Tech CEO: Sovos vice president Christiaan van der Valk

How does one plan for tax compliance? 

More than ever, tax compliance requires strategic thinking. Especially in the field of indirect tax – such as VAT – it is important for businesses to understand we’re in a paradigm shift where existing routines, organisational structures and risk decision-making will no longer yield the optimum outcomes.

Staying abreast of legislation alone will keep you safe in an environment where tax administrations only make minor adjustments to commonly understood frameworks – but it’s not sufficient for an environment where the base rules change radically. Right now, tax administrations are adopting a wide array of innovative approaches that use technology to re-engineer the old ways of collecting tax by requiring businesses to send them their transaction data in real-time or near-real-time.

At the same time, businesses are entering a whole new phase of their own digital transformation projects, by adopting cloud-based transaction platforms and financial back-end systems that are magnitudes faster than the previous generation. If you don’t zoom out to see the big-picture impact of integrating these super-powerful private and public sector systems with each other, you are bound to miss out on unprecedented opportunities and build up significant risk.

Regulators are increasingly more demanding for real-time data reporting – is this putting small practices and companies under pressure?

Interestingly, because smaller companies are often focused on domestic business in a single country, such companies will often be able to work with local software or cloud vendors that build these new forms of compliance into relatively homogeneous systems and processes. Naturally, no one likes purchasing software add-ons just to help the tax collector, but in most countries such compliance software is available from several competing vendors, which keeps costs down, and tax administrations provide incentives such as reduced reporting requirements that offset these costs.

For multinational companies it’s very different: they too are striving to consolidate their processes and systems down to a single, global way of working across the organisation and with trading partners, but this is very difficult to achieve if every jurisdiction requires entirely different ways of exchanging data in real time. The costs and risks grow exponentially with every new country a larger company operates in or engages with.

Sovos is a global company – how do you achieve local expertise as well as cross-border?

We have teams of legal and technical experts in several locations around the world whose sole job is to monitor legislation and keep in touch with tax administrations. These teams are anchored in local cultures and understand each country’s fabric of private and public sector standards, but they work together to make sure we understand trends across jurisdictions and learn from each other’s experiences with different tax regimes.

What are the top 3 challenges your clients are facing in 2019? 

The most commonly heard complaint among our multinational customers is a lack of regulatory visibility: they don’t know where the next mandate will come from. There’s never enough time to meet drastic new digital tax mandates, but finding out later than local companies frequently puts tax and IT departments of multinationals in very difficult positions.

Next would be the lack of consistency among digital tax initiatives rolled out by tax administrations. Even if the trend towards real-time controls is clear everywhere, no two countries are going about it in a similar manner. This often leads to companies adopting short-term local solutions that create massive fragmentation and ultimately reverse the digital transformation that many multinational companies started years ago.

Finally, many companies have built a spaghetti of custom tax compliance code into their often-disparate legacy enterprise systems. Even if they understand that this brave new world of continuous transaction controls requires them to fundamentally revisit the way they deal with indirect tax compliance, they often aren’t fully in control of these many generations of customisations and third-party tools that are scattered around their organisations. Just getting to a level of understanding of how tax compliance has historically been addressed in your own systems can be a huge project, creating another obstacle to meeting digital tax mandates in a timely and cost-effective manner.

What area of technology is particularly evolving fast within the world of accounting software?

The three problems referred to in the previous answer are compounded as companies are facing pressure from ERP vendors to embark upon colossal migrations to new software versions that are cloud-enabled and that exploit powerful new processing and analytics tools. SAP’s 2025 deadline for stopping legacy support for ERP systems that predate S/4HANA is a key example of this.

These software suites are often completely redesigned and, even if transition tools are available to make this task easier, it’s clear that the coming five years will be characterised by unprecedented levels of change all around.

And what does the long-term tech roadmap look like? 

The tech roadmap right now is all about managing the huge diversity of digital tax initiatives and building capacity for millions of more companies that need to come online and exchange live data with their tax administrations in the coming years.

A lot of enterprise software vendors are introducing AI in their solutions, and we do see real-life examples of customers initiating blockchain implementations. For example, some are using it for tax reporting that companies like Sovos get involved in, but the big driver towards large-scale adoption of these technologies in both private and public sector systems will likely be the tax administrations themselves. Blockchain can increase tax data transparency between countries, and AI is starting to be applied to audit the massive amount of data those countries are harvesting in real-time from business transactions, but the technologies haven’t reached that large-scale adoption point yet.

HMRC recently released its tax gap figures for 2017-2018 – how can the regulator minimise the tax gap?

Countries worldwide have been heavily experimenting in the past years with various schemes that can help close the large and widespread VAT gaps that exist. The policy mix will often need to be different per country as the reasons behind the gap vary from country to country. Italy, haemorrhaging indirect tax, went down the real-time control path because of the urgency to fix their very large leakage – there’s plenty of evidence that this is the most effective approach.

Schemes like the UK’s Making Tax Digital and implementations of the Standard Audit File for Tax (SAF-T) are gaining popularity among European countries that can afford to take the introduction of digital controls step-by-step – but clearly the end goal for most countries is to transition to real-time controls. There are also schemes like split payment and domestic reverse charge that are less focused on technology and, instead, tinker with the way VAT is administered and paid by companies.