This blog was last updated on October 14, 2024
Let’s begin with a basic premise. When it comes to tax compliance, you may trust your data, however, the government does not.
Businesses may aspire to develop perfect visibility into business operations, but good visibility will often be good enough for meeting business objectives. Data insight is a relative rather than an absolute goal: it competes with many other objectives to deliver shareholder value.
For the tax administration, the best possible insight into your data is mission-critical to allow the societies that depend on them to thrive. It is an absolute goal: even the smallest improvement in tracking businesses’ operations can save a country billions.
This difference is poorly understood by business executives. Governments have been deceptively slow in the uptake of digital tools to enforce tax and other public laws. Now that many have seen how much technology can do for their mission, however, an unstoppable data revolution has begun that will change business realities forever.
Traditionally, there has been a reliance on the taxpayer to interpret local tax laws and rules which leads to an infinite number of subjective decisions. The goal of tax administrations in recent years has been to replace subjectivity for objectivity through the use of electronic invoicing or e-invoicing as it as most commonly referred to.
And it’s not a topic that business leaders can relegate to the diligent care of accountants and IT professionals. Electronic invoicing is the trimtab that will usher in a new era of e-government and economic transparency. It will enable regulators’ digital dashboards that provide insights into, and ability to impact, key fiscal and monetary policy indicators with unprecedented levels of accuracy and immediacy.
E-invoice is a movement that is gaining momentum internationally. According to ResearchAndMarkets, “the global e-invoicing market is experiencing substantial growth, with the market size reaching US$ 11.2 billion in 2022. Looking ahead, industry experts anticipate significant expansion, with the market projected to reach US$ 35.9 billion by 2028.”
Enter technology for e-invoice
Why are so many governments and tax authorities embracing e-invoice, and why is it an enabler for a much bigger revolution? Debit and credit transactions serve as the scaffolding of the global economy. It may sound simple on the surface, but the information contained in invoices translates to economic gold when the complete picture is formed based on truly trustworthy data. The critical part is ensuring that the data is free from subjectivity and human interference.
E-invoice can do just that: it removes the human element of reporting and compliance. It shifts from declarative data where you have a business providing information after it has been filtered through their own internal processes and committed to business-controlled systems such as an ERP, to source data in the most literal sense, which represents pristine, non-repudiable information in flight between two trading partners. In this scenario, the tax authority can control both ends of the transaction and receive data in real time ensuring its accuracy.
Executing on this strategy is a technology play for governments and businesses alike. Governments are using technology to set specifications to ensure an objective set of data is reaching the tax administration. In essence, they are scripting what every transaction needs to look like and are standardizing platforms to remove silos and eliminate the friction of manual data processing. This way, the same underlying data that is revolutionizing tax compliance can be used over and over again to disrupt nearly all areas of government.
Business networks to unlock data quality
The use of technology to ensure the accuracy of tax reporting is only gaining momentum. In early April, there was a joint statement between the U.S. and EU, stating that “The United States and the European Union share an interest in recognizing mutually compatible technical standards as a way to expand transatlantic approaches for the deployment of critical and emerging technologies that reflect our shared values.” We also recently announced that Sovos has aligned with the Digital Business Networks Alliance (DBNAlliance). As an early member, Sovos is showing substantial support for the DBNAlliance’s mission to rapidly deploy a framework of standards and supporting services for seamless electronic data exchange in the U.S., across the Atlantic and globally.
What do these statements about business-to-business networks have to do with the e-government revolution that is being powered by invoice data? What tax authorities have realized is that if you just require digital invoice data to send to a tax platform in real time, but you leave the networking elements of tax reporting unregulated, small to mid-size businesses which make up 95+% of all business globally will still process data manually.
Governments have realized that mandatory digitization of invoices does not motivate market forces to inject automation into the large base of SMB transactions that is the foundation of nearly every economy in the world. By simply requiring digital invoices, SMBs will tend to use basic solutions such as email and manual portals to input data to platforms controlled by their larger trading partners. The aggregate result of such varying disjointed solutions is that SMBs have not had a strong incentive or ability to automate, leading to upwards of 80- 90% of invoice data being rendered much less reliable for broader government use than it could be with more homogeneous SMB-focused solutions.
Due to an overreliance on a human factor, the data becomes unreliable and prevents governments from unlocking the colossal value of automation for economic efficiency. To counter this, governments are introducing elaborate standards frameworks and forced interoperability of e-invoice networks which allows this business segment to connect to one access point that is theirs and will seamlessly flow invoice data to all other access points as required.
Use compliance data from e-invoice as a force for growth
As governments pile on requirements for nearly all transaction processing systems and networks to transmit real-time source data to their control platforms, awareness in the private sector is growing that businesses lose control over this data at the same rate that governments gain insight. It’s critical that your business take deliberate measures to have all these data flow through a single point which can then mirror this information so that you have a fighting chance at responding to their stated liability or defend yourself should an issue arise.
While the foregoing may feel like a dystopian tale of growing asymmetry of information between businesses and ‘big brother’ governments, there is excellent news for companies that understand the trend and design their strategies to take advantage of it. Satisfying tax compliance obligations and business growth may not seem like a natural combination. However, there is a tremendous opportunity here for businesses to benefit greatly from areas set up to satisfy the tax administration.
What is needed to take full advantage of this opportunity is a trusted and automated compliance platform that bundles tax determination, invoicing, periodic reporting, and e-audit and that can seamlessly integrate with any application you want to use for your business. Along with guarantees of timely real-time and periodic reporting, such a platform can provide unparalleled analytics at every stage of the process.
Tax and business opportunity may have not been synonymous historically, but we have reached an inflection point. Today, if managed correctly, you will seamlessly satisfy your global compliance obligations while uncovering invaluable business insights that are very hard to gain otherwise – all because the government doesn’t trust you as much as you trust yourself.
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