Taxes are not on the top of people’s minds when thinking about digital transformation. While new data-driven business models are emerging in all lines of business, tax compliance typically comes as an afterthought, if at all. But that can be a costly mistake.
Tax authorities around the globe have realized that new business models, especially those related to digital assets, can lead to loss of tax collection. For example, the European Community estimates an annual gap in VAT collection at above 150 billion euros. Therefore, tax authorities worldwide are embracing the latest technologies to crack down on tax evasion.
Front-runners in the technology race are the Brazilian tax authorities. They were the first to introduce electronic invoicing more than a decade ago, a trend that has spread across Latin America and Europe. Having accurate, real-time information from taxpayers allows authorities to match with the periodic tax declarations and detect inconsistencies with ease.
In addition, authorities are requesting more detailed information from the companies in form of audit files, like SAF-T (Standard Audit File for Tax as established by OECD), to further validate the correctness of companies’ tax assessments.
This evolution has led to two key challenges for companies. First, they must be prepared to fulfill the new digital obligations like electronic invoicing and audit filing. Second, they must also ensure that the data they submit is correct, because authorities will detect noncompliance more easily than in the past.
Responding to the growing compliance demands is not only a question of having the proper tools. It also requires a systemic approach to help ensure tax compliance throughout the whole value chain.
Three steps to digital transformation in the tax function
The road map for digital transformation in the tax function can be thought of as a value staircase.
Step 1: Ensure that the company is tax compliant
This means fulfilling all legal obligations — digital or not — in time and with accurate data. This can prove a challenge from a purely technical perspective, especially when new requirements are introduced in a short time, for example, the introduction of “SII” electronic invoicing in Spain in July 2017.
Robust and well-integrated solutions are available that enable customers to fulfill the corresponding legal requirements by transmitting transactional documents in real time and in the required format to the authorities
A key concern, however, is the accuracy of the tax data. Many companies have poor visibility into their data quality, because tax-relevant data is often spread over multiple systems and even kept outside the system — for example, in spreadsheets. Consolidating this data in the short timeframe during period close is typically a stressful task for the tax departments. Aside from the time pressure, they must also implement late corrections or adjustments — for example, when invoices have been posted with incorrect tax during the period. This situation leads to a challenge that often cannot be solved in a satisfactory way and leaves the company exposed to the risk of incorrect tax filing.
A tax compliance solution can help companies gain visibility into their tax data quality by establishing a central tax repository on which rules-checking — such as those provided by tax advisory firms — is applied to identify compliance issues. Furthermore, tools can be used to establish a governance for rectifying identified issues with powerful workflow and monitoring tools.
Step 2: Ensure compliance at minimum cost
Once companies have the tools and processes in place to manage the accuracy of their tax data, it is still a challenge to deliver the periodic obligations efficiently. This is especially true for complex obligations like SAF-T audit files, which many companies struggle to generate in time and quality. Often companies use a multitude of tools, including spreadsheets and manual workarounds, which makes the whole fiscal closing process cumbersome and non-uniform.
Modern reporting platforms for advanced compliance reporting and Brazilian tax declaration centralize the generation of periodic legal reports like tax returns and audit files in a user-friendly application with a standardized user experience. They work on a single source of truth from an ERP solution, and include features like embedded analytics and audit-proof adjustment capability. This helps to accelerate the fiscal closing process and reduce the effort to generate monthly tax declarations.
Step 3: Maximize tax automation
Tax-compliance reporting software can help companies to efficiently rectify compliance issues before they are reported and speed up the fiscal closing process. The ideal situation, however, is to always have accurate automatic tax determination for all transactions in the first place, so that subsequent corrections are not needed at all.
The challenge here is that setting up tax calculation in enterprise resource planning (ERP) systems requires expert knowledge and keeping this information constantly up to date with legal changes is cumbersome. This leads to a high risk of human error, especially when non-tax-professionals need to make tax decisions — for example, a purchaser having to choose a tax code in a purchase requisition. These errors usually propagate until the tax declaration and hence create risk of incorrect tax filing, or require additional cost and effort to make the needed rectifications.
Cloud-based tax determination and calculation engine provides constantly updated tax rules and rates for more than 90 countries in a full SaaS model. The solution removes the burden of the companies having to set up and maintain tax rules. Moreover, it supports accurate tax determination by helping eliminate human error.
Proactively identify tax risks and opportunities
These three steps can help companies to improve their tax compliance gradually and respond adequately to the growing demand from the tax authorities around the globe.
Engaging in a digital transformation of this kind can bring further benefits beyond “mere compliance.” Having a single source of truth with accurate tax data allows companies to use advanced analytics to identify opportunities for tax savings or risks of tax underpayments. Key performance indicators, such as tax-related compliance or financial risks and tax payments, including forecasts, can be visualized with digital boardroom software and serve as a basis for strategic decisions that take fiscal considerations into account.
Find more information in the SAP Solution Explorer on solutions for global tax management.