ends enjoy a competitive edge.
In short, Robo-Advisor Fintechs are currently not revolutionising the asset management industry as they lack a disruptive element, but are helping accelerate the concentration process to produce even larger players.