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How Businesses Are Responding To The New Wave In Global Tax Compliance

Digital Taxation

2 | DIGITAL TAXATION: HOW BUSINESSES ARE RESPONDING TO THE NEW WAVE IN GLOBAL TAX COMPLIANCE COPYRIGHT © 2019 FORBES

A monumental shift is underway. Taxation is morphing from paper-based to fully digital; from filing aggregate data after the fact to real-time transmission of granular transaction data; from taxpayers developing their own returns to tax authorities making direct assessments.

The era of digital tax and continuous compliance is here. Today, compliance with value-added tax (VAT), sales and use tax and other transaction-related tax increasingly requires that companies adopt specific processes for electronic invoicing, on-demand presentation of electronic ledgers in prescribed e-audit formats, electronic VAT collection and digital reporting.

Soon enough, tax authorities will make the shift from a focus on indirect tax administration and compliance to direct taxation: local authorities will begin to use what they learn from direct insight into core VAT-based transactions to build models that calculate then file returns for all forms of taxes on behalf of corporate taxpayers.

The rise of digital tax is just the latest development fueling an era of vastly greater transparency across the whole of international taxation. Consider the Organisation for Economic Cooperation and Development (OECD)-led Base Erosion and Profit Shifting initiative (BEPS) conferring tax administrations the world over with deep volumes of data.

Transformation of such scope impacts everything from basic operations in VAT/GST, supply chain, accounts payable/receivable and IT to broader tax planning and transfer pricing. Moreover, this epoch runs parallel to a handful of related trends such as the overall digital transformation of finance, the rise of AI, advanced data analytics and blockchain.

All of this points to a profound shift that must be addressed on two levels. Initially, businesses need to take steps to ensure compliance with fast-moving, sophisticated e-invoicing, e-reporting and related requirements. In particular, businesses need to ensure that local tax and IT teams are sufficiently focused and armed with resources.

It’s crucial to recognize that a country-by-country approach is not only inefficient but also raises compliance risks. The opportunity here is to take inventory of changes across all jurisdictions in order to build a more consistent, efficient and effective enterprise-wide approach. This should incorporate all key business processes including VAT invoicing, payment, inventories and any other activities with an impact on taxation.

As the digital tax revolution continues, executives must evaluate how their companies will appear when their most intimate operations are fully unveiled to global tax authorities. Jurisdictions around the world will leverage data to perform in-depth analyses, likely leading to more intrusive audits and tax controversy. However, companies can use these same caches of data to improve their own strategic tax planning, providing clearer justification for transfer pricing and reducing audit risk in the process.

Moreover, companies can mate the standardization of invoicing processes, data collection and formulae in response to digital taxation to broader transformation issues in finance and the enterprise at large. The opportunities of digital taxation are transformative beyond just tax.

Introduction

To this add digital filing and tax authorities will have a nearly perfect window into individual companies

and, in fact, entire industries. Eventually, artificial intelligence (AI) and related tools will mine these

insights to evaluate the profitability and adequacy of tax payments and more precisely choose audit targets.


Tableof Contents

4 | Digital Taxation Presents Significant Challenges: Today And In The Long Term

7 | Here And Now: The Heatmap Of Digital Taxation

11 | Five Steps: Forging A Comprehensive Response To The Rise Of Digital Tax

14 | Getting This Right: Understanding The Potential Payoff

16 | Hitching Digital Taxation To Broader Financial Transformation


Digital Taxation Presents Significant Challenges: Today And In The Long Term The rise of digital taxation presents two very different sets of challenges: immediate operational issues followed by long-term, strategic issues.

Immediately, companies face a mixture of compliance and cost issues. A host nation’s taxing authority unilaterally places a new digital e-invoicing or e-reporting requirement. From there, a local business unit needs to respond.

But, more than likely, the parent company uses a core ERP system with its tax logic and transaction processing modules already baked in. Such systems rely on standardization with local adjustments to any regulatory final mile.

But this age-old approach to tax localization no longer works in an era where tax authorities are announcing aggressive, real-time tax mandates. So, in order to comply with the new regulations around e-invoicing, e-matching, e-reporting and e-audits, local managers are pressed to create digital workarounds.


