Some points to think about as we enter the new year:

• With the global economic crisis showing no sign of abating, it’s more than ever imperative for governments around the world to ensure that their financial systems are efficient, cost-effective and as fraud resistant as possible.
• Estimates suggest that in many countries the cost of tax evasion, avoidance and non-payment is equal to the entire national budget deficit.
• Modernization of payment methods – including the concept of ‘the cashless society’ – is the key to increasing tax income without raising tax rates.
• Mobile phone based payment systems are the fastest growing area of cashless financial transactions – and with over 5 billion mobile phone users worldwide, compared to just 2 billion bank account holders, the potential is huge.
• Governments and financial structures are having to become increasingly accountable to citizens and taxpayers, with demands for systems to be fair, accountable and efficient.

RTpay’s system of automated real-time collection of taxes and payment of benefits via a central server-based system, modeled on those used in the credit card and transaction processing industries, ensures that tax is collected and benefits and microfinance payments made available in the most efficient, cost effective and fraud-proof way possible.

The system is swift and simple to implement, requires little or no up-front capitalization from governments, and ensures both an increase in tax revenue and an ongoing income stream for operators.

RTpay has worked for six years on solutions for real time tax collection and the systems needed to create it. We charge no fees; we are entirely self-funded so we have no obligations to anybody other than the taxpayer/ citizen.

What we do have is a wealth of expertise and knowledge in the area of financial transactions, electronic payments technologies and new cashless transaction methods. We also have the experience and skills in working with government departments and multinational organizations in Europe and the developing world.

We have created the practical tools and strategic partnerships to bring about a swift and cost-effective solution.

Cashless transaction systems

Transaction processing has until now concentrated largely on inter-bank and card-based payments. Cash has been used as the primary form of payment in all but the most sophisticated of countries. This has created major inefficiencies in administration and reduced the level of tax collection, security and data control.

This situation is in a state of change; a change that will be rapid, multi-faceted and liable to create chaotic levels of risk for Central Banks around the world. And yet it also creates enormous opportunity – if it can be managed effectively.

The increasingly widespread use of financial transactions using mobile phones – and to a lesser extent, social networking, coupon marketing and non-bank stored value cards – has created a new market of billions of people.

What is required is a way in which to assist Central Banks to control these markets by the provision of a central clearing service that handles transaction and data flow, incorporating real-time fraud analysis. All licensed phone payment service providers and other electronic payment systems would be required to route transactions through the central server, creating interoperability and security.

A number of international organizations (including the World Bank, IFC, ITU, UNDP and ISO) are now working to provide solutions in this area that will be feasible, available and scalable for all governments. A significant feature is that developing countries are often leading the way – as they have the greatest number of people with little or no banking structure, minimal legacy technology infrastructures and an already widespread mobile phone user base, creating an open market opportunity for the new technologies.

The best known example is in Kenya, where a Vodafone subsidiary, M-Pesa, has become a dominant part of the financial system. This has been treated as an example of how to establish such a mobile phone-based system – but it does carry significant risks and inefficiencies from which other countries are learning.

In short, the weak points are:

• There is little interoperability with other payment methods, including users of alternative phone services.
• This limitation means multiple agents are required – one in each area for each phone provider – and therefore raises costs.
• The accounting systems of MNOs (mobile network operators) are not under the same management and reporting structure as banks.
• Even when an MNO is required to work with a commercial bank, the accounting is still open to far greater risk than is normal under banking regulations.
• No real-time analysis is implemented on payments as there is no clearing format.
• This means that AML (Anti Money Laundering) techniques are generally applied too late to be effective, if at all.

The RTpay solution

The RTpay solution is based on a central clearing function between the mobile phone-based transactions. The optimum security is applied when the MNOs are solely messaging entities, while the funds are held by the central bank or designated commercial financial entities.

Tax collection ratios can be significantly improved if electronic transactions are processed using a coherent, coordinated and centralized system, particularly if due tax can be collected during the course of the payment.

With efficient tax collection leading to greater tax revenue, it becomes more feasible for benefits to be paid, infrastructure to be improved and sustainable capacity building to be achieved – and financial inclusion can become part of every citizen’s opportunity.

Over the next twelve months we will address multiple aspects of the risks, opportunities and linked facets of this momentous change – and the likelihood of action to bring this about in various countries around the world.

For specific consulting advice, please contact us at info@rtpay.org or by phone on 1.561.278.7668.

