By Kajal Shah
Businesses have several ecosystems which help them achieve different objectives and meet the needs of the business. These are created between operations, people, data, software, and systems. Businesses have innovation hubs, product hubs, service hubs aimed at exploring new ideas, expanding new customer bases, interacting with customers, enhancing market share, working with regulatory bodies amongst many others. Ecosystems are built to achieve these.
Indirect tax is one of these ecosystems. Indirect tax ecosystems can have different objectives in different organisations – aside to compliant and timely tax reporting which is a regulatory requirement, this also includes effective indirect tax management, supporting finance objectives, amongst others.
In the world of indirect tax, digitisation and technology along with new mechanisms for tax collection and tax management being introduced by tax authorities, also means rethinking the indirect tax ecosystem within businesses. For example, significant and notable recent developments in indirect tax administration include:
- Agents for tax collection – in the e-commerce and digital services sectors, postal operators, platforms and marketplaces, and financial intermediaries such as banks/credit card companies are held liable for the VAT collection obligation in place of/ on behalf of the business supplying the goods/services.
- E-administration – Enhanced indirect tax reporting through e-invoicing linked directly to tax office systems, SAF-T files, and supplementary reports.
- Data exchange and transparency – Tax authorities exchanging information with counterparties in other countries, with other government agencies e.g., between the Customs authorities and VAT authorities, and with relevant businesses e.g., online platforms, financial institutions, etc to assess compliance.
- Data consolidation and analytics – tax administrations developing consolidation tools which collate taxpayer information held on its various databases to generate reports for risk assessments.
Indirect tax management till now
Up until now, with indirect tax arising at a transactional level, tax administrations have relied on businesses to put in place measures to self-assess and self-manage indirect tax as arising on such transactions. Other than by way of VAT returns, tax authorities previously had limited visibility of details of transactions and how businesses determined the tax arising on this.
In the last 10 – 15 years, tax authorities introduced the concept of risk-based self-assessment/ self-monitoring for larger businesses as part of their indirect tax governance. Businesses are required to provide self-declarations on these to tax authorities. Examples include: the UK’s Senior Accounting Officer (SAO) regime requiring CFOs to provide sign-off on their tax processes and accounting, Singapore’s Assisted Compliance Assurance Program (ACAP) for businesses to undertake a risk-review of the effectiveness of their GST controls, and Australia’s Tax (formerly GST) risk management and governance review guide, setting the principles for entities to demonstrate the effectiveness of their controls in the context of indirect tax risks.
The indirect tax ecosystem for businesses therefore has been built on businesses largely self-managing and self-monitoring their business data and activities to determine that tax is correctly being captured and declared to the tax authorities. Whilst indirect tax arises at the time that a transaction takes place, tax authorities primarily only have had visibility of this via the VAT return which summarises this data.
So what is changing?
In the last 5 years, with the advent of:
- Real-time reporting
- Enhanced digital reporting requirements
- Increased data sharing i.e. data received from/ exchanged with third parties (e.g. online marketplaces, other tax authorities)
the tax administration ecosystems for how they address and monitor indirect tax compliance by taxpayers has shifted and changed.
Now, tax authorities are better able to access business data, also with more detail at a transactional level, in real time, and therefore able to perform independent checks as to how businesses are addressing indirect tax. Businesses ecosystems for indirect tax management and compliance therefore also need to evolve alongside.
With these developments, and tax authorities seeking to enhance indirect tax compliance, new stakeholders are also coming into play such as third-party agents for tax collection. In place of the business supplying goods/services being responsible for tax collection from customers, third parties such as platforms, postal operators now are held as agents for tax collection and remittance on behalf of the businesses supplying the underlying goods/services. Such new interactions, and relationships need to be considered as part of a changing indirect tax ecosystem.
Where would these be required to be considered
- Business processes and operations – your business will need to ask itself, what data is required to be captured for indirect tax reporting. Where is key business data held, how is it captured correctly and managed to be able to address real time reporting for example? With these, what changes, enhancements and new indirect tax processes and controls need to be considered and implemented.
- Interaction with business teams across international borders – with both exchange of information by tax authorities across physical borders as well as different taxes, tax authorities can build an overview and a tax profile of a business. Businesses will need to do the same and ensure where they have business operations in other countries, teams are connected similarly whether across borders or across different taxes.
- Third party tax collection agents – increasingly a new role of third-party tax collection agents is being seen – most notably in the digital economy. Businesses therefore need to understand the new roles between themselves and such third-party tax collection agents and what obligations and responsibilities are arising, and considerations thereon.
- Digital audit trails and compliance and reporting requirements – mirroring the approach used by tax authorities and leveraging on the different technology and data in the business to regularly monitor and review data, and maintain digital audit trails. In this context technology/service providers which businesses work with, or partner up with, are also relevant. Increasingly as part of indirect tax compliance and reporting, there are requirements arising such as on data formats, digital signatures, audit trail requirements, storage of records, document retention, and access to records, etc. Businesses using or partnering up with such technology/service providers whether as part of in-house or outsourced compliance, will need to work closely on this and periodically monitor and review this.
In a nutshell: How can businesses reshape this?
- Reassess the current business model and operations for relevant indirect tax links, key indirect tax touchpoints and processes;
- Enhance collaboration between impacted indirect tax links, key indirect tax touchpoints and processes;
- Redefine relationships within the business model and operations and where indirect tax may now have a role to play e.g. a business operating as a platform would need to consider indirect tax collection obligations arising on behalf of suppliers using the platform, or alternatively indirect tax record keeping obligations arising in the countries where customers are established even where no indirect tax obligations arise on the platform itself;
- Leverage your own technology and data to address and manage indirect tax, the same way the tax authorities are using your data to monitor your compliance.