Beyond the Books: Why Tax Matters to Every Business

Here’s why your business needs to pay attention to tax reporting and compliance.

March 21, 2023

Innovative factors, including technological advances, can make tax laws more complex. Eric Lefebvre, CTO at Sovos, shares more on how tax reporting and compliance should be holistic to an entire business. 

In today’s digital, global economy, tax is no longer an accounting or finance concern. Tax compliance is a holistic business issue that requires an understanding of a business’ operations, the industry and markets in which it operates as well as the tax implications of strategic decisions. For a business to succeed – not to mention avoid audits, fines and shutdowns – it needs a solid tax strategy that can help it stay ahead of regulatory changes and maintain compliance.

Several factors are converging to make tax laws more complex – from globalization to evolving legal precedents to technological advances. While streaming content and digital software licenses have made it easier for businesses to operate across borders and expand their user base, it has also resulted in the use of intricate financial instruments that can be difficult to tax. 

As businesses expand, they must comply with the tax laws in the various jurisdictions in which they operate. These can be very different from their headquarters and vary dramatically depending on the state or country. To ensure compliance, businesses are now required to have a broad understanding of tax laws and regulations worldwide, which extends beyond conventional accounting expertise. Complicating it even further, these tax laws continue to evolve as courts interpret and refine laws or even as new innovations emerge.

The Real-world Impact 

Consider the landmark U.S. Supreme Court case, South Dakota v. WayfairOpens a new window , which addressed the issue of whether states could require out-of-state retailers to collect and remit sales tax on purchases made by customers within their state, even if the retailer had no physical presence in the state. In June 2018, the Court ruled that South Dakota’s law was constitutional, which has significantly impacted e-commerce businesses and out-of-state retailers. Since the Wayfair decision, every state with a sales tax (and Alaska at the local level) has passed laws or issued regulations that require out-of-state retailers to collect and remit sales tax on sales made to customers within their jurisdiction.

On a global level, before the rise of ecommerce, it was relatively easy for businesses to avoid collecting VAT on sales made to customers in foreign countries. The rise in digital commerce, however, made it more challenging to track and collect VAT on cross-border sales. This has resulted in new rules being introduced on a country-by-country basis to ensure that digital businesses pay VAT on sales made to customers in their countries. 

For example, the VAT in the Digital Age (ViDA) initiativeOpens a new window is the European Commission’s response to digitalization of the economy, aiming to modernize VAT reporting obligations, facilitating e-invoicing, updating VAT rules for the platform economy and moving toward a single VAT registration for the European Union. While the rules and requirements vary by country, the overall aim is to ensure that digital businesses pay their fair share of VAT on cross-border sales.

ViDA typically applies to businesses that sell digital goods or services, such as software, digital books, music and streaming services to customers in foreign countries. These businesses are required to register for VAT in the countries where they have customers and to collect and remit the appropriate VAT on their sales.

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Simplifying compliance

While technology has contributed to the complexity of tax compliance, it also can be used to help companies comply with VAT mandates. There are many softwareOpens a new window solutions that companies can rely upon to manage their VAT obligations, whether it’s managing calculations, generating invoices, or tracking filings. There are also digital invoicing and record-keeping tools that enable companies to automate and streamline their VAT compliance processes which can make it easier to manage and track transactions, reduce the risk of errors and ensure that records are easily accessible and organized. For companies with a global presence, there are cloud-based solutions ideally suited for helping businesses manage VAT compliance obligations across multiple jurisdictions. 

Data analytics, artificial intelligence (AI) and machine learning also play important roles in helping businesses maintain tax compliance. This information can help companies: 

  • Improve compliance processes
  • Optimize compliance strategies
  • Identify potential risks and opportunities

Furthermore, AI and machine learning can enable businesses to:

  • Automate VAT compliance tasks (i.e., data entry, analysis)
  • Improve VAT compliance accuracy and efficiency

Predictive analytics inherent in these technologies can also help businesses anticipate and address potential issues before they arise, minimizing non-compliance risks.

What Comes Next?

Our economy is changing, thanks to digitalization and globalization. And as a result, tax has become a strategic business issue and must be treated as such. Businesses must take a proactive stance when it comes to managing tax compliance obligations to avoid costly penalties and damage to their reputations. TaxOpens a new window planning and strategy are key to strengthening a business’ bottom line and ensuring it can effectively compete in a global marketplace.

Organizations must adopt a holistic approach that involves collaboration across all departments and leveraging technology to automate and streamline all tax processes. A proactive approach to tax management ensures businesses achieve compliance and unlock opportunities for growth and competitive differentiation.

How are you streamlining your tax processes? Share with us on FacebookOpens a new window , TwitterOpens a new window , and LinkedInOpens a new window . We love it when you share!

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Eric Lefebvre
As chief technology officer (CTO), Eric sets and oversees technology strategy for Sovos. With more than 25 years of experience leading technology teams, he is a strong proponent for establishing a corporate vision and then providing his teams with the room to work, ensuring they have the freedom to tap into their full potential.
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