This blog was last updated on September 23, 2019
The future of business transaction compliance with tax and other legal requirements calls for government approaches that cater for the unlimited diversity of business processes; real-time controls are one promising avenue to do that, but on the condition that business data to be sent to government platforms maps organically onto existing business definitions of trading documents.
I know people who saw the first fully automated exchanges of structured order and invoice data between a supplier’s and a buyer’s computer back in the 1980s. I also know people who, in 2017, are investing millions in systems to scan paper supplier invoices to achieve some level of accounts payable automation. I had just started working in the early 1990s when I sent my first email through a dial-up modem. It felt good not to have to queue at the fax machine. To this day, we have partners whose core business remains secure fax management.
Business is diverse – in fact, it is so diverse that the number of ‘aha’ moments when learning about a very advanced or not-so-advanced use of technology when working with enterprises, and learning about the reasons why, is probably unlimited. As we all know, not all economic behaviour can be explained in rational terms, but the reverse is just as true: like most business decisions, this incredibly wide gap in technology adoption across businesses processes has good rational reasons most of the time.
Seeing people from across this huge automation gap in the business world talk to one another is always immensely entertaining. They may actually be people working for one and the same corporation, but you’d think they are part of different species.
There’s an important parallel with compliance. Since business processes come in endless variations, there are many ways in which a process can be made compliant. There are two ways you can think about that fact if you’re interested in compliance innovation.
The first way is to conclude that businesses must be left freely to decide how to comply within their unique process setup, as long as they can demonstrate compliance. In my opinion, this theory was shipwrecked against the cliffs of economic reality: leaving businesses the choice of how to comply with vague functional objectives means tax administrations must adjust to the countless ways in which business can do business. This is especially problematic with the growth of automation and the acceleration of transaction processing. Since tax administrations have limited means, this leaves the door open for growing enforcement inefficiencies and, in the case of invoicing, a widening VAT gap.
Many countries have started thinking about this in another way. They believe that real, economically viable innovation in tax law enforcement must come from generic, process-agnostic ‘hooks’ that any IT-facilitated process, regardless of its level of automation, can access. If tax administrations define neutral APIs that can act as micro-services with a high level of prescription as to the data that must be provided, but complete freedom as to the process or system that provides such data, the real-time economy can flourish. We often call these approaches ‘clearance systems’ and they are all the rage among tax administrations nowadays.
To achieve a well-functioning clearance approach, it is very important to define the data packages required for real-time ‘copying the government ’ in a process-neutral way. It is better for governments to keep to the level of granularity of existing business document definitions rather than defining new supersets of such data. For this reason, I believe that the European trend towards real-time reporting, which in many cases is based on an audit file format that includes not only the invoice but also various other business process data, is less business-appropriate than the ‘pure’ invoice clearance regimes in regions such as Latin America.
