A current mega-trend in VAT is continuous transaction controls (CTCs), whereby tax administrations increasingly request business transaction data in real-time, often pre-authorising data before a business can progress to the next step in the sales or purchase workflow.
When a tax authority introduces CTCs, companies tend to view this as an additional set of requirements to be implemented inside ERP or transaction automation software by IT experts. This kneejerk reaction is understandable as implementation timelines tend to be short and potential sanctions for non-compliance significant.
But businesses would do better to approach these changes as part of an ongoing journey to avoid inefficiencies and other risks. From a tax authority perspective, CTCs are not a standalone exercise but part of a wider digital transformation strategy where all data that can be legally accessed for audit purposes is transmitted to them electronically.
It’s all about the data
In many tax authorities’ vision of digitization, each category of data is received at ‘organic’ intervals that follow the natural cadence of data processing by the businesses and data needs of governments.
Tax administrations use digitization to access data more conveniently, on a more granular level, and more frequently.
A business that doesn’t consider this continuum from the old world of reporting and audit to the new world of automated data exchange risks over-focusing on the ‘how’ – the orchestration of messages to and from a CTC platform – rather than keeping a close eye on the ‘why’ – transparency of business operations.
Data received quicker and in a structured, machine-exploitable format is infinitely more valuable for tax administrations as it gives them an opportunity to perform deeper analysis of both varying taxpayer and third-party sources of data.
If your business data is incomplete or faulty, you are likely exposing yourself to increased audits, as your bad data is under scrutiny and more transparent to the taxman.
Put differently, in a digitized world of tax, garbage-in will translate to garbage-out.
How to prepare for CTCS – automation is key
Many companies already have the magic formula to fix these data issues at their fingertips. Start by preparing for this wave of VAT digitization with a project to analyse internal data issues and work with upstream internal and external stakeholders – including suppliers – to fix them.
Tools designed to introduce automated controls for VAT filing processes can help achieve better insight into the upstream data issues that need ironing out. These same tools can also help you through the CTC journey by re-using data extraction and integration methods set up for VAT reporting for CTC transmission, thereby creating better data governance and keeping a connection between these two naturally linked processes.
A lot of bad data stems from residual paper-based processes such as paper or PDF supplier invoices or customer purchase orders. Taking measures now to switch to automated processes based on structured, fully machine-readable alternatives will make a big difference.
Improving invoice data is not the only challenge. With the inevitable broadening of document types to be submitted under CTC rules (from invoice to buy-side approval messages, to transport documents and payment status data) tax administrations will cross-check more and more of your data, as well as trading partners’ and third parties’ data — think financial institutions, customs, and other available data points.
Tax administrations are unlikely to stop their digitization efforts at indirect tax. Mandates to introduce The Standard Audit File for Tax (SAF-T ) and similar e-accounting requirements show how quickly countries are moving away from the old world of tax and onsite audits.
All this data, from multiple sources with strong authentication, will paint an increasingly detailed and undeniable picture of your business operations. It is just a matter of time before corporate income tax returns will be pre-filled by tax administrations who expect little to no legitimate changes from your side.
‘Substance over form’ is a popular aphorism in the world of tax. As more business applications and data streams become readily accessible by tax administrations, you need to start considering data quality and consistency as a first step towards thriving in the world of digitized tax enforcement.
Aim for more, not less, insight into your business than the taxman
In the end, tax administrations want to understand your business. They don’t just want data, they want meaningful information on what you do, why you do it, how you trade, with whom and when. This is also exactly what your owners and management want.
So the ultimate goals are the same between businesses and tax administrations – it’s just that businesses will often prioritise operational efficiency and financial objectives whereas tax administrations focus on getting the best, most objective information possible.
Tax administrations introducing CTCs as an objective may be a blessing in disguise, and there are benefits of introducing better analytics to your business to comply with tax administration requirements.
The real value lies in real-time insight into business operations and financial indicators such as cash management or supply chain weaknesses. This level of instant insight into your own business also enables you to always be one step ahead, leaving you in control of the picture your data is providing to governments.
CTCs are the natural next step on a journey to a brave new world of business transparency.
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