Automated tax reporting will soon be the only way to meet requirements
Author: Rebecca Polley, Vice President of Business Development, Vertex
In a quest to cut down on fraud, tax authorities are increasing the amount and complexity of the data they require.
Manual tax reporting raises no more significant difficulties for companies than getting to grips with different countries’ regimes. As digitalisation finds its way into every corner of business, however, this is changing. Tax reforms across the world are seeing authorities demand ever more specific and detailed data, to such an extent that old-fashioned human reporting systems will soon be unable to cope.
For global firms reporting in multiple jurisdictions, this doesn’t just mean more work: the dangers of incorrect or inaccurate reporting can be extremely costly, in terms of time as much as money. This is where third-party tax specialists come into play, aiming to take the burden off businesses, providing technological solutions to ensure compliance.
With this in mind, European CEO spoke to Rebecca Polley, Vice President of Business Development at Vertex, about the growing importance of tech in reporting, how businesses can do more to give their tax departments a better chance of avoiding mistakes, and how Vertex works to prepare clients for a world of changing demands.
What global trends have you observed in tax technology?
One of the most interesting global developments is the introduction of a goods-and-services tax in India. The introduction comes as part of an overall attempt to consolidate tax processes, and brings with it new reporting requirements, which require taxpayers to submit transaction-level data to authorities. That will be matched with the opposite party on the transaction, and any data that doesn’t match will actually go back to the taxpayers.
In the GCC, the new VAT regime due to come into force in 2018 is following a similar path; real-time, transaction-level data will be required by authorities. Though the new tax is based on the European VAT system, this additional technological element is an attempt to improve on what Europe has by reducing fraud potential.
«The dangers of incorrect or inaccurate reporting can be extremely costly, in terms of time as much as money.»
These developments have not been lost on Europe itself, with Spain due to bring in reporting requirements that will entail, once again, real-time transaction-level data for indirect taxes. Taken as a whole, for global multinationals, this trend is going to require the submission of millions, if not trillions, of lines of data to various tax authorities. Companies would be well advised to start thinking now about how to harness tax technology to tackle this impending challenge.
Is the only response for businesses to digitalise their tax departments?
That’s the solution to the tax data management challenge. The amount of data that’s going to be required is not something any human being can sit down and analyse. Companies need tools and advanced analytics, so they can understand what tax authorities are looking for and make the necessary corrections before submitting data.
That’s the ultimate objective: to submit data that is as clean as possible, to avoid lengthy interactions and an onerous process of feedback and resubmission. Thankfully, there’s a lot of good technology out there to help, and this is something we offer to our customers, as well as support through the whole process.
The US is a useful example here: when major vendors began to roll out enterprise resource planning platforms in the 90s, the complexity of the various tax regimes in the US meant that providers quickly outsourced the whole compliance process to vendors such as Vertex. This allowed the development of a very robust solution that actually performs tax calculations as well as providing all the relevant rates and rules. In terms of the global picture, this is looking likely to be the best approach for all international firms going forwards, as reporting requirements become more complex.
Do companies need to use the same technology as tax authorities to ensure compliance?
In an ideal world, yes, and there are technologies available today that are close to achieving this. When we talk to tax authorities, we find they’re looking at things like machine learning, and how they can use advanced analytics and robotics. IBM’s Watson AI system is a great example of this effect, with machines becoming proficient in understanding transactions, trends and patterns, and identifying where certain transactions may not be aligned with a trend.
As a technology vendor, that’s something we’re looking into: how we can harness new technology to enhance customer compliance. Specifically, we want to incorporate advanced solutions because we want to ensure our customers are equipped to meet the new reporting requirements emerging around the world.
How does data volume and variety increase the complexity of the task?
A good example of data variety can seen in terms of standard audit file tax (SAFT) reporting. SAFT is a reporting standard that was designed by the OECD to encourage consistency across Europe in terms of how companies could give more detailed reports to tax authorities. Unsurprisingly, however, most countries decided to put their own twist on that implementation, which once again mean companies need to make sure they understand the different requirements for each country.
In terms of volumes of transactions, take the example of a retail business. A global or even large European retailer will be working with the aforementioned trillions of lines of data on a regular basis. For that volume of data, a technology solution has to be in place, and it has to be something many, many times more powerful than Excel.
What is the business risk of unreliable or badly processed data?
We recently spoke to a customer that has just gone through the process of transforming their tax department and bringing in new technology, both in terms of calculation and content. That customer told us about an example where they had sent out about 70,000 invoices to customers with the wrong tax rate on them.
Obviously, from a branding and imaging perspective, this caused a huge headache, not to mention the work required to address the issue. In the social media age, word of mistakes spreads quickly, which is, of course, something companies really want to avoid. They want to be absolutely confident that the rates they’re charging customers are 100 percent correct.
How do providers like Vertex give businesses this confidence?
We’ve got a very large research team that actually covers the entire globe in terms of tax rates, rules and trends. We supply that information to our customers as part of our product. So, you not only get assurance regarding rules and calculations themselves, but also rate changes, which can happen very quickly. If you’re working in an environment where your tax professionals are potentially distributed around the world, you want to make sure you’ve got a consistent process, that everybody’s getting the same information at the same time, to ensure that consistency. This is the essence of what we offer, and this type of simplification is only going to become more valuable for businesses as tax rules and reporting requirements become more complex.