Workarounds “are not only inefficient and costly, but they also introduce compliance risks,” says Carolyn Bailey, Partner, EY Tax Services, Digital Tax Administration Services. What often happens “is that no one knows who needs to take ownership, and so nothing gets done until nearly the last minute. Suddenly, it’s less so a problem for the business unit than it is for IT—who now has to pull staff from other strategic work to create something for the local business.”

Or worse, says Bailey, “the local team fails to comply correctly, goes for months or even the full year before realizing they haven’t been sending their information correctly, and now you’re looking at enforcement and penalties [—possibly even business disruption].”

Over the long term, the risks inherent in the rise of digital taxation become highly strategic. As more countries gain access to more detailed taxpayer data, the focus will begin to shift from more efficient VAT/GST collection to a focus on income and profitability. Recognize that this data collection goes beyond the mere digitization of transactions to

include heightened reporting stipulated by the implementation of BEPS-driven initiatives.

With so much data, Bailey explains, “tax authorities will be able to view profitability of like businesses across entire value chains.” Moreover, host nation tax authorities will increasingly share this information with other jurisdictions. The result according to Bailey:

“That tax filings will become increasingly automated by government authorities—hosts will simply take what they know, which is a great deal thanks to digital data collection, to make their own assessments.”

Moreover, “audits will become increasingly revenue-focused, increasing the potential for higher income assessments and controversy,” says Bailey.

CAROLYN BAILEY, Partner, EY Tax Services, Digital Tax Administration Services

“Audits will become increasingly revenue-focused, increasing the

potential for higher income assessments and controversy.”


To better understand how organizations expect digital transformation of taxation to impact business, Forbes Insights, in partnership with Sovos, surveyed 250+ financial and IT executives for their perspectives. Most executives believe:

Overall, 87% of executives say all of this will have a dramatic impact on their industry. Host tax authorities will have remarkably detailed insight into intercompany domestic and cross-border transactions, as well as a view into entire value chains. The likelihood for more aggressive income assessments will surge.

62%

57%

52%

Digital taxation gives tax authorities a clearer window into multi-country operations leading to closer scrutiny of transfer pricing between subsidiaries.

With unprecedented visibility into individual company’s operations, tax authorities will be increasingly likely to launch sophisticated tax audits.

Tax authorities are very likely to begin using tools like AI and other advanced data analytics to detect irregularities, evaluate compliance and launch audits.


Here And Now: The Heatmap Of Digital TaxationThe digital transformation of taxation isn’t on the horizon—it’s already here, and a significant majority of executives are catching on. For example, 92% are familiar or very familiar with the phenomenon, with 68% saying they are already taking needed steps.

Majorities are experiencing new requirements, such as:

80%

56%

64%

53%

64%

Certification that tax-relevant business software and transaction reporting processes meet local regulations and/or data must be processed and/or stored in-country

Mandated use of electronic invoices for tax purposes, including real-time submission to the tax administration

Replacement of manual periodic form filing with continuous transmission of granular, transaction-level data files including accounting ledgers

Specific requirements for the long-term archiving of tax-relevant data, including tax audit access, human read-ability, storage time, security or personal data protection requirements per country

Businesses must maintain tax accounts based on transaction data submitted to the tax administration online in the tax administra-tion’s systems

LOCALIZATION

E-INVOICING

E-REPORTING

E-ARCHIVING

E-ACCOUNTING


Developing and emerging nations take the leadThe number of nations where actual digital taxation is already in force is somewhat limited. As Bailey explains, “The figure today is around only 30 or so where authorities are requiring at least some significant form of digital compliance,” says Bailey. “The list is primarily developing nations” and for three key reasons:

First, a driver of digital taxation is the desire to reduce VAT/GST fraud. “Nations like Brazil, Mexico and other early movers were looking for ways to respond to underground economies and fraud.” Digital methods of tracking transactions, for instance, matching of offsetting sale and purchase invoices, greatly reduces commerce-related crime. It is perhaps for this reason that 72% of survey respondents note that digital transformation of indirect taxes (e.g., VAT/GST) is unfolding faster than digital transformation of overall direct taxation.

