When European or American companies talk about Europe increasingly adopting VAT reporting solutions based on the OECD SAF-T standard, they are mostly showcasing their ignorance of the revolution in tax controls that is really brewing.
Europe is playing catch-up with many other parts of the world which are utilizing the Internet and associated technologies to re-engineer VAT controls. Interestingly, this revolution in public sector adoption of cutting edge technologies is driven by emerging economies. Countries such as Brazil and China have spent the past century reinventing themselves as industrialized nations, while their former colonizers were catapulted into the information age. Now, the tables are turned and the time for leapfrogging has arrived. Tax administration experts from many a developed economy are studiously taking notes as their Brazilian and other counterparts explain the basics of the real-time tax controls that have become business as usual in their country.
North American and European businesses, in all this, are dumbfounded as their southern hemisphere subsidiaries announce that they cannot join ‘strategic’ business process cloud solutions that their HQ just spent years acquiring and rolling out in ‘easy’ countries. At a loss for strategies to counter this tsunami, they leave corporate mid-management to pick up and defuse angry calls from local CFOs.
As testimony to the way many Western businesses continue to fundamentally misunderstand what’s really happening around them, we are starting to hear some VAT practitioners talk about European countries “moving towards SAF-T reporting requirements” – like that’s the big thing happening right now.
If you’re not familiar with SAF-T: from 2005, SAF-T was designed as a data standard for e-audit data dumps and online VAT returns, which are traditionally performed on or close to a company’s ERP or accounting system. The SAF-T specification includes typical invoice data, but isn’t limited to it. There are still a few countries that are adopting ‘traditional’ solutions based on SAF-T for e-audit (on-demand presentation in case of audit) or online aggregated VAT reporting. But that’s not where the novelty is.
The real change on the EU market is that countries are moving towards real-time or near-real-time invoice inspection requirements for VAT compliance. Some countries indeed use SAF-T or SAF-T-inspired formats as the basis for this journey towards increasingly frequent, granular and automated compulsory exchange of business transaction data with the tax administration. That is problematic in many ways, but, again, focusing on SAF-T is a very misleading way to describe what’s new.
You cannot talk about the impending revolution in the way VAT controls are performed by EU tax administrations by referring to the data format you must use to send every one of your invoices to a tax administration cloud platform. That’d be like saying that the biggest change from horse-and-carriage transportation to cars was an increased use of rubber tires.
Companies need to prepare for a completely different way of interacting with tax administrations. The coming 5-10 years will see a lot of experimentation by governments, which will force especially multinational companies to support many different ‘clearance’ processes and integration methods. To do so in a controlled manner and without negative impact on their process automation plans, companies need to invest more time in fundamentally understanding the mega trend towards real-time controls.