Date: 1 Mar 2011 Comments: 0

The recent events in the Middle East and North Africa highlight a number of important points:

• Communication by mobile phone and online systems is virtually immediate (for good or bad).
• With approximately 50% of the global population being under 25, there is a need for governments to understand how to communicate with them effectively.
• The unemployment level – particularly for the young – is high and getting disturbingly higher.
• The economic austerity measures introduced in many countries across the globe mean that governments do not have much scope to spend their way out of social unrest.
• Spiraling food and fuel prices will exacerbate the problem significantly.

Let’s be clear; there is no simple or complete solution, but hopefully there are ways in which an integrated approach can make a major difference. My view is that we need to use the communication methods that can link with the young to obtain their tolerance, if not support, for governments, in order to bring about some fundamental changes in financing.

P2G – people to governments – i.e. collecting funds through taxes, is a necessary part of the equation. We cannot activate G2P – governments to people – unless we have the funds to do it.

Similarly B2G and G2B are linked; we have to improve the way we collect taxes from businesses if we are to offer these same businesses support for taking on more staff and growing their business overall.

We target nine areas:

1.       We want to use mobile phone-based payments to create electronic audit trails for better fraud reduction and to know how to target the neediest.

2.       Virtually every person who earns money has a phone, whereas well over 50% do not have a bank account.

3.       By creating a secure central clearing system for payments, any phone owner can make and receive payments from any other.

4.       In order to achieve the necessary security against money laundering and abuse, a fraud analysis tool that acts in ‘real time’ to block any suspicious transaction as it takes place can be used.

5.       Getting paid the right amount is important, while ensuring that the correct taxes are paid is also critical. And doing this while reducing the administrative burden on small businesses can make a big difference as well.

6.       Collecting VAT on the sale of goods – at the time of payment – can reduce the enormous fraud inherent in the current outmoded VAT collection system.

7.       But, any increase in household cost has to be offset by benefits for the poor, particularly for basic food products and fuel.

8.       If we can build a database of transactions for small businesses, we can identify those to whom help can be given to employ more staff.

9.       And, as that creates more employment and better data, the end result is that the small business becomes creditworthy and can get funding from commercial banks and investors.

In order to make this work, we have to make it popular – and we have to do it quickly and cost-effectively.

Action plan:

1.       Create a system in which all employers settle gross wages each week (or month) to the central clearing (CC) – note: reduces admin work considerably for employers and tax authorities

2.       CC calculates all allowances for each employee, and pays the net amount to virtual accounts held at the CC for each individual, linked to their registered mobile phone numbers.

3.       Regular payments for rent, mortgage, utility bills etc. can be made directly from the mobile phone handset or by standing order. Each payment has the VAT extracted at the time of settlement and paid to the tax authority.

4.       For utility bills, the lower paid get a direct grant of, say, 25% of the bill for the first year, reducing by 5% per annum over the next 5 years.

Example: I pay $110 to the electricity company; it receives $100 being the net after VAT is extracted. The Tax Authority receives $10 as the VAT due – and then I recover from the government $27.50 in the first year, being 25% of the total I paid. So, a net loss of $17.50 for the TA first year, $12.00 in year 2, $6.50 in year 3, $1.00 in year 4 and makes a profit in year 5 of $4.50 and $10 per year thereafter.

5.       Similarly, if I buy food from a merchant, as an incentive I could get 25% off if payment is by electronic means, funded by a government refund. This will make ensure that the merchant declares and pays the VAT component, as otherwise the discount would not be applied.

6.       By using these methods, the merchant’s true business level is now known; the VAT report shows its actual sales, while the refund the merchant looks for on its purchases – along with the staff costs seen from its payment of gross wages – give a good indication of overall profitability. From this, a credit report can be created for even the smallest merchant.

7.       Using this report, the government and/ or private investors can look to assist the merchant to grow. In particular, assistance can be given to encourage employment of more staff.

Will this plan increase employment by much? It’s hard to say, but at least it creates the opportunity. Many small merchants are unable to get credit from banks and, unfortunately, many governmental assistance plans are abused by fraudsters pretending to be merchants.

The bottom line is that food prices are increasing sharply, as is unemployment. If governments are to survive the ‘wind of change’ they need to help those most in need, including in particular the young, who have most interconnectivity and determination to get things done. But, as we all know too well now, governments cannot just spend their way out of this situation; they need to fund any assistance by increasing tax revenue.

The wealthy have to pay for the poor to some extent, but the other way in which the overall tax revenue can be increased is by reducing the massive levels of fraud in virtually every country’s tax system, and by increasing the efficiency with which tax is collected, increasing the overall take and reducing the cost of collection. To do that, we need to create and use electronic records of all transactions; and to achieve this we also need to take steps to greatly reduce the use of cash.

Moving onto larger businesses and B2B payments in general, there is much that can be done by implementing e.invoicing for most transactions. Again, the concept of collecting VAT in the course of the settlement is fundamental to the fraud avoidance plan. Of course, many B2B transactions do allow the buyer to recover the VAT for genuine business purchases; the central clearing format enables this to be automated as well, once the fraud analysis tool has approved it.

The saving for companies in using an electronic data and transaction processing facility should be significant. Similarly, the opportunity for the tax authority to cut down on fraud is clear. There are many aspects of on-line accounting, particularly when applied in real time, which can improve all aspects of business.