But two additional drivers are also significant, says Miguel Silva Pinto,

Executive Secretary of The Intra-European Organisation of Tax Administrations. The second is that these countries view digital as a means of improving communication and interaction with taxpayers, “which are important goals for host governments.”

Finally, “digital reduces costs overall—and with limited resources, countries very much want to be efficient with their operations.”

It is noteworthy, says Pinto, that some of those moving the quickest are able to do so because they are in the midst of building their tax systems “almost from scratch.” And so, when it was time to develop improved processes, “a digital approach made the most sense.” By contrast, more developed nations are hampered by the extensive legacy systems already in place. For them, “the shift to digital may be even more challenging.”

MIGUEL SILVA PINTO, Executive Secretary of The Intra-European Organisation of Tax Administration

“Digital reduces costs overall— and with limited resources,

countries very much want to be efficient with their operations.”

9 | DIGITAL TAXATION: HOW BUSINESSES ARE RESPONDING TO THE NEW WAVE IN GLOBAL TAX COMPLIANCE

Developed countries will followDigital taxation models are so compelling that the developed and emerging markets world will soon follow this initial wave. As Bailey explains, “what started in Latin America is now spreading.” Poland, she continues, “is a great example of a country moving to transaction reporting in real time and an on-demand audit environment.”

But even larger economies are taking the hint. In Australia, “they’re investing in [tax-focused] technologies, looking to have companies submit their information digitally in a more standardized manner.” In the UK, digital filing for VAT began in April 2019 for companies with sales of £85,000+, part of the country’s “Making Tax Digital” initiative.

This is all part of a larger transition to a truly digital global economy.

As Pinto explains, “there are new actors; new forms of digital transactions. Accounting systems are no longer physical and lines are blurring in terms of permanent establishment.”

Amid so much change, “host jurisdictions both in developed and developing countries, are looking to improve the quality of service for taxpayers but, at the same time, control their own costs.”

Overall, though countries will move at different paces with a variety of objectives, the shift to digital taxation, says Pinto, “is inevitable.”

Why Developing Nations Tend To Be Leaders In Digital Tax:

VAT/GST tools such as e-invoicing and e-matching address fraud—often rampant in developing nations.

Lacking extensive legacy systems, developing countries are free to pursue cutting-edge automation in tax enforcement.

Digital taxation reduces collection/audit costs—a key factor amid tight budgets.


10%

20%

30%

40%

50%

Where are you experiencing digital taxation? 47% of executives say their companies are experiencing indirect digital taxation of some form and 72% say VAT/GST/indirect taxation is most prevalent, but direct taxation is catching on.

Of those experiencing at least some form of digital taxation, the breakdown is as follows:

Developing and emerging nations lead the way

Percentages are based on the number of companies who are experiencing each specific form of digital taxation, not the full sample.

MEXICO PORTUGALGERMANY PHILIPPINESUK MALAYSIABRAZIL KOREASINGAPORE TAIWANFRANCE

Indirect (VAT/GST)

Direct (income)

0% 42%

49%

43%

39%

26%

13%

12%

38%

22%

13%

10%

44%

41%

32%

32%

27%

4% 5%28%

16%

5% 8%


Five Steps: Forging A Comprehensive Response To The Rise Of Digital Tax

Centralize:Today, the typical response to digital taxation is on a one-country-at-a-time basis. This is not only costly, but it also increases compliance risks. And perhaps most importantly, it robs businesses of the opportunity to leverage digital tax models as an engine of competitive advantage. That is, companies that centralize can be more efficient and also better positioned to improve their underlying tax strategies and planning. Indeed, 83% of survey respondents recognize the need to manage tax more centrally.

Responding to the rise of digital taxation is no easy task. Note that nearly six out of ten executives, 57%, view this as a significant challenge for their company—including 69% of companies with $2-5 billion in revenue. Survey and interview findings suggest five essential steps companies should begin taking now:

Dig deep:But the majority of business leaders (about 60%) go even further, saying they recognize that increasing requirements for continuous, digital tax compliance require a deeper, comprehensive approach. This is more demanding than merely increasing the degree of centralization, and suggests a need to revisit and optimize everything from basic invoicing and payment operations to core transfer pricing, supply chains, permanent establishment or even intellectual property.

