As taxes move into the digital domain, it is not without its challenges. VAT an inescapeable part of doing business may prove to be one such challenge and it will be up to the business to make sure they stay compliant.
As companies continue to migrate to digital ways of working, there is a real drive to move business-critical processes away from traditional methods. The benefits of such a change are well documented – cost savings, greater efficiency and accuracy, etc. – and the impetus is being placed on companies to transform through internal pressures, external regulations and competitor activity.
Tax, one of life’s certainties according to Benjamin Franklin, is among the business functions that is being dragged into today’s digital world. However, fulfilling all the required necessities has largely always been a paper process – particularly for any company more than a decade old – so the migration has been relatively steady but slow. Invoicing, for example, has seen the evolution from paper to electronic with the format becoming more widely accepted and simplified, similarly, VAT return submissions are now done online as the norm. This is just a base layer as some tax authorities have introduced more advanced technology like real-time reporting too.
Business data can provide a snapshot into a company’s real-time situation and governments and regulators across the globe are recognising the opportunities this provides. Tax data offers an in-depth look at how businesses and their wider industries are performing. It also helps to identify where pressures and bottlenecks in the tax system need to be addressed, on top of improving the general speed and accuracy of tax returns for individual businesses.
Latin America was the first continent to champion the use of advanced technology within tax. Brazil, the world’s ninth largest economy, began its drive for electronic tax processes back in the early 2000s and is among the most prolific users of electronic invoices. One of its formats, the NF-e electronic invoice (which is the mandatory invoice for transactions relating to the buying and selling of goods) must be structured in XML format and declared to the relevant tax authority before items are dispatched. This ‘tax first, goods second’ approach ensures all tax processes are in place and businesses and authorities aren’t playing catch-up once money has already been exchanged. While Latin America were the pioneers, we are now witnessing similar movements across Europe.
France announced during its Finance Bill (published 27th September 2019) that from January 2023 all business-to-business (B2B) invoices would have to be electronic, with paper versions no longer acceptable. Italy, in an attempt to clamp down on its growing issue of VAT evasion, introduced its scheme built around the sistema di interscambio (system of exchange) or SDI in January 2019. Invoices must be uploaded to the central system soon after issuing and fines for non-compliance range between 90 and 180 percent of the VAT due. Greece announced in August 2019 that it is to introduce electronic book-keeping requirements in 2020 that involve sales, purchase and summary reporting for tax purposes. There are also schemes in place in Hungary, Poland, Portugal and Spain which all look to digitise parts, if not all, of their local tax processes.
All these initiatives show that Europe has technology at the heart of its tax landscape and, as such, companies have an ever-shortening period of time to comply and identify the appropriate tax treatment before being reported to the tax office.
Automating tax technology is seen by many as the answer to ensure businesses deliver what they need to on time. Yet, it’s not quite as simple as many believe it to be. While solutions automate manual processes and add accuracy, organisations that don’t consider their entire VAT compliance function – which includes the vital determination stage – may soon find themselves coming unstuck.
Accurate tax figures are reliant on accurate data but one crucial stage that many solutions neglect is at the point of raising a sales invoice – where the collection and collation of required and relevant transactional data for making VAT assessments and determination takes place. Inaccuracies at this stage won’t automatically be corrected by most solutions, regardless of its capabilities. Quite simply, you put the wrong answers in, you’ll get wrong answers in return. The task is made even more complex if invoices are being issued across regions or states where VAT rules and languages differ.
This glaring gap appears for several reasons. One is that there remains confusion over who exactly is responsible for VAT compliance. Many will argue that it’s a compliance and reporting activity, while others will say it’s for accounts receivable or for the sales team to manage. The lack of clarity leads to little accountability and focus. Also, teams are often not provided with the required resources to handle determination accurately meaning that inefficient manual processes are the only option. With increasing pressure from ever-shortening digital tax compliance windows, accuracy is often traded for speed, and businesses have little time for recovery before tax authorities are knocking on the door.
Businesses need to focus on the function as a whole. They need to decide who oversees the entire process and provide them with the tools to complete this vital stage efficiently and accurately. This should include access to real-time global VAT data – including figures and registration dates – which they can simply factor into their determination.
Ultimately, companies have to digitise their tax processes to stay compliant, and those that don’t may already find themselves restricted in where they can do business. But, before acting and investing in solutions, decision makers must take a step back to ensure all aspects of the function are being considered. The VAT determination stage is often overlooked by many solutions for processes that come later, despite the figures produced providing the foundations for overall accurate tax calculations. Organisations simply have to ensure that tax determination is accounted for to ensure that their entire VAT system doesn’t collapse.
Gareth Kobrin is the CEO of VATGlobal.