The issue of tax can be distracting – not to mention frustrating – for many businesses. And, even though government requirements around indirect tax such as VAT are financially neutral in theory, they can still represent an administrative burden.
To ensure they don’t fall foul of frequent changes in the VAT rules of different regional jurisdictions, many businesses will employ in-house or outsourced teams of VAT compliance specialists. Such teams are often more accustomed to manually processing traditional periodic reports, though, rather than managing the demands of the “always-on” digitised VAT enforcement increasingly used by tax authorities around the globe. To help them find their way around the growing world of continuous transaction controls (CTCs), businesses must ensure they have sufficient insight into their data as it is shared with tax administrations in real or near real-time.
But, while the introduction of CTCs has revolutionised how data is communicated to governments, it’s important that businesses are aware that these advanced tax enforcement methods are an extension of traditional VAT compliance when it comes to scope and purpose. A failure to approach such widespread changes in legislation as an ongoing journey can result in significant inefficiencies. Indeed, as far as tax authorities are concerned, CTCs are part of a general digital transformation, not a standalone exercise. When it comes to CTCs, businesses need to focus on the journey rather than the destination.
Making data available
Looking to close their country’s VAT gap and reduce fraud, tax administrations everywhere are demanding more visibility into businesses’ datasets, mandating the digitisation of all reporting to the government. Here, each category of data is expected to be transmitted at “organic” intervals, following the natural flow of business data processing and the data needs of the respective governments.
Under this approach, transaction data – primarily, although not exclusively relevant to VAT – should be received on a per transaction basis. Other types of data, such as inventory movements or payment data, can be transmitted at weekly or monthly intervals, with broader accounting data reported or requested less frequently.
Rather than viewing CTCs as just another IT formality, businesses need to understand these new requirements through the general lens of what data they are making available to tax administrations. The digitisation of tax reporting is designed to put tax administrations closer to the transaction, accessing data quickly and more conveniently, on both a regular basis and at a granular level. But understanding the transition from traditional ways of reporting to the new world of automated digital data exchange requires businesses to focus more on the reasons behind it, rather than on how it’s done.
For example, if a company’s data is currently incorrect or incomplete, it won’t prevent that company from connecting to a CTC platform in compliance with an administration’s formal connection rules and deadlines. These companies are likely to expose themselves to more stringent audits than ever before, though. Data is becoming transparent to tax administrations quicker than ever, enabling them detect and act upon anomalies and any accidental non-compliance on a deep data level that would previously have gone unnoticed.
Essentially, tax administrations can now cross-examine a company’s data, and that of its trading partners and third parties, such as financial institutions and customs, as well as introducing SAF-T and other similar e-accounting requirements to push this triangulation to entirely new levels. Taken as a whole, this data will paint a clear, detailed, an inarguable picture of a company’s operations.
Resolving data issues
Many companies already have what they need to fix data issues. It’s highly likely that the process VAT compliance teams go through before filing their next return contains many of the logic rules needed to mitigate data quality-related risks in a CTC scenario. Those who are yet to consider such mitigating tactics, must prepare for the oncoming wave of VAT digitisation.
To avoid CTCs suddenly exposing their internal business mechanisms and revealing their minute imperfections, businesses must embark on a deep analysis into any data issues and work with upstream stakeholders, both internal and external – including trading partners, to fix them. They can also explore the range of tools specifically designed to introduce automated controls around VAT processes that will help them achieve better insight into any upstream data issues that need resolving. Importantly, taking these measures now, and replacing paper-based data flows with automated processes based on structured, fully machine-readable versions will certainly help businesses prepare for CTCs.
As more business applications and data streams become readily accessible to tax administrations, there’s a need for companies to start considering compliance with rules relating to the exchange process as a necessary but insufficient step toward thriving in a world of digitised tax enforcement. And this step can be managed as part of a largely IT-led project.
A parallel, and more important, step, however, is to pay attention to the story this abundance of data tells about a business now that it’s continuously available to public authorities. This is why businesses must start investing more into their own data analytics capabilities – primarily to avoid penalties, but also to capitalise themselves on the rich data arising from their digitised business processes.
Valuable insights
As with its owners and its management, tax administrations want to understand a business. But whereas a business will inherently trust that its processes and partners will work in its best interest, tax administrations don’t have that luxury, so they set out with an intention to gain access to the best, most objective information available. This is why it’s so important for companies to share clean and detailed transaction data – something best done through introducing superior analytics.
The benefits of introducing analytics at a level wanted by tax administrations go beyond simply detecting fraud and errors. The real value lies in the real-time insight it offers into business operations and financial indicators such as cash management or supply chain weaknesses. And this level of instant insight into their own operations also enables companies to work cohesively with tax administrations, allowing them to retain control of how their data portrays them to governments.
Businesses must invest in the process of adapting to CTCs. As everything becomes more digitised, they must keep pace with the change, and maintain the same level of data insights as the data authorities.
To ease the shift toward tax digitisation, businesses should focus on adapting their tools to deliver better data insights – to maintain their competitive edge as well as to appease global tax authorities. And they must strive to understand that CTCs are a natural next step in a journey toward business transparency. The destination will have benefits for all concerned, but right now, it’s the journey that matters more.
This article was originally published on 6 September 2021.
About the Author
Christiaan van der Valk, Christiaan acts as VP Strategy for Sovos Compliance which in early 2018 acquired TrustWeaver, a leading company in the e-invoicing and e-archiving compliance spaces that Christiaan co-founded in 2001. During his 25 years of experience, Christiaan has served on executive and supervisory boards for European and international business and organisations.