While most executives see the value in a comprehensive strategy, not everyone is taking action: only 38% say they are employing such an approach, while 16% are taking active steps toward it and 7% recognize the need but haven’t started yet. This leaves 40% of leaders who are still in country-by-country mode or have taken no steps at all. However, Bailey suggests that as assessments and audits proliferate, “many more will be forced to follow.”

Of executives think digital taxation is a

significant challenge

57%


Outsource:In any country where tax compliance regulations are digitizing, ERP and financial system software providers are likely already mobilized. Eighty-one percent of survey respondents say they will be seeking assistance from such providers. Meanwhile, 70% say they will be adding new software applications.

In both instances, be aware of the need to perform due diligence on any new software packages or relationships. As Bailey explains, “some of the providers that arise may be no more than someone working from their garage.” Large companies with reputations to protect and cybersecurity risks to consider “need to make certain they know what they’re getting.”

Hire:Amid so much change across so many jurisdictions—and with all the risks associated with heightened transparency—it’s very likely that existing IT and tax teams are going to be overburdened. In fact, 45% and 38% report insufficient IT and tax resources, respectively.

For these reasons, 64% say they will be hiring additional tax and IT resources centrally, 56% at the local level. Another 54% will acquire needed horsepower through the engagement of external consultants.

Essential Responses To The Rise Of Digital Taxation

Business leaders recognize they must:

83%

59%

64%81%

62%

Centralize tax operations

Pursue a comprehensive approach

Hire tax and IT resources

Outsource/engage with ERP and financial system software providers

Collaborate between the tax team, finance, IT and operations


Collaborate:Sixty-two percent recognize the need to expand collaboration between the tax team, finance, IT and operations. Digital taxation focusing on VAT/GST collection and payment touches virtually all aspects of a company’s operations. No part, component or finished product can move to a new owner without reporting to tax authorities.

Such requirements will require expanded collaboration and cooperation throughout the enterprise. But as host governments collect more data, companies can expect more frequent and contentious audits of not only VAT/GST accounts but also overall transfer pricing and profitability. Planning and teamwork across these core functions become essential.

Closely related, 48% say they will reach out, collaborating with host governments to achieve compliance and 47% say they will be voicing concerns to host governments—no doubt hoping to influence the form and timing of rollouts.

Optimization Of Digital Taxation Requires Extensive Collaboration

To address the full range of risks and opportunities, the tax team needs to more deeply engage with:

81% 73% 64% 62% 58%ERP and financial software providers

Other business functions/IT

Industry groups including

competitors

Regulators Suppliers, customers, distributors,

partners


Getting This Right: Understanding The Potential PayoffThe rise of digital taxation introduces an array of compliance risks. These include not only fines or business interruption from failing to adopt newly required processes, but also heightened transparency leading to closer scrutiny, more frequent and in-depth audits and higher income assessments.

But forward-thinking leaders should look beyond these challenges and consider the opportunities for their businesses. Access to more and better data can lead to improved business outcomes and even performance breakthroughs. The shift from paper-based processes to a leaner digital approach can streamline and simplify operations. Key findings include:


Greater opportunities to use advanced tools for insight and efficiency gains Seventy-two percent believe advanced analytics and AI, applied to vast caches of detailed transactional data captured by digital tax processes, can lead to improved comparative operational and cost analysis.

Closely related, 67% believe the shift to digital taxation will provide insights that are deep enough to help them transform supply chains and value chains. In addition, 57% believe the data available from digital taxation can help them transform operations, while 53% see an opportunity to digitize “the last mile” (i.e., replace paper-based processes). Finally, 89% say blockchain will also play an important role.

Advanced tools will also be used to examine overall tax efficiency: Fifty-six percent of executives say their companies will also turn to AI for tax planning, risk assessment and optimization.

Vastly improved processes for global tax complianceSixty-one percent view this as an opportunity to pursue a more standardized global approach to taxation with local variation only where required. Three out of five executives (60%) believe such moves will lead to substantially reduced risks in tax compliance and half expect improved transparency into compliance status with regulators (47%).

