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Seeing is believing, but did you know that if you don’t believe it, you won’t see it? There will be significant changes to tax compliance and controversy administration over the next ten years; the evolution is happening now, right in front of our eyes.
Revenue authorities will engage with taxpayers differently in the digital age. There are already several levels of digital maturity amongst revenue authorities that present risks and challenges companies should recognize now and position for in the future. At the lowest level, “E-filing,” taxpayers file tax returns electronically using standardized forms. Other types of electronic engagement include providing revenue authorities digital feeds of source data such as trial balances and invoices, or handling entire audits electronically, in real time and across multiple businesses and jurisdictions.
Nearly 30 countries have already implemented some form of digital tax reporting requirements, with many of the earlymovers being developing nations. Brazil implemented the Public Digital Bookkeeping System in 2008 and has since required companies to provide tax information electronically. Mexico requires companies to integrate systems with the government and provide VAT activity in real-time. Italy and the UK have rolled out electronic VAT projects inthe past two years – expect other mature jurisdictions to follow suit. Looking even further down the road, one can imagine discontinuous change with the use of Blockchain in the transfer of sales tax or VATto the government at the point of sale, removing the middleman from collection and remittance activities altogether.
The overriding goal of tax authorities is to obtain more intimate information about taxpayers and connect it in a story-like fashionfor a better understanding of whether a company is paying its fair share. The OECD’s Base Erosion and Profit Shifting initiative is a step in this direction andis an ambitious project of international collaboration to end tax avoidance. International tax systems worldwide will converge and result in a more transparent tax environment globally. Ultimately, jurisdictions will apply advanced analytics and artificial intelligence to scrutinize transactions in search of evidence that can be used to determine whether companies are compliant and paying tax in the appropriate jurisdictions.
Digitization of tax accelerates the exchange of data between taxpayers and revenue authorities and increases transparency at a rapid pace, and this increases tax risk to companies. The need for immediate, accurate data creates internal disruptionandrequires close coordination between finance, IT and tax. With high transaction volume, even minor issues could result in fines, business disruption and damaged reputations if reported incorrectly in a digital context. These trends create challenges for companies in both the short and long term. Meeting multiple requirements on short timelines across a growing list of jurisdictions can lead to a patchwork of solutions amid a scarcity of local IT and tax resources. In the near term, companies will need to adapt or even overhaul their invoicing, payment, enterprise resource planning (ERP) or other financial systems to meet this challenge.
Operational risk is introduced as governments ask for tax clearances before transactions can even be undertaken, sometimes bringing business to a standstill. Business leaders will need to closely collaborate with tax departments to obtain proper tax documentation contemporaneously. Authorities can more aggressively audit as higher levels of data analytics and data matching lead to greater numbers of electronic inquiries generated without human involvement.
Given the challenges and risks creates by the digitization of taxes, what should the operating model for tax departments be in the upcoming years? A centralized, well-connected tax department will be essential for crafting a better narrative globally. Now is the time to start moving towards this model by taking steps to standardize processes and systems, explore managed resource models, and implement robotics and automation within the department. Organizations must unite leaders across functions and processes, includingfinance, IT and tax. A coordinated response linking core business processes and ERP systems with new interfaces and improved solutions for reporting and compliance can significantly reduce costs and risks.
The skill set required for company tax professionalsin this digital tax model changes dramatically as well. Tax departments need more people with technology skills to managesystemsand data on a regular basis and tax technicians must stay on top of electronic initiatives globally. To be successful, communication and influencing skills will be critical. Tax professionals will need to interact more closely with business partners, understand business priorities and initiatives and communicate tax information to non-tax people in a concise fashion.Tax directors must ingrain these expectations into the hiring and recruitment strategy.
The digital age is upon us and revenue authorities worldwide are at the forefront, using new technologies to capture tax data and administer and assess taxes in real time. Companies mustadapt the processes and the skillsets of their tax departments to meet the demands of a digital tax world and better tell the story of the businesses globally.Sometimes we cannot see what is right in front of our eyes, but once we do, we wonder why we did not see it sooner.