Why businesses need to act fast in preparing for big-data driven collection and enforcement

Why businesses need to act fast in preparing for big-data driven collection and enforcement

Nicholas Hallam, CEO of Accordance VAT, on how automation is changing the VAT process across the EU - and what the limitations will be

Why businesses need to act fast in preparing for big-data driven collection and enforcement

The tax world is changing, and fast. Globalisation and the proliferation of new technologies have created an environment in which it is increasingly hard for authorities to collect traditional income and corporate taxes.

Assets can be shifted across the world with the lightest click or swipe. Nevertheless, the demands for increased public spending grow daily. Health and social care costs for ageing populations living longer on their own thanks to technological progress threaten to bankrupt mature economies in coming decades.

Growing resentment

Populist resentment at a perceived footloose parasitic global elite is, as in France last week, erupting into resistance and violence. The OECD has repeatedly pointed out that sales and consumption taxes, which are at least in principle tethered to particular transactions in particular locations, are already the key areas of Government revenue growth and will remain so for the foreseeable future. Chief among these is VAT.

In the eyes of EU and global tax authorities, all roads lead to indirect tax digitisation. As we move into a world increasingly organised by and around technology, digitisation will be critical to the effective future-proofing of tax collection. Authorities are anxious to shift rapidly to big-data driven collection and enforcement, as it offers an unrivalled possibility to immediately spot irregularities and errors, and to leverage fines and penalties with greater efficiency.

New types of electronic VAT reporting are in place or planned from Spain to Sweden, Great Britain to Greece. For the tax authorities, the ultimate goal is algorithm-driven tax collection automation. Spain is already using AI to generate and respond to VAT queries. The EU VAT gap currently stands at in excess of €150 billion annually. Digitisation not only has the potential to arrest this problem, but to reverse it. At the very least, authorities are determined to use technology to ensure that this already substantial leakage doesn’t turn into a flood.

The long march towards digital progress

The European Commission has long desired to harmonise the EU’s VAT regulations. Member states, keen to prioritise their individual needs, have resisted, only accepting piecemeal standardisations. As a result, there are still considerable differences in the understanding and application of VAT regulations across the block.

Paradoxically, these differences are being exacerbated by the introduction of electronic VAT reporting technologies.  There is a startling lack of coordination in implementation – from Making Tax Digital in the UK to Polish SAF/T, Spanish Supply of Immediate Information (SII) and Hungarian Real Time Reporting (RTR), different nations are setting up their own versions of digitised reporting systems. And this is just the beginning. Over the next five years, most EU authorities are likely to introduce some variant form of electronic reporting, and most of these will probably be intended to operate in real time.

While digitisation offers huge possibilities for streamlining and improving efficiency, it also weaves in additional layers of intricacy to the existing complexity of a semi-harmonised EU VAT system. As each new member state responds to its own imperatives and implements a version of digital reporting, businesses trading cross border are confronted with new and differing systems, each with their own particularities, requirements and risk factors.

The transition to digital will not be voluntary. Full tax automation requires machine learning; and machine learning requires vast and comprehensive data sets. All will be obliged to digitise. The EU itself intends to introduce a data driven MOSS for distance sales in 2021 and hopes to consolidate the block’s VAT system with an overarching digital One Stop Shop shortly thereafter (though how this project is reconcilable with the emergence of discrete RTR systems is unclear). As we move into a digitised future, information will be demanded in a format that suits the technologies; and, where possible, data will be cross-referenced to permit ever more accurate instant assessment.

Impact for businesses

For businesses operating in the EU, there is a clear imperative to transform data to a point where it becomes transparent to the tax authorities – and, just as importantly – transparent to businesses themselves. Tax authorities will increasingly demand higher levels of proactive compliance in their dealings with business. The adoption of technology also creates an opportunity for companies to use indirect tax data as a source of management information. The increased use of technology offers the potential for enhanced clarity, efficiency and the safe streamlining of some of the more mundane, yet risk charged tasks fundamental to VAT compliance.

For all this, automation is not a panacea. VAT is, after all, a legal construct: processes around it can be automated, but it is not itself of the digital era. Tax still requires human interpretation. The European Court of Justice, not Google, is the last word on VAT. Automation may or may not eventually resolve this problem; but it will certainly make human error far more apparent to hungry tax authorities. If your business has misunderstood from a VAT perspective the nature of its transactions, and built that error into its reporting, automation makes it an easy target. As digitisation creates greater transparency, businesses must ensure that they have a deep understanding of their financial processes and their VAT profiles.

For now, and for the foreseeable future, the answer for companies with complex and ever-changing international trading flows will be to marry data-literate human tax expertise to flexible and responsive tax technology. It needs to be a priority. Tax authorities will accept no less.

 

 

 

 

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