As for tax operations, 45% anticipate significantly reduced costs and efforts in tax processing and compliance. Executives also look forward to more and better data enabling better dashboards and insights (44%), greater standardization of global indirect tax compliance (42%) and reduced processing errors or delays in reimbursement of indirect taxes (41%).

Additionally, digital taxation raises the bar for digitization of key business processes across entire value chains. Companies of all sizes in emerging markets—and smaller companies almost anywhere—are often recalcitrant when it comes to upgrading systems. Now facing government mandates for e-invoicing of VAT and related processes, entire industries will be required to migrate from inefficient and costly paper-based systems to a far more efficient digital model. All participants benefit.

Data Transparency Will Help Businesses

Here are some of the opportunities executives foresee:

72%

Improved comparative operational and

cost analysis

67%

Transformation of supply and value chains

53%

Replacement of paper-based

processes


Digital Taxation Should Hitch To Broader Financial TransformationA final insight is that the digital transformation of taxation coincides with another key trend: the digital transformation of the overall finance function—evident at 66% of companies surveyed. Within 3 years, 69% of executives believe digital taxation will fast become the global norm.

Key challenges in financial transformation include:

Bailey’s perspective amplifies the survey findings: transformation of overall finance and the digitization of tax are complementary initiatives requiring a coordinated approach. The trouble, however, “is that there’s no one in the organization who currently owns digital taxation.” So far, “most companies are treating this as a problem for the local teams, and not something that needs a comprehensive response,” says Bailey.

The best way forward is for companies to recognize the shift to digital tax as a critical initiative. “Someone needs to take ownership, prioritize needs and coordinate efforts across jurisdictions.” According to Bailey, it’s even better “if all of this can be [embedded] within overall finance transformation.”

CAROLYN BAILEY, Partner, EY Tax Services, Digital Tax Administration Services

“Someone needs to take ownership, prioritize needs

and coordinate efforts across jurisdictions.”

84%Managing a myriad of data protection and privacy rules

72%Migrating systems

to the cloud

80%Optimizing the

after-tax value of intellectual property

57%Determining legal domicile of global

e-commerce flows/avoiding double

taxation

56%Adding new

transactional applications (e.g., supply chain manage-

ment, order-to-cash, purchase-to-pay)


The findings in this report are based on a Forbes Insights survey of 253 senior executives based in the US conducted in January and February of 2019.

Key demographics include:

All organizations had annual revenues of at least $500 million

40%

ManufacturingFinancial ServicesRetail

CFOCIOChief Tax OfficerDirector of Tax

EVP/SVP/VP Finance

Other

Director of Finance

IT titles (EVP/SVP/VP of IT, Director)

10%10% 3%

26%

26%

12%

7%

REVE

NU

E

Report at least $5 billion

Methodology

INDUSTRYTITLE

6% 34%32%

33%

COPYRIGHT © 2019 FORBES

AcknowledgmentsForbes Insights would like to thank the following individuals for their time and expertise:

CAROLYN BAILEY, Partner, EY Tax Services, Digital Tax Administration ServicesMIGUEL SILVA PINTO, Executive Secretary, Intra-European Organisation of Tax Administrations

is a leading global provider of software that safeguards businesses from the burden and

risk of modern tax. As governments and businesses go digital, businesses face increased risks, costs and

complexity. The Sovos Intelligent Compliance Cloud is the first complete solution for modern tax, giving

businesses a global solution for tax determination, e-invoicing compliance and tax reporting. Sovos supports

5,000 customers, including half of the Fortune 500, and integrates with a wide variety of business applications.

The company has offices throughout North America, Latin America and Europe. Sovos is owned by

London-based Hg. For more information visit www.sovos.com and follow us on

https://sovos.com/

https://twitter.com/SovosCompliance

https://www.linkedin.com/company/sovos/

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is the strategic research and thought leadership practice of Forbes Media, a global media, branding and technology company whose combined platforms reach nearly 94 million business decision makers worldwide on a monthly basis.

By leveraging proprietary databases of senior-level executives in the Forbes community, Forbes Insights conducts research on a wide range of topics to position brands as thought leaders and drive stakeholder engagement. Research findings are delivered through a variety of digital, print and live executions, and amplified across Forbes’ social and media platforms.

BILL MILLARReport Author

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