It would be nice to think that governments have learned their lessons from the near disasters of 2011. The greatest danger is that a brief period of calm, with new governments in Italy and Spain, there is a perception that all is now well and the problem is solved for the near future. It is not.

The time is now imperative to take fundamental action over government financing. The only practical cure is to increase tax revenue, rather than drive down the economy to a Japanese style decade of no growth.

There are two fundamental strategies for increasing tax revenue:

1. Reduce fraud dramatically

2. Reduce avoidance dramatically

Given the seriousness of the current position, we need to do both.

The first part of the solution is to move away from cash-based transactions and towards electronic transactions as the primary payment solution for business. We must ensure that it is significantly more attractive to use payment methods other than cash so that the vast majority of people, businesses and politicians will agree that it is desirable to make this change.

Taxes can be collected in real time – and, more importantly, in a far more efficient and cost-effective manner – if we implement a system in which electronic transactions pass through a central clearing service. The most obvious problem countries, such as Greece and Italy, have appalling collection ratios, i.e. the amount of tax which is actually collected compared to the theoretical amount which would be received if all regulations and legislation were enacted fully; they also have very high cash-based ratios for their economies. This is not a coincidence.

The second part of the solution is to simplify the tax code and, in particular, reduce the exemptions, exceptions and peculiarities. The role of tax consultants in advising large companies and wealthy individuals is a major component in the increasing divide between rich and poor – a divide which only serves to increase the already high risk of civil disobedience becoming a key factor in the economy in 2012.

Big businesses have been able to accumulate large amounts of cash credit on their balance sheets. They have the capacity to absorb less favorable tax treatment at this time, in a way that every other group does not. A reduction in exemptions and exceptions is an important – and available – step. It is also something that most people would regard as fair.

Getting new measures approved and accepted

The moves proposed above are dramatic – because they need to be. They will have opponents – big, important, influential ones. It is critical that these opponents do not include the average taxpayer, both individual and SME. These are the fundamental issues:

• Elections in France, Germany and USA during 2012 will mean a high degree of political discussion and vitriol. Given the weak position of each current government, this may be an opportunity for preemptive action – if pollsters can demonstrate public approval of plans to increase tax revenue by more efficient collection rather than higher taxation.
• Bankers are right up there with lawyers and realtors as being the most disliked professionals (apart from politicians, of course) so any apparent enforcement to put money with banks would be unpopular. Also, as the 15 year history of SEPA development in the EU shows most dramatically, they have the capacity to obfuscate and delay any process that they fear may have a negative impact on the fees they can charge to customers.
• Technology is becoming ever more popular and widespread. The confidence that now exists for purchasing on the web (this holiday season is likely to show a dramatic increase in e-commerce) and in the use of mobile phones is very important.
• Similarly, new technology for small merchants – such as Square and iZettle – means that accepting payment electronically is not just for big stores, but can be managed by the home-based micro-merchant.
• Creative marketing through loyalty programs and discounts or rebates for cashless payments is a well-developed area. It is particularly appropriate for mobile phone and internet-based transactions, where the driving force is already incentive-based. These initiatives should be supported by government action.
• Any measure which demonstrates fairer treatment for the individual can get an immediate, positive response. Governments need to engage with the public and demonstrate the benefits of a fair, efficient policy if they are to have any chance of retaining power.
• Circumstances vary by country, but tax authorities can afford to give such rebates and incentives if they can increase the ratio of compliance. In countries where there is less than 30% collection, a discount / rebate of 10% on VAT (down from 25% to 15% for electronic-based payments) would still double the total tax collected if fraud was eradicated.
• Similarly, with exceptionally high unemployment and increasingly strained finances for retired people, the unemployed and those with disabilities or particular needs, there is increasing need for fair allocation and distribution of benefits. But with less money available to pay them, benefits need to be better managed and focused more precisely on each individual’s specific needs. Electronic payments can enable such a focus, ensuring that benefits are granted for relevant products and services and how they are paid to the correct individuals. For example, new mothers could receive specific discounts and exemptions on baby products, while retirees could be given additional help with heating or nutrition.
• An additional advantage to settling benefits in a focused electronic environment is that payments or discounts can be applied in a completely confidential manner.  Benefits recipients can avoid the stigma associated with coupons or food stamps as in many current systems.
• Another consequence of the current status of technological development is how such a system can be created in an amazingly short timeframe – and at modest cost. Old preconceptions of mammoth data servers installed at staggering cost and taking years to bring about are now history.

Obstacles and roadblocks

There are a number of groups and individuals whose self interest would not be met by the introduction of systems such as those outlined here. Some of these groups have significant power, resources and influence.

