A number of countries have started implementing a process for submitting transaction data to taxing authorities. Standard Audit File for Tax (SAF-T) was initially agreed upon by the 38 member states of the Organisation for Economic Co-operation and Development (OECD) in 2005. On July 1, 2016, Poland was the first country to mandate monthly online value added tax (VAT) filings using the SAF-T protocol.
The idea behind SAF-T is that companies provide governments with full transparency towards the company’s business transactions. This will enable tax inspectors to audit companies on an ongoing basis, and have line-item transaction data available at any time. For example, if Company A makes a taxable supply to Company B, Company B’s tax inspector will be able to confirm whether Company A has paid over the VAT, before allowing the VAT refund to Company B.
This is an unprecedented level of line-item data submission, which is in line with the broader global trend towards eliminating and strictly policing tax avoidance, BEPS and similar government initiatives.
The mandatory transparency has an upside for companies as well. As compliance is largely automated, eventually compliance costs and demands on staff resources will decrease, as will internal audit costs. It is expected that the SAF-T extraction and analyses tools may at some point void the need of separate VAT and income tax returns.
However, companies will likely require more resources to deal with the expected increase of authorities’ queries and potential cash flow disadvantages connected to VAT credits that are being held up as a result of the ongoing audits. In addition, IT resources will have to be freed to develop and maintain connectors and extraction software, as well as periodically oversee the actual data submission.
In the SAF-T protocol, authorities require more than just all transactional data. There are six reporting requirements:
- The full general ledger and journals
- Accounts Payable, with vendor master data, payment ledgers and softcopy vendor invoices
- Accounts receivable with client master data, payment ledgers and copies of customer invoices
- Warehouse inventory product master files and inventory movements
- Inbound and outbound flow of goods
- Fixed assets ledgers, depreciation, and amortizations
Companies must demonstrate the relationship between these six categories, particularly the Accounts Payable and Receivable in connection with the flows of goods.
Interestingly, Portugal and Austria have already announced that they won’t require reporting details of all six of these categories, but that a simplified structure will be acceptable.
In addition, The Netherlands and Belgium have already developed a different submission format alongside of SAF-T. Similar to SAF-T, this “Transaction Network Analysis” focuses on identifying VAT fraud, but authorities apply different tests and require a different submission format. The way that it looks now, the two approaches to analyzing transactional data may continue to exist in parallel, even though the expectation is that in the future only the SAF-T framework will prevail.
With Poland having implemented their national SAF-T requirements earlier this year, it is expected that other European countries will follow quickly. France, for example, has already announced that they will introduce a different format that aligns with the French “Plan Comptable General”, which is France’s framework of accounting principles. It should be noted that SAF-T not only put the onus on resident businesses to submit transactional data, but also non-resident companies that file VAT returns in a SAF-T country must comply. The OECD SAF-T protocol mandates a monthly submission; it is expected that some countries may require the largest businesses to keep data available on a real-time basis.
Companies now need to get ready for SAF-T, and tax, finance and IT staff need to be prepared to implement the data extraction frameworks. Businesses that currently have a Tax Control Framework (TCF), which supports and maintains a detailed overview of all business activities in an organization, will use the TCF to help identify the data sources on a country-by-country basis.
In particular, TCF will be helpful with mapping of the data flow from the ERP or other resources towards the data extractor. At the time of the mapping, it will be clear where data gaps exist. This will materialize, for example, if not all transactions are routed through a single ERP or for example if assets are managed in a separate accounting platform.
As mentioned earlier, not all countries have the same data submission requirements, and the mapping or extraction should be tailor-made on an individual country basis. There is no prescribed method of data extraction, but it is clear that the final submission should be in XML-format, following the specific country’s framework.
Finally, companies should develop their SAF-T strategy with an eye to the data analyses that the authorities will perform. For example, where a company normally has vast timing differences between dispatch, invoicing, and payment collection, these should be explained beforehand to the authorities to avoid significant disruption of the compliance process. Also, avoiding estimates/accruals will be an important part of the SAF-T strategy. For some companies, the data submissions will be massive, and testing the extractions immediately prior to the online filing will minimize audit queries.