Written by Kajal Shah
It’s been interesting to witness the pace at which new indirect tax compliance terminology and buzz words crop up. Phrases like: real-time tax reporting, e-invoicing, pre- approval of invoices, pre-populated VAT returns, SAF-T are keeping tax departments around the world on their feet.
Furthermore, the terminology and requirements vary by country. This can make implementation challenging because you’ll need to understand what these new requirements mean exactly for indirect tax compliance.
Tax authority Direction
Part of the challenge is understanding in which direction each tax authority is moving. For example, countries such as Italy and Poland are introducing changes in phases:
- Italy introduced e-invoicing which requires tax authority pre-approval. The next stage is tax authorities using this information to generate pre-populated VAT returns for taxpayers to review, make relevant updates/adjustments and submit.
- Poland is introducing SAF-T format files to replace VAT returns – the objective being to reduce the number of documents submitted. The single filing will contain all relevant primary information for VAT reporting. The next phase being considered is a centralised platform for e-invoices between suppliers and customers which the tax office also has access to.
Indirect tax compliance considerations
Businesses need to consider the following points for the business at both a country and operational level:
- What direction is the tax authority taking and how should you be keeping up with it.
- Standardising tax compliance processes across multiple jurisdictions to be more efficient and safe in the knowledge that you’re actually doing it correctly.
- How to better leverage existing systems, or adopting new technology, in the same way tax authorities are.
- Familiarity with both the VAT compliance requirements as well as technology elements required. For example, understanding XML formats, data structures of electronic files/e-invoices, links to tax office systems, digital links will stand you in good stead.
- System requirements used to raise invoices and generate VAT reports.
- Impact on existing accounting, VAT compliance and reporting processes.
- If using in-house and/or outsourced compliance service providers, what needs to change from a process perspective.
- Which areas of tax compliance require more attention than others.
A fresh perspective on the indirect tax compliance process
To date, indirect tax compliance has primarily been around invoicing and VAT returns with additional reporting obligations such as EC Sales Lists and Intrastats in the EU. Thereafter, tax authorities undertake inspections, audits and reviews. At this point, tax authorities request supporting transactional and commercial documents.
With the above developments in mind, let’s look at VAT compliance from a fresh perspective. The information that is required by tax authorities now broadly looks as follows:
- In advance of the VAT return
- Standardisation/ pre-approval of e-invoices – invoicing systems are required either to be linked to the tax office either for pre-approval (e.g. Italy, Hungary and France considering this) or systems pre-approved by tax authorities (e.g. Portugal).
- Provision of real-time reports which requires standardised information of invoices issued (e.g. SII in Spain).
- VAT returns and additional reporting
- Replacing the VAT return with the SAF-T report (e.g. Poland and JPK_VDEK reports).
- Pre-populated VAT returns (e.g. Italy, and France considering this). Tax authorities now have visibility over what type of adjustments that businesses are making post transaction and invoicing.
- Ensuring VAT return data is digitally linked to source transactional data to allow for trace through. (e.g. UK and MTD digital links requirement).
- On request (i.e. during an audit/review/inspection)
- SAF-T files – with standardised data sets and structures and provision of information electronically (e.g. Austria).
What does this mean for your business?
How you compile and provide this information to the tax authorities is also evolving.
For example, each business has its own invoice template (for tax and commercial purposes). And although the tax invoicing data fields were always required to be included, how and what data is captured varies significantly. In addition, It’s possible to raise invoices manually. Consequently, data included could be incomplete, or incorrectly classified for tax purposes. Alternatively, some businesses have well-established, auto-invoicing systems that are configured for tax requirements and generate pre-populated transactional data (e.g. customer master data, product data, tax classification) which cannot be altered. Therefore, there are pre-existing links between transaction information, invoices and the VAT reporting.
Technology enables the above set-up’s level of standardisation.
Rolling with the changes
To roll with the changes, businesses should focus on combining the below elements from an operational perspective. Of course, this is dependent on the robustness of pre-existing systems and processes in place:
- Systems: You’ll require a system which can capture commercial and tax-relevant information about a transaction. That’s if you want to be able to raise approved formats of e-invoices in real-time. Alternatively, if real-time reports are required, systems can also generate reports showing invoices raised in prescribed data structures including required data fields.
- VAT compliance process: with real-time reporting, ensuring that the correct tax treatment is applied at the time of raising the invoice rather than the VAT return stage. This may require changes to business & finance processes.
- Data Collection: An area that has always had little focus cast its way. It is the collection of transactional data and maintenance, and setup of this from a tax perspective. The VAT implications and determination can stem as early as the time at which a transaction agreement is concluded. The VAT then arises once the transaction takes place. With real-time reporting, if VAT has not been considered prior to a transaction taking place, there is a shorter period for businesses to address this. Whereas to date, if any issues arise, you can address them to the point of the VAT return submission.
Tax authorities are effectively looking at ways to enhance indirect tax compliance by having access to more data in real-time. The OECD notes this concept as “compliance by design”. To illustrate, this means using technology to re-design VAT compliance and effectively diminish non-compliance. This stems from the base principle of VAT arising when a transaction takes place.
Ultimately, businesses need to take a similarly fresh approach to their own indirect tax compliance. By addressing the data captured for VAT in real-time when the transaction takes place.