By Christiaan van der Valk, VP of Strategy at Sovos

The way governments and businesses engage is becoming increasingly digital. With growing pressure to move away from paper-based invoicing and embrace real-time reporting, keeping a clean record of tax activity has never been more important. Countries in Latin America, such as Chile, are trailblazers in this space, having already pioneered real-time reporting based on electronic invoicing systems to replace periodic reporting.

The switch to continuous transaction controls (CTCs), which sees transaction data automatically submitted to governments for approval, places authenticated source data of business transactions into the hands of governments, removing much of the dependency that tax administrations have had on resource-intensive onsite business system and document audits. Using CTCs means that the government authority builds a picture of a business’s tax liability using small, incremental reports supplied to them at the time of the business transaction. It’s an entirely autonomous process which limits the involvement of individual businesses, ultimately negating the need to file periodic returns. In theory, this removes the pressure on businesses to maintain exhaustive records to prove historic transactions, but the reality is that it presents a new case for diligent tax record keeping and proactive data reconciliation. Now, to challenge their tax liability determined independently by the governments, firms must have an intelligent evidence base of high-quality data to tap into.

Digital evidence base

The data needed to form these tax records comes from customers and the supply chain. The CTC revolution highlights something that has always been problematic, but that tax administrations have had to tolerate for practical reasons: many businesses struggle to reconcile their accounts, tax filings and operational invoice data. With tax administrations receiving detailed line-item sales and purchase data in real time, they are in a much stronger position to triangulate against electronic accounting records and external sources such as payment data. Discrepancies will be flagged, and businesses will have relatively little time to correct them.

Underlying every indirect tax right and obligation is the notion that a business needs to prove that an actual transaction took place. CTC systems increasingly include mandatory messages from buyers’ invoice approval workflow systems, which allows tax administrations to control the buyer’s tax credits on the basis that these can only be claimed if the supplier pays the corresponding consumption tax. However, many countries will still want to be able to verify the veracity of the actual transaction, which means that documents such as purchase orders, transport and payment information need to be available and consistent with invoice data.

To be able to confidently challenge the records kept by the government, businesses need to keep track of the evidence in a clean and organised way. Given the multiplicity of business systems that are involved in handling supply chain and customer fulfilment data, thankfully, technology can help.

Christiaan van der Valk

Working with a powerful technology platform that continuously ensures data reconciliation across systems and processes becomes critical. Storing invoices and associated transaction records in a single data warehouse keeps a business in control of its evidence position, allowing it to access consistent and verifiable data at any time to contest a record held by the government. As the focus for tax authorities has moved closer to purchase and sales transactions to reduce the VAT gap, there has been a greater need for more data to support accurate invoicing with end-to-end data consistency controls in real-time. Fragmentation of data storage and lack of proactive checks to act on discrepancies among systems can set off alarms in tax administration control towers and lead to intrusive audit. The amount of data means it’s no longer feasible for businesses to store information in remote filing cabinets. It needs to be organised and readily available in a digital format to correspond with this shift.

As governments continue to recognise the benefits of using digital controls to replace paper returns and ensure compliance with indirect tax laws, so too should businesses harness the benefits of technology to organise their evidence base and ensure compliance with CTCs.

The domino effect of CTCs

Implementing widespread digital tax controls is dependent on the will of individual governments. In Europe, for example, France has taken initial steps to introduce real-time reporting and CTCs, whereas Hungary, Spain and Italy have had such systems in place for some time. A patchwork of legislation currently exists without consistent application across different regions around the world. But the benefits of moving toward increasingly digitised tax controls is clear. Real-time data gives governments enhanced visibility over the economic health of their country, in addition to improving fiscal controls and effectively reduce fraud. The trend is gathering pace globally, with many more governments inspired by the success of digital schemes.

Embracing automation

Moving away from businesses manually submitting invoices is a clear path toward CTCs compliance but without concise, organised data, it simply won’t be possible. For businesses, this means enhancing record collection by using technology services and improving the accuracy of data across business operations for granular auditing purposes. In a world where tax controls take place in real-time, you don’t want the tax administration holding up your invoices because of data quality issues. There will inevitably be challenges associated with this digital shift, but businesses can ensure they’re prepared to face forthcoming changes by implementing business process and transaction automation to ramp up data quality before it is too late.

What’s more, enhanced data which covers every aspect of the supply chain and transactions can be used to a businesses’ advantage; these powerful insights can be optimised to deliver strategic success which is critical as the coronavirus situation continues. Automation saves costs, increases resilience, will create better controls and allow for a more accurate understanding, from the ground-up, of granular reporting requirements. Businesses can prepare themselves for this monumental change by ensuring that their evidence base is well organised and prioritises the granular data governments will need for real-time invoicing.

Data reconciliation and organised, clean digital archives will ensure that businesses are well equipped to dispute any transactions or reported activity, as the authority for invoicing is placed into the hands of governments. Driving real strategic success can be unlocked by powerful data-intelligence. As economies rebuild, technology and the insight it brings will be the catalyst for success.