Data is one of the most valuable assets of companies and individuals. Data gathered, cleaned and analysed well enables businesses to realise their utmost capabilities. With the digitization trend, error-prone paper forms, ledgers and books are replaced by electronic versions. This development gave companies more control over their data and liquidated data for further analysis.
This is also true for governments. Since tax income is one of the most significant revenue sources for countries and transactional data is the basis of tax income calculation, transactional data analytics is also essential for governments.
Purpose of real-time data collection
Receiving data in electronic form enables tax authorities to estimate their tax income and income sources better and eventually collect taxes more efficiently. This process has led many global tax authorities to require taxpayers to transmit relevant tax data electronically. Furthermore, the reliability of real-time data has shown to be so appealing that taxpayers are required to transmit data in real-time to the tax authority in many countries.
The real-time or near-real-time tax-relevant data transmission requirement is a new trend often referred to as Continuous Transaction Controls (CTC). CTCs require each transaction to be transmitted to the tax authorities to enable immediate and continuous control. CTCs are becoming more and more common around the world. The initial purpose of the CTCs when it was first launched in Latin America, the origination point, was to reduce the VAT gap. By looking at countries which have adopted CTCs, it’s fair to say that CTCs have already achieved this goal. However, tax authorities subsequently noticed that the benefits of CTCs are not limited to closing the VAT gap.
The vast amount of data collected through CTCs presents immense opportunities for tax authorities. Tax authorities can achieve unprecedented levels of business transaction transparency. Tax authorities T can calculate taxpayers’ compliance risk, and can plan audits based on these risk calculations. Furthermore, data can be used to drive fiscal and economic policy and shared with other government bodies. For instance, during an economic crisis, it’s possible to determine the business sectors most affected through the sales data reported by taxpayers. Those effected can be granted support (through tax exemptions, reduced rates etc.). The OECD Forum on Tax Administration’s chart compares different tax jurisdictions’ data management and analytics abilities and can be used to understand different countries’ data analytics technology.
Challenges for businesses
Granular data collection and transparency of source data create challenges for businesses as there is little room for mistakes, shortcuts or later error correction. Businesses will need to ensure much more granular tax determination decision-making earlier in their processes and their trading partners’ processes.
Furthermore, ensuring compliance where CTCs are implemented can be challenging, especially for international companies, who have historically viewed taxes as something to be addressed by local accountants. Viewing tax as primarily a local concern by adopting local solutions that combine business and compliance functionality for each jurisdiction will be difficult to reconcile with a business’ broader digital and finance transformation and alignment, which is often global.
To step up their game, businesses should focus on data gathering and having a central data repository to have the “big picture” rather than acquiring local solutions to “save the day”. Real-time data transmission also requires clean data to maintain. The global digital transformation strategy must be in place to meet these requirements as well as a scalable technology to manage future tax demands.
