• Andrew Hocking, VP Tax Technology at Sovos


• 14.11.2023 10:30 am
#digitalization #tax #compliance

Tax professionals around the world are facing an increasingly complex tax environment. While individual countries are digitizing parts of their tax system in isolation (for instance the Making Tax Digital regime in the UK), the European Commission has launched a package of measures called VAT in the Digital Age (ViDA) to modernize VAT law throughout the EU and adapt it to the requirements of today‘s digital era.  While e-invoicing mandates such as those being potentially harmonized under ViDA are a relatively new concept in the European region, Latin American countries have blazed the path forward when it comes to modernizing tax systems, with some of their e-invoicing models well over 20 years old. Essentially, fundamentally any country that has not digitised its tax system today will be on the path to do so tomorrow.

These developments have far-reaching implications for businesses operating across borders, and as a result, an ongoing challenge is keeping up with these changes and preventing compliance issues from affecting business operations. Conflicts often arise from differences and inconsistencies between state, national, regional, and global regulations. Also, e-invoicing and other real-time regimes mean that revenue authorities are now developing a more comprehensive picture of taxpayer data than ever before, and enterprises being able to understand what is being supplied to tax authorities in real-time is more important than ever to be proactively ready for data based revenue authority reviews.

Despite the tightening of budgets we’re seeing during this period of economic uncertainty, many companies are considering investing in compliance software to adapt their systems to meet the new demands of tax authorities and to automate the fulfillment of compliance requirements across multiple jurisdictions. The use of scalable systems is particularly important: tax solutions should be able to adapt quickly to current and future requirements so that the company is prepared for the future in the face of constant change at a global level while being agile enough to meet local requirements.

Tax compliance is a strategic issue: companies that fail to prepare for the challenges of tax digitization risk fines and reputational damage. They would do well to embed tax compliance in their broader enterprise systems strategy and take a holistic approach to all financial data points, rather than relying on point solutions to solve problems only in the present day.

Securing the future: IT and finance need to work together

When it comes to the digitalization of tax and broader regulatory reporting, the responsibility for compliance is increasingly shifting from a tax department-led project to having IT as a key stakeholder if not even an overall leader. However, traditionally IT departments encompass people with IT skills and not necessarily tax skills - and vice versa (albeit ongoing digitization of reporting may see this evolve). The IT department plays a key role in implementing technical solutions that facilitate tax compliance, including implementing e-invoicing systems, ensuring data security, and integrating tax software with existing business systems.

Historically the tax department is responsible for the correct recording, calculation, and declarations of VAT in addition to a broader business advisory in determining tax risk strategy and in-house advisory services. Despite this fundamental difference in function collaboration between IT and tax is now becoming essential to ensure that technical solutions meet tax requirements and integrate smoothly with business processes.

Therefore, clear communication and a common understanding of tax objectives and requirements are required, as well as management taking the issue seriously and providing the necessary resources for smooth cooperation between the two departments.

A common challenge in any transformation process is resistance to change. Companies should be prepared for this and provide appropriate training to help employees adapt to not only new technology but in understand how such digitization can enhance a focus on master data quality and many other downstream business processes. A positive corporate culture that sees compliance as an important goal is a key success factor.

From reactive to proactive: opportunities and benefits for businesses 

Companies should no longer view tax as a short-term aggregated problem where compliance issues can sometimes be hidden from further scrutiny. Instead, they should take a strategic and forward-looking approach. The global tax landscape is changing rapidly, and companies that adapt to these changes will be able to meet their tax obligations more efficiently while taking advantage of opportunities to optimize reporting quality and provide further business insights.

It is high time to move from a reactive to a proactive and forward-looking approach to tax to thrive in a digital world. Companies that understand this will be well prepared for the challenges of tax digitization.

Implementing tax compliance software makes sense not only from a regulatory perspective. It also offers strong business benefits, such as the ability to streamline processes, reduce the risk of human error, cut costs, and provide organizations with detailed, real-time data for fast, better-informed decisions.

Now is the time for companies to reap the benefits of accelerating digitalisation and automation.