Data Analytics: A Critical Component of VAT Compliance

This blog was last updated on March 11, 2019

Finding potential errors or missing data before filing VAT forms is essential to efficient VAT compliance and reporting, but this process is often left to manual, random and selective processes. These ad hoc data checks simply aren’t enough when it comes to ensuring accurate VAT compliance in a changing regulatory landscape requiring real-time data sharing and electronic audits.

Tax authorities around the world are validating companies’ data more and more in real-time on a transaction-by-transaction basis. As companies begin operating under these new VAT compliance regulations, data analytics becomes increasingly important. Data analytics is no longer about simply ensuring the integrity of the information being submitted or protection against fines and penalties; companies must apply data analytics in real-time in order to meet the new VAT compliance standards.

Enterprise resource planning (ERP) systems typically do not cater to strong data analytics.They often assume that all data is accurate, complete and VAT is correctly calculated by the configurable VAT determination logic. However, standard VAT determination logic functionality of ERP systems is typically not adaptable enough to address complex supply chains. Also, most ERP systems are not configured in a standard way and not all required reporting master data fields are properly completed in practise.

Additionally, regulations require reporting of very detailed (non-transactional) data that are not captured in ERP systems to start with (e.g., transaction classification codes, re-submission codes, regional codes, etc.). As a result, companies typically have data gaps before submitting VAT forms and transactional information.

This is where data analytics integrated in your VAT compliance process can help. There are two forms of analytics on which companies operating in countries with new VAT regulations should rely:

• Auto correction rules, which correct and complete missing elements. These tools automatically make corrections, looking for missing data or errors based on predefined logic rules.
• Error-flagging rules, which require tax managers to make decisions about the potentially erroneous data. This type of filter function highlights potential problems and enables the company to address issues before filing VAT reports.

For many companies, such analytics are typically done manually, relying on employees who may have limited knowledge of complex VAT rules, and who certainly cannot process large volumes of information. As a short cut, these companies often sample only the riskiest/highest value transactions, hoping that they catch major problems.

To be truly effective and handle the complexities and scale now involved with VAT compliance and real-time reporting, data analytics must be automated and treated as a core component of the VAT reporting process. While there are single, stand-alone tools for analytics currently available in the market, they often do not integrate with VAT reporting solutions or automate error detection.

Instead, companies should look for a comprehensive compliance solution. In terms of data analytics, it should:

• Integrate seamlessly with existing ERP and other back office systems
• Automate the entire analytics process
• Translate extensive VAT knowledge into rules that validate data and complete missing information
• Analyze all transactions (vs. a small sample) to ensure your company is consistent in its checks and balances
• Track changes and corrections to build a solid audit trail, offering an understanding of what was changed, when and why.

Only by automating data analytics as an integrated part of the VAT compliance process can companies meet the new real-time reporting and electronic audit standards of today and tomorrow.