Firstly, criminals – including those who deliberately evade paying taxes and partake in the black economy as well as deliberate fraudsters. Given the enormous non-collection ratios, this is a big group. Many of them may not view themselves as criminals, but it is important to raise public perception that non-payment hurts everyone in society and that those who deliberately choose not to pay are effectively stealing from everyone else.

Tax professionals – those who have specialist detailed knowledge of how to manipulate the current tax system for the benefit of their employer or client in order to avoid paying tax – will also be opposed. If the rules become simple, and collection methods are automatic, their value-add reduces.

Some tax authority officers may also be opposed, with a mistaken view that radical changes to the system would be too difficult or ineffective or would take too long or be too expensive to implement. Some are still working on memories of models of technology and failed projects from many years ago.

Old technology companies have a vested interest in maintain the myth that mammoth systems are the only way forward. The concept of 5 year development plans for multi-billion installations is so ‘old hat’ that it is hard to understand how these companies continue to survive. By definition, these ‘solutions’ are out of date before they come into existence.

The decision

Do you want to risk the Arab Spring becoming a testing ground for the European Summer and the US Fall? Is the concept of more and more borrowing (if the money is available) acceptable, or is it time to correct the imbalance?

It should be obvious – but who makes the decision, and to whom do they listen?

If there were ever a time for democracy to be used correctly- when votes are soon to be counted and, for a while, politicians may listen – this is it.

We are all seeing sufficient signs of what could happen if we do not act now. The current policies of saving the banks by printing money are failing; government debt is spiraling; confidence is declining so that critical withdrawal of funding is close.

Having tried every other method, could we now try improving the tax collection system so that it is fair for all?

A brief advertisement – but as a non-profit group, hopefully you don’t mind. RTpay has worked for almost six years on potential solutions for real time tax collection and the systems needed to create it. We charge no fees; we make no money; we are entirely self-funded so we have no obligations to anybody other than the taxpayer/ citizen.

Our solutions are designed to work with local groups, both in and out of government, in any country – and in any type of country, rich or poor, big or small.

Please contact us at info@rtpay.org or by phone at 1.561.278.7668.

Before it is too late!!

However, there are opportunities for improvement. The massive spread in the use of mobile phones throughout all areas of the world provides a great opportunity for governments to consider moving to a cashless society. This concept not only offers economies in costs for business, individuals and government, but also brings about an opportunity for greatly reducing fraud from tax collection.

RTpay has designed a structure to create the greatest value from a movement to electronic transactions as the norm. Working with organizations such as the World Bank, IMF and the United Nations, RTpay has created a multi-faceted system in which taxes could be collected at higher levels from the better off, while providing those in genuine need with discounted goods and services or with direct benefit payments.

So, for example, a merchant could sell children’s clothes with a high VAT rate to every consumer; the better off customer pays the full rate. The customer entitled to benefits may have their bill reduced by, say, 50% and no VAT. The merchant receives the same net figure – and, importantly for many, has no awareness of the difference in the net amount paid by each of the two customers.

The same central clearing system, built by RTpay, collects the VAT from one and dispenses the benefit for the other, confidentially, efficiently and in real time.  A true ‘take from the rich, give to the poor’ story, with a modern twist!

RTpay works with all for-profit and not for profit groups to create a range of options for operating real-time tax collection and benefits payments systems. RTpay believes that local ownership and management should be the majority stakeholder in each country where it operates; a target of 80% local ownership and just 20% retained by RTpay is considered to be optimal.

National governments, aid agencies and international bodies are actively seeking methods to improve efficiency and fairness in tax collection and benefits payments. RTpay aims to help in any way it can, using its transaction processing expertise and purpose-built software to deliver efficient, trustworthy, secure and reliable solutions.

These are tough times; we need to work cohesively to make use of the most appropriate technology to help those in most need.

RTpay is a not-for-profit organization. Many of its people are business professionals who wish to use their expertise in payments to bring about a fundamental change in the way taxes are collected and benefits settled.

It would be interesting to know what ideas there are as to how such an extraordinary measure could be achieved.  It is not a question of whether there ever should have been a union of this nature – but I see no manner of changing it without a complete breakdown of the financial system.

I suppose we could see one or more euro countries ‘do an Argentina’ by completely defaulting on their debt. This would, again, be a high risk for the financial system, given the amount of inter-connected debt that would have to be written off by the banks. For that reason I believe the richer nations should want to do everything they can to avoid this high risk event.

