Tax administrations around the world were already going digital. The pandemic has only accelerated the trend.

By Emine Constantin, Global Head of Accoutning and Tax at TMF Group.

Why do tax administrations choose to go digital?

Among the many reasons, the most important one is the pressure to perform. Most governments complain that the tax revenues they collect are significantly lower than what should be collected. To increase the collection rate, tax authorities need better insight and access to detailed information.

Another key reason for tax digitisation is the need to address cross-border challenges and the issue of value creation.

“Where is the right place to tax cross-border transactions – is it the country of residence or the country of consumption?” has been a topic of discussion for some time. Adding another level of complexity, many cross-border transactions take place online. For tax authorities, the challenge is the lack of information about the users and the amount of payments made for the activities facilitated by the online platforms. Without such data, identifying the place of consumption is very  challenging

Where is tax digitisation at?

Most tax administrations are currently implementing e-reporting (enabling the submission of tax information in an electronic format) and e-matching (correlating the data received from different sources: e.g. both customers and vendors submit information on sale and purchases and the two sources of information are checked and agreed to identify discrepancies). Through e-reporting, tax administrations are able to:

• Obtain real-time or near-real-time data submissions. Instead of waiting until the end of the month for summary tax information, each invoice is electronically communicated to tax authorities when it’s issued. This moves compliance upstream. Tax assessments are supported in real-time or close to it, instead of assessing transactions that have happened in the past. TMF Group’s research has found that 24% of countries surveyed globally require companies to issue tax invoices using technology and send them to tax authorities electronically, without any form of manual intervention. The percentage gets higher in the Americas (where more than 50% of countries have such requirements) and in APAC (where 36% of countries have no adopted this method).
• Share best practices and boost cooperation with other tax authorities. According to a recent OECD report, 15 of 16 tax authorities surveyed use data analytics to drive audit case selection. With national implementations of BEPS (Base Erosion and Profit Shifting) and global tracking and monitoring, digital is a new focal point for the OECD. Tax administrators learned the value of such collaboration from previous projects and are putting that experience to good use by sharing approaches and leading practices.
• Increase the coverage of the tax audit. Tax authorities request more and more data and more and more details during tax audits. Such requirements are not limited to technology companies that may host a platform where their users trade with one another. In some cases, companies have been asked to provide data files. In others, they have even been asked to install tax authority software on their systems.

When it comes to digitisation, it’s important to understand local and regional trends because the level of maturity can be quite different.

In Europe, countries are increasingly adopting SAF-T (Standard Audit File for Tax) submission requirements — long described as the closest to a consistent approach for managing tax audits.

Portugal, France, the Netherlands and Luxembourg are just some of the countries where SAF-T submission is now mandatory.

Digitisation brings benefits but also challenges for companies. In Spain, VAT refunds are suspended until SII (Immediate Supply of Information) submission is fully compliant. In the Czech Republic, the introduction of VAT control statements has led to many formal and informal queries by tax authorities with a required response time of 5 working days. All these requests put pressure on taxpayers to provide accurate tax data to avoid further enquiries.

LATAM is the most mature region in terms of tax digitisation. Latin American countries have adopted a “layering” approach, splitting tax and accounting data into “slices,” each with its own submission schedule, scope and format. Brazil is one of the most advanced countries in this respect. Virtually all accounting and tax data is communicated electronically.

In APAC, China and India have also started their journey towards fully-fledged electronic reporting.

A positive shift

Digitisation makes the tax journey easier, not only for the tax authorities but also for the taxpayer. One obvious benefit is the reduced tax return filing burden. For example in Poland, the submission of the VAT return was replaced by the SAF-T submission.

Based on the amount of data collected, tax authorities in Spain and Australia have created virtual online assistants to help answer tax questions. In India, the authorities are looking at pre-populating the GST return, reducing the amount of time that taxpayers spend preparing it.

Implications for companies

When responding to the electronic requirements of tax authorities, companies have some key considerations.

Data requirements – what will companies need to report, and how? What we see in practice is that:

• Data sits in multiple places and companies need to either aggregate it automatically or reconcile it before extracting it manually.
• Data is inputted manually and – as such – is prone to errors, inaccuracies and incompatibilities.
• Some of the data needs to be manually adjusted outside the normal transactional cycle (e.g. output VAT on goods provided free of charge)

If a company faces any of the situations described above, the challenge will be to aggregate and validate the data before reporting it.

Processes – do current processes allow companies to collect all data that is needed? Often, the data collection processes do not allow for consistency or for storage of all relevant data. Processes might need to be adjusted to make sure that the right level of data is in place.

Technology – are the company’s current systems appropriate for reporting purposes? Existing software might not allow for accounting records to be digitally linked.

Tax reporting process – is the tax reporting process fit for purpose? As described above, tax resources need to be moved to the front-end of the accounting process: data needs to be accurate when entered into the system.

Companies that wish to mitigate these problems should follow these steps:

• Understand local requirements.
• Identify the required data sources and strive for a global standard. Looking for local solutions will not help you deal with the digitised world.
• Create a library of tests – it’s believed that 70% to 80% of national revenue authority requirements are similar.
• Prepare to respond to tax queries – as tax authority scrutiny and testing moves into real or near-real time, so must the response.

Digitisation is very much a global trend, more and more countries are introducing it, and it’s seen as a safe solution to reduce the tax gap. In the short-term digitisation may bring complexity, because it will affect how a company’s accounting and tax functions are organised. But in the long term, once processes are automated, it will save companies time and effort – and allow them to stay ahead of the demands of tax authorities.