The tax landscape is changing at a rapid pace. Corporate Income Tax (‘CIT’) is experiencing major reforms driven by the Base erosion and profit shifting (BEPS Action 1) Actions, aimed at combatting corporate tax planning strategies that shift profits from higher–tax jurisdictions to lower–tax jurisdictions. Although BEPS Action 1 is all about challenges around digitalisation, it mainly touches upon the allocation of taxable income across countries, as opposed to the operational part of tax collection and management.
This operational digitalisation is significantly impacting transactional taxes like VAT/GST (from now on referred to as ‘VAT’). In combination with the European Commission’s efforts to close the VAT Gap of EUR 137 billion – a loss of 11.2% of the total expected VAT revenue —tax administrations are introducing new laws that are digitising the tax collection and administration process. The digital transformation of VAT is a massive gamechanger for both tax administrations and corporate tax departments. The rapid developments of (digital) solutions to improve compliance and find the smallest anomalies in the data make it a very agile landscape from a VAT and CIT perspective.
Here are some of the major areas in which the tax landscape is making the digital shift from both the perspectives of tax administrations and corporates.
- Digital reporting and analytics
Until recently taxpayers were in some countries still required to periodically submit paper VAT returns to the tax authorities. Nowadays, most tax authorities require taxpayers to file their taxes electronically. On top of this, there is a clear trend in which many countries are adopting mandatory e-invoicing as well, as it allows authorities full and real-time insight into the transactional (VAT) data of businesses both from seller’s and buyer’s perspective.
- Standard Audit File for Tax (SAF-T)
Where traditional VAT returns consisted of aggregated data, there is now a rise of authorities requesting much more detail of the numbers reported by taxpayers. SAF-T or alike reporting requirements are introduced to obtain this insight. These reports provide tax administrations with structured, non-aggregated data which allows them to examine each invoice and transaction separately. As of April- 2020, Poland will even officially abolish the requirement to submit a regular VAT return and will instead require all data to be submitted in a SAF-T file (locally called JPK_VAT) on a monthly basis in order to calculate the VAT position. Many countries are following suit, and in Spain, for example, taxpayers are already required to submit non-aggregated reports within only four days of the invoice being issued or received and booked (locally called SII).
The industry is heading in a new direction when it comes to VAT reporting and e-invoicing via authorities systems is becoming a key element of that. Italy, China and Mexico being a few countries that have already adopted this way of working, while France is soon to follow by extending the e-invoice scope to B2B as well. Some key opinion leaders believe that is only a matter of time before tax administrations will have a direct connection with the taxpayers’ systems (through APIs) or will have full insight in all AP and AR transactions through e-invoicing via the authorities systems, to allow them to calculate the VAT liability without the direct involvement of the taxpayer.
- Exchange of information – Transaction Network Analysis (TNA)
There has been a major increase in the exchange of information between tax administrations. In the EU, tax administrations have announced the Transaction Network Analysis (TNA), which will allow Member States to rapidly exchange and jointly process VAT data, enabling them to quickly detect suspicious networks of VAT carousel fraud. Further collaboration between tax administrations is expected and may end up in a situation where every purchase transaction from one country can be matched with its sales transaction in another. In combination with standardised invoice data, this could give tax authorities full insight into all transactional data on a global scale.
What does this mean for Tax Administrations?
- Faster processing times
With the rise of real-time or near real-time reporting mandates, tax departments will have to turn over data much faster than the traditional two to four weeks after the end of the tax period. They will no longer be able to perform routine quality reviews, as there simply will not be enough time. All manual processes will need to be fully automated and the VAT department will need to monitor all aspects of business processes to ensure data integrity for all VAT data processes.
- The explosion of VAT data
With tax administrations increasing the amounts of data they require for VAT determining tax payer’s VAT liability, the anticipated data overload will require a major restructuring of the tax departments’ database systems. We may very well see a time when data architects have an outsized influence in the accounting sphere.
- Cloud availability
Many companies have invested significant resources in the development of tax data warehouses as a means to provide the necessary data for analysis and reporting. These databases are static and often do not reflect the latest information. Now, the major ERP providers are focusing on cloud-based solutions based on one big corporate data lake, which can be seamlessly integrated in real-time with all kinds of tax-related applications. This will make an enormous amount of data available to the tax team at any given time, even for low-value transactions.
Need for progressive solutions
This is where emerging technologies in the area of Big Data and Artificial Intelligence will play a significant role. Specifically, VAT has a great deal to gain in the area of semantical analysis (giving meaning to data).
In addition, with all the latest digital developments, tax departments will need to introduce a new set of skillsets. This includes education and experience in the basics of technology, systems architecture, finance and business processes. This wide range of capabilities is key, as tax departments will need to understand all these processes to interpret data and determine the precise set of data to analyse. This will allow VAT managers to sift through and fully utilise the available data in the most efficient and effective way possible.
Progressive tax departments will need a strong analytic skillset, technological mindset and tax expertise. They will also need to have data storytelling capabilities to understand the meaning of data, communicate insights and lead their companies confidently and resolutely into the digital era.
For more information about the paradigm shift of digital tax transformation, we invite you to download the full eBook on the topic, The Paradigm Shift in Digital Tax Transformation written by VATBox’s VP Tax & Product Strategy Remco Dewaerheijt.
Download the full eBook
Remco is VP Tax & Product Strategy at VATBox, responsible with his team to keep the VATBox systems fully up-to-date and design new features and solutions in the area of VAT, Benefits in Kind and Corporate Tax within the scope of the Travel Expense domain and part of the AP process. The mission is to develop those solutions that provide our clients with more insight and control over their tax relevant data and increase the level of compliance, using VATBox patented AI proprietary technology.