Why overlooking the VAT determination process is detrimental in the era of tax digitalisation
As tax moves into the digital world, hundreds of thousands of organisations across Europe will face substantial challenges when it comes to adhering to VAT and indirect tax compliance. For many, paper has been the staple for generations, be it invoicing or VAT reporting. This gradually shifted online, with electronic invoices increasingly being acceptable and simplified, and similarly moving to VAT return submissions online as the norm.
Today, just as technology continues to change the way businesses operate and transform business models, similarly it is impacting how tax is managed. The Organisation for Economic Co-operation and Development (OECD) in its 2016 report , looking at how technology can be used to improve tax administration, has challenged and encouraged revenue authorities to consider this in developing compliance approaches and developing new capabilities that are data-driven and intelligence-led. Governments and tax authorities recognise the opportunities this offers, are driving this change forward, and are now focusing on the use of technology to obtain and analyse business data, in order to streamline and clean up the tax system.
This digital revolution is gathering pace and fast sweeping across the continent.
- In late September, France’s annual finance bill confirmed the country would shift to a clearance-based e-invoicing solution which is earmarked for roll-out in 2023, before covering the entire economy by 2025. That announcement mirrors a similar system implemented in Italy in January
- Add that to the real time reporting approaches being used in the likes of Spain and e-invoicing approaches in Hungary, Portugal, and Turkey which require the use of licensed/pre-authorised invoicing software approved by the tax authorities
- Poland looking to abolishing the VAT return and replacing this with Standard Audit Files (SAF-T) for VAT reporting
- In August, Greece announced plans to introduce electronic book-keeping requirements in 2020 which would include both sales and purchase reporting, summary reporting for tax purposes and including electronic transmission of this data to the tax office
All of these moves show that Europe’s current and future tax landscape has technology at its heart and as such the window for businesses to comply, and to identify the correct the tax treatment before being reported to the tax office, is shortening.
Additionally, tax authorities are also using data analytics in enhancing tax compliance.
So, what does this mean for companies, operating in an ever more competitive business environment, and the impact on their business and tax processes?
Well, many – but not all – are placing an emphasis on circling VAT as a technology issue by moving to automated, tech-based compliance and reporting solutions, that they see as the answer to managing ongoing VAT compliance in this new world. While this makes sense, most businesses are missing a crucial step – the collection and collation of required and relevant transactional data for making the VAT assessment and alongside, the effective VAT determination.
This revolves around the transactional level of business data at the time a sales invoice is raised or information required at the time of processing a purchase invoice and managing the VAT aspects around this. It is a crucial step that needs additional focus and if not properly considered runs the risk of a firm’s entire VAT system collapsing.
It’s a common oversight that is brought about by a range of factors including (but not limited to) the fact that, to date, VAT management has been primarily a compliance and reporting activity.
This combined with a lack of resource within finance teams when it comes to making the assessment and VAT determination, and an ever-shortening window for timely compliant reporting, due to increasing global tax digitisation does mean that businesses increasingly face the risk that tax authorities could be in a position to pick up issues before the business has time to consider this.
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 OECD(2016), Technologies for Better Tax Administration: A Practical Guide for Revenue Bodies