In the last few years, three key global trends have made tax and compliance professionals’ lives far more complicated. The increased rate of regulatory changes with new rules coming thick and fast, improved use of technology by tax administrations and their increased demand for raw data have ensured that tax managers must continuously be on their toes.
Governments are now demanding and getting invoice level data from enterprises, giving them real-time visibility into operations. The use of tech-powered analytics has enabled regulators to spot anomalies and quickly act upon them.
Here is a snapshot of how governments are upping their game globally.
· Spain has instituted a system called SII, Spanish for Immediate Information Sharing. Every four days, businesses have to send every single B2B invoice to the government to be approved for claiming input credits on VAT.
· Poland has instituted a system called Standard Audit File for Tax. The tax administration requires firms to file all kinds of additional information on top of standard reporting, including lists of suppliers and B2B customers, invoices, and General Ledger data, among other things. It has come to a stage where companies do not need to file their VAT return. The government does it on their behalf.
· In Turkey, every B2B invoice has to be pre-approved by the government.
· India has already announced plans for launching an e-invoicing portal (currently postponed because of pandemic-induced disruptions).
· Several nations are toying with the idea of instituting a Split Payment system. Under this concept, the VAT amount goes to an escrow account controlled by the government, and the business gets only the invoice value net of VAT. A reconciliation happens at the end of the month, and the government takes its share from the escrow account.
The Global Hunt for More Revenues
The reasons for these moves are not difficult to understand. Governments are continually looking for ways to boost revenues. But there are limits to how much they can raise tax rates or impose new taxes before both voters and businesses start to push back. The most apparent method is to plug leakages in the tax system.
A 2018 analysis by McKinsey & Co suggested that globally about USD 5 trillion of government revenues – roughly 20 per cent – go missing each year. These are in taxes owed but never paid or outbound payments gone awry.
Before the pandemic, worldwide government deficits were expected to be 2.6 per cent of the estimated GDP in 2021. According to the McKinsey study, improving revenue collections by just one per cent of GDP – through the use of big data and analytics – would eliminate over one-third of the deficit, equipping leaders to make and implement better policy choices.
The pandemic has, of course, led to massive spending by governments worldwide to support businesses and people. But this is only making the hunt for additional revenues more urgent. Administrations are using the latest technological tools to make tax compliance a continuous process in order to get their fair share of taxes and plug leakages.
Compliance – From Snapshot to an Ongoing Process
Governments’ use of big data and analytics enabled by technology is permanently changing the entire tax compliance process. This is how it is shaping up.
E-Filing: Electronic filing of returns
E-Accounting: Filing supporting data to justify the E-Filing (e.g. Standard Audit Tax File)
E-Match: Matching a firm’s GST/VAT filings to other areas like corporation tax, customs duties and withholding tax
E-Audit: Auditing of any anomalies that data throws up
E-Assess: Assessment and scrutiny of filings is driven by Data Analytics and Algorithms
In this changing dynamic of tax compliance, authorities are no longer satisfied with just looking at a snapshot and then checking six or 12 months later. It is a more continuous process.Wilson Ang, Partner, Head of Asia Regulatory Compliance and Investigations Practice, Norton Rose Fulbright
Speaking recently at a Thomson Reuters webinar, Mr. Ang said, “Regulators and law enforcement are not simply content with ‘these are the laws, and you need to comply with them’. They are moving beyond that to say what processes you have to comply with for them. And now they are moving beyond that to ask ‘what data do you have to inform yourself on the compliance of such processes’.
We’re no longer in a ‘show me’ world, we’re in a ‘prove it to me’ worldTony Fulton, Partner, RSM Australia
While speaking at the same webinar, Mr Fulton said that authorities no longer want to see what firms have filed, but also that their filing material is accurate and reflects the correct position. They want companies to prove to them that it is correct and that they have processes to ensure that.
“Don’t Bring a Knife to a Gunfight”
With tax administrations demanding more and more data and employing technology for Big Data analytics to zoom in on possible anomalies, the only way businesses can cope, most experts say, is by investing in the latest tax technology.
Mr. Fulton said that for MNEs operating in different jurisdictions, complying with various regulations is only possible if they invest in technology and have consistent processes and controls in place to manage the information and ensure that they can keep adequate compliance records.
Mr. Ang concurred, saying that the only way companies can adapt to this uncertainty is to digitize operations so that the emerging data allows enterprises to enhance and enable key compliance and tax processes.
There was a time when tax professionals did not want to deal with technology. That no longer works. Another tax professional put it more eloquently. “If you are not investing in tax technology, you are bringing a knife to a gunfight. It is not going to go down well.”
Find out more about Thomson Reuters’ tax technology here.