The tax implications of moving to a cashless economy

Abstract

Purpose: The primary purpose of this study is to analyse tax evasion through underreporting of income and undeclared work through a cash and electronic payment (digital economy) perspective. The researcher firstly examines how the use of cash leads to tax evasion. In line with this, the researcher analyses the adequacy of measures implemented by Maltese authorities to reduce cash related tax evasion and evaluates measures implemented in other countries, with the aim to provide recommendations. Moving towards a cashless economy, transactions are increasingly being held through the digital economy using electronic payments. Thus, the researcher assesses tax evasion through digital platforms and digital assets and analyses the implementation of EU Directives DAC7 and DAC8 to combat such threat. Design: The research objectives have been satisfied through 25 semi-structured interviews held with tax practitioners, officials from the Office of the Commissioner for Revenue, officials from the Finnish, Irish and Swedish Tax Authorities and representatives of commercial banks, the Central Bank of Malta and the Financial Intelligence Analysis Unit. Findings: The findings reveal that cash is a significant contributor of the shadow economy and fuels the shadow economy more than other payment methods. Most local implemented measures have been perceived as effective, however issues including lack of enforcement weaken the efficiency of such measures. Furthermore, other possible preventative measures have been analysed. Measures deemed most effective for Malta are online cash registers and encouraging the use of electronic payments. The study found that with regards to the digital economy, the main tax issue is lack of visibility, however DAC7 and DAC8 have been perceived as effective measures to combat such threat since these exchange information with competent authorities. Conclusion: If cash would be abolished, tax evasion will reduce but will not be eliminated. The study concludes that although most implemented measures and regulation are sufficient, the Commissioner for Revenue needs to have adequate resources to enforce effectively and ensure that measures are being utilised as intended. Furthermore, the implementation of other recommended measures would be ideal. Value: This value of this research is that it contributes to the development of the current tax system, as it investigates the adequacy of local measures and EU Directives to identify possible amendments and implications, while also analyses the sufficiency of new possible measures.