How to Reduce Risk in Today’s Regulatory Environment

This blog was last updated on June 26, 2021

An Interview with Sovos President and CEO Andy Hovancik

As governments around the world turn to technology to close tax and regulatory loopholes and address the revenue collections challenges of revenue, businesses are finding it harder to keep up with today’s more complex regulatory environment.

The ever-increasing pace and complexity of tax compliance and business-to-government reporting regulations increases risk and burdens for businesses. These challenges can interrupt operations and impede growth for unprepared businesses forced to react to constantly changing requirements.

Andy Hovancik, President and CEO, Sovos, discusses the current state of global tax compliance and business-to government reporting and what businesses can do to prepare for the challenges ahead.

Download our eBook: The State of Regulatory Compliance: How Businesses are Keeping Pace with Change in Global Tax Compliance and Business-to-Government Reporting.

Q: From tax transparency to electronic audits, there is a lot happening in the regulatory environment. How would you summarize the current state of the regulatory environment as it relates to tax and reporting?

Andy Hovancik: While technology has changed business, it has also empowered governments to implement innovative tax and reporting regulations and increasingly effective enforcement tactics.

We’ve seen a wave of new regulations that speed up reporting and the audit process spread quickly around the world.

While electronic audits and invoice compliance started in Latin America, we’re seeing these things pop up across Europe and even in tax information reporting in the United States.

We live in a world where governments are more aggressive, more data-driven and more transparent with each other, which means the loopholes that used to exist are quickly evaporating. And, businesses are struggling to keep up.

Q: Talk a bit more about the aggressive regulatory environment. What are the biggest examples of governments doing things differently in the past few years?

AH: eCommerce retailers and other remote sellers are facing global challenges, as jurisdictions find creative ways to extend  the definition of physical nexus. U.S. states are cracking down on collecting remote sales tax: in Massachusetts, a recent law aims to define a piece of code on a person’s browser as physical presence. In Colorado, the Supreme Court upheld the “Amazon tax” law which requires retailers with over $100,000 in annual sales within the state to notify buyers that they may owe use tax and provide the state an annual report of buyers, purchase amounts and contact information. Similarly, countries around the world are banding together under Action 1 of the Base Erosion and Profit Shifting package to require sellers of digital goods to register and collect VAT in their customer’s country. This is causing retailers to implement entirely new business processes and invest in additional resources to support them.

Financial institutions have begun taking steps to comply with the Common Reporting Standard (CRS) which takes information reporting to a new level in the fight against tax fraud and evasion. More than 100 countries worldwide have agreed to a reciprocal exchange of information about accounts held by individuals with a tax residency in a different jurisdiction.

And, of course, manufacturers and other businesses in Latin America face one of the most complex regulatory environments, with aggressive electronic invoicing, audit and reporting measures requiring electronic submissions of transaction-level VAT data before a business can ship anything. The impact of these requirements surpasses finance and accounting departments – including inbound receiving, shipping and logistics, as well as human resources. And many countries across the European Union, APAC and the Middle East are beginning to follow suit. E-invoicing is about ensuring the maximum amount of VAT Tax is collected and many countries rely on this as it can represent more than 60% of the government’s tax base versus US/EMEA which gets a larger portion from Income and Social Taxes.

Q: What major challenges are these business-to-government compliance regulations presenting to businesses?

AH: We are constantly hearing from companies’ compliance teams the challenges they have manually pulling data from different systems and reconciling. They don’t have the visibility, control and reporting they need, which creates gaps and errors in reporting and increases fines and penalties. They’re forced to throw more headcount at the problem from various departments, pulling people away from strategic priorities. And, even with that, they’re unable to keep up.

The tools businesses have traditionally used to solve these problems — from manual process to in house systems to embedded ERP functions — weren’t built for this new world of rapid-response compliance. As a result, business leaders are getting uncomfortable with compliance costs and risks.

Q: What three strategies should businesses consider to address these quickly evolving business-to-government compliance regulations?

AH: First, pay attention to the biggest global trends, and create a plan to safeguard your business against what’s beyond the horizon. Then, create an environment that supports constant learning and improvement to take a fresh look at the systems and processes that govern compliance.

Second, look for opportunities to create value hidden within these new regulations. It’s not all bad, these regulations are driving process automation, and as they report real-time, transaction-level tax data, companies and governments alike can eliminate manual data entry, reduce errors and allow employees to focus on more strategic tasks. This surge in automation means invoices can be approved in real-time, enhancing cash flow.

Third, stay focused on what your company does best, rather than compliance. The resources required to constantly update and validate technology to comply with the latest regulatory changes is immense. Find ways to get compliance out of the way so your team can focus on high-impact projects.

Lastly, take control of your data so your business isn’t caught off guard when transaction-level compliance becomes the norm. Most businesses don’t fall down on the reporting itself. Rather, businesses fail to make sense of their data across a patchwork of systems.

Q: We talked about governments adopting technology to close loopholes. What has been the biggest impact on how clients approach compliance?

AH: We’ve seen a big shift in how our clients think about compliance. In the past, business-to-government reporting was a necessary evil to address once a month or even once a year. As the pace and frequency of reporting and audits accelerates, many companies are beginning to look at compliance as a global problem and they need solutions that are centralized, data-driven and technology enabled.

Q: Sovos just announced the Intelligent Compliance Cloud. What should businesses know about that solution?

AH: The Sovos Intelligent Compliance Cloud is the first global platform for tax compliance and business-to-government reporting, pairing the world’s most accurate and complete regulatory analysis with nimble cloud software platform.

As businesses adapt their approach to deal with increased pace and complexity, we give them a platform built not just for the problems they have today, but for the challenges looming on the horizon.

Our global software platform is scalable, reliable and secure. And, we back it with a unique combination of local knowledge and global infrastructure to support businesses wherever they grow.