Today, with many governments needing to reduce their budget deficits and deal with rising national debts, collecting all tax revenue due is becoming more critical than ever. Authorities in many countries are becoming increasingly strict on the accuracy and timeliness of tax payments, and enforcement of tax compliance is on the rise.
How serious is the problem for governments?
There are good reasons for increased scrutiny from authorities. For example, in a recent study for the whole of the European Union, the European Commission estimated the loss of revenue from nonpayment of value-added tax to reach a staggering €160 billion. The increased scrutiny has been visible primarily in Germany, the EU’s economic powerhouse, but other countries, like Spain, the UK, Poland, and Croatia, are fast following Germany’s example.
In the U.S., even though the new administration promises to reduce regulatory burdens, tax authorities are well known for their rigor and severity against businesses that fail to comply. And current debt levels keep high pressure on all governments – federal, state, and local – to enforce compliance and collect all the tax revenue they can claim.
What are the implications for businesses?
Increased scrutiny from authorities means companies must pay more attention to their tax processes and implement tighter controls and surveillance to ensure that they pay the right amounts at the right time. Being found non-compliant can lead to hefty fines now and increased scrutiny going forward.
The problem isn’t a small one; based on an examination of companies’ sales revenue, tax spending is second only to the direct cost of sales. Almost two-thirds of Western companies declare that tax expense is a significant burden on their business and express concern that it will continue to increase.
It’s not a simple problem, either. Tax regulations are not simple, and as masses of transactions are recorded, errors in applying the correct tax rules, rates, deductions, and postings are not insignificant and can generate compliance issues.
How can technology help? ERP? GRC?
Setting up rules rigorously in business systems where transactions are processed (typically enterprise resource planning or specific billing or payment processing software) limits the risks of tax non-compliance. But this does not fully guarantee protection against human errors, be they in setting up tax rules or entering transactions, or against unforeseen technical problems.
Avoiding such problems can require an amount of effort from personnel in charge of controlling tax transaction compliance. Common ways to ensure compliance include reviewing voluminous reports and calling for manual processes to gather all related information and make the necessary corrections to tax rules and transactions. In addition, they need to ensure that their actions are documented for further audits and justifications to tax authorities.
Increasingly, companies are looking to use more automated, dedicated applications that screen high volumes of transactions and identify potential compliance issues based on tax-checking rules. If a compliance issue is discovered, these applications automatically alert the controlling tax and supervisory personnel in finance and compliance departments.
These are Big Data solutions, which must not only be capable of processing high volumes of data, but also delivering flexibility and extendability to support companies that are subject to a variety of tax regulations. (VAT and other sales taxes are the most obvious.) And as the business grows internationally, becomes digital, and accelerates under increasing regulatory pressure, it needs the ability to set up all tax-checking scenarios to meet expanding and fast-evolving needs.
Key characteristics of a tax compliance solution
Finally, it’s important to check a number of key characteristics as you look into a tax compliance solution to ensure that:
- It can easily integrate into business systems to seamlessly screen transactions subject to tax
- It can be optimized to avoid raising excessive numbers of false alerts
- It is easy to use so that the personnel in charge can investigate potential tax compliance issues and implement corrections with the required traceability
- It adapts to individual technical choices and road maps, and can be used either on premises or, more and more, in the cloud
Tax compliance can be challenging as companies expand their business and international footprint, especially as authorities increase their scrutiny, tax regulations become more complex, and fines are significant.
When choosing technology to help mitigate this risk, companies should ensure that they’ll be able to process high volumes of data with accuracy and velocity so that corrections can be implemented in a timely manner and tax compliance fines avoided.
With the right solution, they should also be able to streamline their tax compliance process using automation and a flexible tax control framework to adapt to various tax requirements, to have real-time insight into their tax compliance status and any corrections, and protect their business and personal liability.
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