The future of tax administration: how digitalisation is reshaping tax compliance

The future of tax administration: how digitalisation is reshaping tax compliance

As the digital revolution continues to reshape industries, the realm of tax administration is undergoing a profound transformation

The digitalisation of tax administration has brought sweeping changes to the processes used by accounting and tax professionals, as well as important benefits such as real-time reporting. As more and more regulators globally introduce mandatory requirements to digitalise tax, both companies and public authorities are realising that they must make the digital investments required to ensure compliance. 

At Thomson Reuters, Lianne Bowker, indirect tax solutions consultant, points out that in the past both corporates and tax authorities have been too dependent on manual, error-prone processes when it comes to tax administration – but that the movement to digitalisation is now spearheading a wave of change. 

“Some corporates are starting their journey while others are already transitioning away from manual processes. Some have reached an advanced stage and no longer need them,” she says. “In some cases, companies may be more technologically agile making it easier for them to adapt, but a lot also depends on the resources allocated to the tax departments. Tax authorities, meanwhile, are making changes as they go along. They are not necessarily further ahead but they are catching up.” 

Bowker explains that digitalisation has had its biggest impact on tax processes. “Many tax departments have used the same processes for a long time, and these were no longer fit for purpose,” she says, identifying the introduction of e-invoicing is having had a major impact on indirect tax processes. 

 “In these situations, change management becomes very important and, generally, there is some resistance to change. Some businesses are more agile than others – but in other cases, it is harder for tax departments to adapt. 

“However, there are also different regulations governing indirect tax across the world and, in some cases, these have forced tax professionals to react and adapt more quickly.” 

Recent research by Thomson Reuters revealed in 2022, 36% of tax departments cited their effectiveness (meeting deadlines and complying with tax requirements) as their most important strategic consideration. This was followed by risk management at 32%, efficiency (making improvements through automation) and new software at 21%, and finding the talent and skills required at 10%. The research also found that most corporate tax departments are still grappling with global digitalisation, from a technological perspective as well as the technology’s impact on workforce capabilities and culture. It concluded that a tax department’s success will be largely dependent on how it manages the various technological solutions at its disposal as well as the people who implement and use them. 

Digitalisation benefits 

For many corporates and tax authorities, the digitalisation of tax has brought about major benefits – particularly in improving the collection and processing of tax data and allowing access to that data. It has also enabled real-time reporting by corporates and means that tax authorities can access information in real time. 

There are several other advantages: “For many businesses, it has led tax professionals to learn new skills in technology; introduce more efficient processes; and look at their entire tax compliance process holistically. For both businesses and tax authorities, it has also led to fewer errors,” says Bowker, noting that it has eliminated human errors in areas such as the manual inputting of tax figures. 

“As companies move away from the use of Excel and spreadsheets to consolidating all of their tax data into one repository, they also achieve greater transparency into their data. It means that they can access tax data whenever required. Tax authorities also benefit from easier access to that data. All of this leads to improved control of the data that is collected.” 

She adds that tax digitalisation also has the potential to help accountants and tax professionals when advising their companies on how they can limit their tax exposures. “A lot of this, however, depends on having good quality data – this can really influence decision-making.” 

In terms of costs, Bowker notes that these will not necessarily go down immediately with tax digitalisation but that there will be a big efficiency gain, and tax returns will become more accurate. “Over time, as people become more used to the technology and it becomes the norm, the costs may go down,” she says. 

Regulation is driving investment 

For both tax authorities and companies, tax digitalisation requires major investments in technology, and, in many cases, this is being spurred on by new regulatory requirements. 

“Regulatory requirements put tax teams in a stronger position when asking for the resources, they need to bring in new technologies – this investment is required for the company to become tax compliant. As a result of this, tax experts are now being included at a higher level as stakeholders when budgets are being allocated – they are now getting a seat at the table,” says Bowker. 

She adds that tax professionals need to identify people in their departments who can take the lead in these discussions and that having a tax technologist on the team can really help. 

The ongoing movement towards tax digitalisation has already had implications for the talent hired by tax teams and there is now a greater focus on bringing in resources with a technology background as opposed to just a tax background. “There needs to be a good mix of both – professionals with a tax background and those with a technology background. Whereas before, it was usual to have a 70% focus on tax skills and a 30% focus on technology skills, today it can be very much the other way around,” says Bowker. 

“Tax teams today need to understand how they can use data and there is a massive need for existing tax teams to be trained on the technology too. A lot of tax professionals are learning as they go along – learning by using the technology – and for this reason, they need to be using intuitive technologies.” 

Risks and challenges 

While digitalisation does bring benefits, there are, however, risks and challenges to data-driven tax administration in relation to ensuring data security and privacy. 

Bowker points out that tax transparency and the exchange of information between countries and organisations can result in security breaches – if the data is not adequately protected. 

“This can result in unauthorized access to the data by malicious entities, leading to data loss or its misuse,” she says, pointing out that when confidential data is shared with other countries and organisations, the latter must ensure that it is adequately protected to guard against both loss and misuse. 

Data privacy also becomes a risk. As an increasing number of EU countries adopt and mandate e-invoicing and real-time reporting – and more information is forwarded to tax authorities in different jurisdictions – the risk of abusing data privacy grows. 

Bowker adds, “given the trend towards Software-as-a-Service (SaaS) and cloud-based tax solutions, companies also need to ensure they are using a technology provider that can offer control where data resides and ensure privacy and security requirements are met.” 

Thomson Reuters offers an invoicing product which enables companies to submit transactional data/information in a secure manner. 

“As a content-driven company, we are also always aware of legislative tax changes in over 205 countries and territories and can adapt our solutions to meet new compliance requirements,” says Bowker, noting that different jurisdictions have different requirements in relation to the movement of tax data and some require it to stay in their residency. “Thomson Reuters has introduced ‘Edge computing‘ within the ONESOURCE platform which provides flexibility as to where data resides.”   

Digitalisation of tax administration has enabled a wave of positive changes in tax compliance, from real-time reporting to improved accuracy of tax returns. While there are a lot of risks and challenges associated with data-driven tax administration, such as data security and privacy, careful investments in technology and the use of intuitive solutions can help tax professionals guide their organisations to greater success. Companies and tax authorities must continue to make the necessary investments to remain compliant and reap the benefits of digitalisation. 

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