Industry First: Businesses and Government Partner on New Digital VAT Compliance Principles

Christiaan Van Der Valk
June 25, 2020

For the first time in history, international business and governments have come together. Their aim was to define and agree a guiding set of principles for tax compliance in a world where continuous tax controls (CTCs) are becoming the norm.  The International Chamber of Commerce‘s (ICC) executive board has now formally approved the first set of deliverables from this independent committee which I initiated two years ago and had the pleasure of co-chairing.

The changing face of tax compliance

Two years ago, the International Chamber of Commerce (ICC) Commission on the Digital Economy approved my proposal to put together a dialogue between practitioners and executives from businesses and tax administrations on the subject of CTCs. If you’re not familiar with the topic, this revolves around tax administrations requiring businesses to send invoices and other key tax relevant data to them for scrutiny, or even pre-approval, in real-time. Tax administrations in Latin America, and increasingly worldwide, are revolutionizing not just the world of tax, but also drastically changing the world of business process automation and digital transformation, by effectively imposing themselves as a third party in the exchange of sales and purchase data between actors in the supply chain.

Automation: a win-win policy for governments and business alike

Interestingly, few indirect tax or IT experts would claim that removing friction, from what has long remained a paper-based process for the reporting and auditing of VAT and similar condition taxes, is an inherently bad idea. No one benefits from the inefficiencies that have needlessly persisted for decades. The technology to lower administrative burdens for businesses, while at the same time increasing efficiencies in tax collection, has arguably been around for well over two decades. For most of that time, tax administrations worldwide have been sitting idle, insisting on paper invoices, or admitting digital invoice originals only on strict conditions of cryptographically enhanced audibility. The basic mechanism of forcing businesses to report totals of their sales and purchase transactions periodically, in the meantime, continued to frustrate businesses while remaining an extremely blunt – and outrageously ineffective – instrument for governments to combat fraud. Governments and businesses alike have been hemorrhaging vast amounts due to a lack of automation between them – money that could have been used to create jobs, or to improve healthcare and education globally.

In principle, therefore, automating the interface between tax administrations and businesses could be the perfect policy instrument to increase tax collection without raising taxes and increase economic efficiency at the same time – an extremely rare and win-win policy instrument.

Sadly, we’re far from exploiting this unique opportunity. At an international level, the introduction of CTCs is extremely chaotic, with little coordination among tax administrations, and even less with businesses. This means that businesses acting under tax laws of multiple countries must adjust their enterprise systems and core financial processes to integrate in real-time with diverse detailed specifications for real-time data exchange. The continuous and diverse nature of these automated communications with tax administrations injects massive complexity into the delicate art of getting heterogeneous business systems to communicate with each other. In technical terms, we’re easily talking hundreds of thousands of permutations that need to be considered by software programs tying it all together. This diversity increases security exposure, reduces resilience and introduces new economic inefficiencies – to a point that some have hypothesized that e-invoicing based on these schemes for multinational companies has become as expensive as paper-based invoicing. This is a very depressing state of affairs: no rational argument and no interest group stood in the way of creating an unprecedented win-win for all stakeholders, yet despite this perfect storm we’re somehow well on our way to messing it up.

The only reason things went this way is that stakeholders weren’t talking to each other outside individual country borders.

Shared intent: the seed of guiding principles

So, two years ago we decided to take a first modest step towards fixing this outrageous situation: we brought together well-known expert practitioners from tax administrations and businesses to talk. Nothing more. Our initial ambition was merely to get a discussion going about imperatives and constraints on both sides, in the hope of raising awareness of issues that unnecessarily have arisen and perhaps start to outline how we could collectively make things better.

The result of this dialogue, I am proud to say, was just approved by the ICC governing bodies. It’s a set of basic principles that the public/private sector group has adopted unanimously and that are now available from the ICC’s website.

Behind these fairly simple principles lies a massive body of analysis by the expert group, which has met virtually and face-to-face for two years. I’d like to thank all practitioners involved in this group for their exemplary collaboration. These CTC principles are a foundational component that I’m certain will be of great benefit to tax administrations together with other stakeholders to review to benchmark national CTC regimes, whether in operation or under design.

It hasn’t been easy for many experts to participate in this work. They are all very busy people with major responsibilities within their own administration or business. More than one of these individuals had cultural barriers to overcome within their own organizations in order to participate in a group focused on open dialogue with “the other side”. Instead of publishing one-sided consultation documents or position papers to each other, they sat at the same table to openly debate the pros and cons of certain choices.

Finally, I’d like to commend ICC for having had the foresight and flexibility to support this group outside existing structures and beaten paths. The NGOs and IGOs and other organizations we’ve built over the past centuries to address global policy topics need to constantly reinvent themselves to remain relevant as innovation accelerates and societies transform. For the real-time economy to emerge in a shape that maximizes value and minimizes risk, we need platforms built on the wisdom of the past but with processes that support the needs of the future. Real-time open dialogue between the private and public sectors must be a foundational principle for such platforms, and therefore the real-time economy, to succeed.

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Author

Christiaan Van Der Valk

Christiaan Van Der Valk is vice president, strategy. Elected a World Economic Forum Global Leader for Tomorrow in 2000, Christiaan is an internationally recognized voice on e-business strategy, law, policy, best practice and commercial issues. Formerly co-founder and president of Trustweaver (acquired by Sovos), Christiaan also holds long-standing leadership roles at the International Chamber of Commerce (ICC) and the European E-invoicing Service Providers Association (EESPA). Over the past 20 years, he has presented at and authored key papers for international meetings at the Organisation for Economic Cooperation and Development (OECD), the Asia Europe Meeting, World Trade Organization and several other UN agencies. Christiaan earned his Master of Laws degree from Erasmus Universiteit Rotterdam.
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