The State of Indirect Tax, featuring IDC, was a three-session event hosted by Sovos on April 7. It covered IDC’s thoughts on the current and future state of indirect tax, the biggest trends and changes from a regulatory perspective and the importance of aligning your IT and tax teams in your compliance strategy. The sessions focused on several important lessons, including the following:
Automation technology continues to grow
As organizations move into the digital economy and focus on digital transformation initiatives, the function of corporate tax is turning to advanced technologies to enable its evolution. Technology-driven use cases for tax management include:
- Robotic filing: Tax filing is a compilation of manually aggregated data to support tax reporting requirements. Multitudes of system reports must be aggregated and then human intelligence must be applied to meet the tax requirements. Robotic filing for taxes is done automatically based on required due dates and governmental requirements.
- Tax planning optimization: Each governmental agency tax requirement is planned and optimized across all governmental tax requirements, allowing the business to proactively plan and predict tax requirements.
- Digital transactional tax: Recent regulatory shifts have dramatically increased the need for digital transactional tax software.
- Global tax compliance: As cross-border ecommerce continues to grow, many businesses are unexpectedly faced with new tax compliance challenges.
Financial software vendors prioritize convergence
Over the past two to three years, vendors are increasingly working to bring more holistic applications to the market. This is seen in the following ways:
- Regulatory issues like marketplace/aggregator liability will make ecommerce a natural convergence point for tax and ecommerce software.
- VAT reporting and reclaim complexity make convergence between travel/expense and tax management software a bigger likelihood.
- Tax withholding and the rise of the 1099 economy also make accounts payable and tax compliance a natural point of convergence.
- Software vendors supporting POS for brick-and-mortar businesses, kiosks or pop-up stores are another potential of convergence with sales tax compliance software.
Continuous transaction controls expand, but not in U.S.
While the U.S. Federal Reserve and the Business Payments Coalition are working on a pilot project on a business-to-business e-invoicing system, there are currently no U.S. state governments considering continuous transaction controls (CTCs) as part of their sales tax compliance approach. The one thing that makes the U.S. different from most of the rest of the world is that sales tax is administered on a state-by-state basis. Many states would be stretched to deploy the technical and computing resources to stand up a seamless CTC network.
Government access to data is increasing
Should this be a top concern? Not necessarily. Most tax professionals may cringe at the notion that tax authorities know more about your business and know about it sooner. On the positive side however, if taxing authorities become adept at identifying compliance errors early and alerting taxpayers so they can make an immediate adjustment, it could eliminate the agony of a repeated mistake that results in an enormous tax, penalty and interest assessment when discovered by an auditor.
Align IT and tax teams in your tax compliance strategy
It is never too early to consider tax when planning your tax compliance strategy. These efforts are typically already being considered from other areas in the organization, so it is cost- and resource-efficient to include tax in these conversations. This also reduces gaps and rework within internal systems.
Knowing the tax implications can influence business decisions in terms of avoiding non-compliance risks and better understanding the potential benefits, like choosing locations based on sales tax sharing agreements. Consider the following reasons to align your IT and tax teams early:
- Without alignment, you can hinder your ability to grow:
- If you cannot be compliant in a new region, you cannot sell there
- Without understanding the tax implications, you cannot expand into new products
- Keeping up with the pace of regulatory changes is a full-time job
- Improved audit support:
- Create consistency across channels to save time and money
- The right documentation helps prove you were staying compliant, or attempting to do so
- A better customer experience:
- Make the transactions pain free for customers
- Taxes need to be consistent across all channels you sell through
- Don’t lose business to competitors because you cannot properly apply tax rates
Each session from the State of Indirect Tax can be accessed at the following links:
Want to learn more about current indirect tax issues? Check out our Sales and Use Tax Annual Report.