The alternative, as proposed by many pro-Europeans such as Commissioner Almunia recently, is for some form of political union. This is so far from the view of the populace, i.e. the people who elect the governments, that I see little chance of any such event. Indeed, one point that has always troubled me about the viability of the European ‘club’ is the way the members all go back from meetings to tell their constituents about how successful they have been in protecting the local interests to the detriment of the rest of the club. No club I ever heard of could work that way for long.

So, is there something we can do which might bring about a degree of confidence in the viability of the euro in particular – and the EU overall in general? I have to go back to what seems the most obvious remedy for what is a budgetary problem; let’s increase our income, rather than just concentrating on cutting expenditure.

Any increase in tax rates is, of course, extremely unpopular – and therefore not going to happen while governments can come up with anything else. Therefore the way to increase tax income is to improve the collection method. We know the way to do it, namely to cut out the enormous fraud involved in VAT throughout the EU, by bringing in intra-EU VAT collection and by stopping the delay in collection.

Taking VAT out during the course of payment is capable of increasing tax revenue by over €1 trillion over five years. The annual fraud losses are over €100 billion, and of course, the fraudsters are seldom paying income tax when they are cheating on VAT.

How this increase is invested is probably going to be country-by-country, but can be considered as a funding amount of far greater significance than a few hundred billion euros in the EFSF. A further factor in its favor is the general appeal of it ‘being fair’ – most people detest the idea of others getting away with things while they have to pay the full tax.

The concept of simplifying and modernizing VAT collection has far greater benefits in reducing costs for businesses overall. And there is an extra point which may mollify the northern Europeans; the degree of VAT fraud is far higher in southern Europe, so the relative fiscal affect is far greater there.

What do we need to do? The current need for unanimity of each of the 27 countries on any tax changes kills any potential action in a normal environment. That should change overall – and in this specific case, it should be the unanimous decision to make this change.

One final thought; if we reduce cash as a payment vehicle we cut many more costs and increase efficiency. Is it time for the EU to be proactive – and look to join the 21^st century a little late, but maybe, just maybe, before it is too late?

There are few things of which we can be sure, but death and taxes are certainly in there. If you don’t collect your taxes properly, you will suffer a painful financial death; nothing can be clearer than the Greek swimming pool story (of May 2010 in the IHT).

We seem to be moving, rapidly, from the non-acceptance of default by any euro country to a feeling of inevitability. The rates being charged for Greek, Irish and Portuguese new debt issuance shows that the end is near. But do we have any real idea what is going to happen after that?

There are a number of ways this can go, but I believe we start to see a structure emerging. Merkel needs to strengthen her position with her electorate – and the way to achieve this is to create a smaller, more tightly linked group of countries where the budget constraints are honored more aggressively. The actual terms may still be up for debate, but there is a clear mood for a Berlin-centric group to emerge.

The formation of a deuro (a currency used for inter-central bank transfers and mutual support for fund raising) is going to create a problem for the euro-based countries outside of the deuro group. In essence, Germany will guarantee in the deuro group – under strict guidelines – while the external countries will effectively revert back to independence of currency and financial structure.

The banks and investors will get a choice of buying deuro-denominated debt instruments – at very low yields – or continuing to invest in what would become highly speculative euro loans. This may sound an odd situation, but it deals with one critical factor of how each country can manage its current euro-based indebtedness.

The fall in value of the euro, versus both the deuro and other currencies, would relieve the debt burden of the external countries in a way that exiting the euro does not.

Is this going to be a messy process? Yes. Which countries are going to be in the deuro? Some are obvious (Holland, Austria etc.) while some are clearly not (Greece, Ireland etc.) and some are going to be fascinating to watch. The big guns, of France, Italy and Spain, have to make a decision; do they accept a level of external (Berlin) control over their fiscal affairs – and make some fairly major austerity measures work – or do they fight it out on their own?

In the end, I believe all three will accept that being in is better than being out – but whether this creates a political battle at home is the follow-on question.  What would be the impact on the French election in particular? When push comes to shove, I would expect the ‘deuro in your pocket’ versus the ‘euro in the bush’ to be more highly valued.

If all this takes place, does it impact the existence of the EU and what are the political implications? I would like to think that the EU would revert to what most people actually wanted, i.e. a trading group of independent nations, while whether Germany wants to emerge as a major political power is still unanswered. At the moment, there is still a reluctance to accept a big role; perhaps a greater direct fiscal control position will encourage the German people to take up a greater place.