Government tax authorities around the world increasingly are implementing digital tax reporting because, well, it works.
In 2015, tax evasion in Latin America totaled $340 billion (USD), representing 6.7% of the region’s gross domestic product. In 2019, however, it was reported that Brazil had increased tax revenues by $58 billion as a result of digital reporting requirements. Similarly, Chile and Mexico reduced their gaps in value-added tax (VAT) collection by 50%. Today, more than 30 countries have implemented digital tax reporting rules that require corporate tax departments to improve data management, upgrade technology, streamline their reporting processes, and keep pace with fast-changing regulatory requirements.
In an upcoming webinar, Kristy Kerr, an indirect tax product manager at Thomson Reuters, will describe the challenges facing a typical multinational company as it navigates the increasingly automated world of indirect tax compliance.
You can register here for the Jan. 22 webinar, Digital Tax Reporting: New Global Trends and Requirements, featuring Kristy Kerr of Thomson Reuters & Brad Colie of Pagero.
“This organization has entities and operations globally, they’re dealing with a complex supply chain, and at each stage of a transaction, they are required to calculate the tax,” Kerr said. “So how do they manage all of this? They’ve got several different individual teams in different locations researching different independent sources of information to understand the rules and requirements of the jurisdictions and calculate the relevant tax.”
Adding to the difficulty, Kerr explained, is the fact that global companies typically operate multiple Enterprise Resource Planning (ERP) systems, often with little or no budget to maintain and update them as necessary to keep up with rule changes. “The (regulatory) requirements vary from jurisdiction to jurisdiction, both in terms of timing as well as the format they need to be reported in,” she said. “Reporting is managed centrally through Excel (worksheets), and that takes a significant amount of time, carries the risk of error, and also means inconsistencies in how these calculations are produced.”
A primary concern for corporate tax departments, Kerr said, is tax authorities’ push toward reporting at or near the time of the transaction. “It’s a really difficult challenge to manage within the current process of extracting data from systems and (performing) data manipulation to meet the reporting requirements,” she added. “What we’re seeing is the timeline continuously shrinking as more and more jurisdictions move toward real-time reporting.”
The march of e-reporting
In a recent report, the German billing advisory firm Billentis said countries leading the global adoption of e-invoicing include Mexico, Chile, Brazil, Argentina, Uruguay, Italy, Norway, Sweden, Finland, Iceland, Kazakhstan. and South Korea. Countries moving quickly in that direction include China, Vietnam, Germany, Portugal, Canada, the Dominican Republic, El Salvador, and Guatemala.
“This is not going away anytime soon and, in fact, it’s growing,” said Brad Colie, executive account manager at Pagero, which streamlines and digitizes business processes. “As the trend grows, each of the governments seem to take a different approach to rolling out and managing the data requirements for e-invoicing and e-reporting,” Colie explained. “This means for global businesses you need to figure out how to generate the data and documents in a way that can satisfy all of these markets. Otherwise you could find yourself in a dangerous cycle of continuous updates to your systems to satisfy the growing needs as well as the change management that occurs as each of these countries upgrades their schemes and their requirements.”
Digital transactional tax reporting initiatives include the U.K.’s Making Tax Digital Initiative, Spain’s SII, and the far-reaching Standard Audit File for Tax (SAF-T). The Organization for Economic Co-operation and Development (OECD) provided the guidance for SAF-T, which has been adopted by Austria, Lithuania, Portugal, France, and Luxembourg. In 2020, SAF-T implementations are anticipated in Norway, Romania, Hungary, and Poland.
“The OECD’s objective with SAF-T is to ensure revenue authorities receive accurate, tax-relevant information in a structured and reasonable format that is commonly understood by every OECD taxing jurisdiction,” said Pagero’s Colie. “The problematic part here is that all countries so far have interpreted the OECD guidelines differently, so they require different types of information from the taxpayer either on a mandatory filing basis or an on-demand basis.”
As a result, companies could face rapidly expanding and varied regulatory requirements across dozens of countries, difficulty extracting, cleansing, and managing the tax data required to comply with these regulations, and a condensed reporting timeline.
To reduce these risks and costs, Kerr and Colie recommend that corporate tax compliance teams implement automated systems that:
- incorporate an indirect tax determination engine that is continually updated to reflect current rates and rules for every relevant jurisdiction;
- manage e-invoice creation and distribution as well as document receipt, approval, and validation;
- address post-audit accounting management and report submissions;
- employ consistent, auditable processes; and
- work across all transaction tax types including VAT, goods & services tax, and sales & use tax.
Ideally, Thomson Reuters’ Kerr noted, compliance automation will feature end-to-end cloud architecture, support local compliance, deliver industry-specific content, integrate with the company’s main business systems, and connect to taxing authorities and procurement systems.