Worldwide, nearly one-third of countries’ revenue from value-added tax (VAT) or other indirect taxes goes uncollected because of fraud, evasion, or errors. Totaling almost half a trillion euros – equal to the annual economic output of a country the size of Norway or Austria – this VAT gap is a problem of macroeconomic proportions.
Many countries are taking steps to address these gaps. More than a decade ago, countries in Latin America began instituting regulations that mandated electronic invoicing and real-time reporting systems, investing in digital transformation to support greater interconnection and automation. The resulting success in driving down VAT gaps has resulted in widespread regulatory changes and the digitalization of tax around the globe.
Compliance drives process integration
Many tax authorities ultimately want to achieve frictionless tax collection by harvesting compliance data directly from business processes as they happen. To comply with such real-time requirements, businesses have to integrate their procure-to-pay processes with systems that communicate directly with tax authorities. This approach not only quickly reports indirect tax liability, but also provides a foundation for governments to deal with direct tax concerns, such as profit-shifting by global companies.
By 2025, companies in industrialized and emerging economies with VAT are expected to exchange more than 75% of all invoices electronically with tax administrations in real time or immediately after the invoice-exchange process. While the benefit to governments is clear, businesses are at risk of losing control over their own digital transactions. These reforms put tax administrations in the driver’s seat on the road to the last mile of enterprise automation – forcing digitalization of invoices and other key tax documents.
Tax complexity breeds new challenges
This new three-way communication paradigm between buyers, sellers, and the government is dramatically changing the way companies do business in countries requiring real-time authorization of every invoice and sale. Companies are now facing an increase in audit risk related to tax compliance in the procure-to-pay process. On top of that, they’re realizing that this process has the potential to stop the supply chain dead in its tracks if transactions are not approved or questions arise with the data submitted.
For many businesses, moving from paper-based to electronic processes continues to be a difficult transition – and the introduction of mandatory integration with digital tax-administration platforms takes the complexity to a much higher level. In fact, many finance professionals are often unaware of the full extent of the challenges that digital tax compliance introduces to their procure-to-pay process, such as the following:
- Multiple stakeholders within a single organization must collaborate. In this new scenario, tax compliance must functionally sit within procurement and other business functions that own the data interchange with the company’s trading partners. The ultimate responsibility for compliance still belongs in the tax department, but they are increasingly dependent on IT and third-party transaction-automation vendors to maintain compliance. Companies need to break down traditional silos because there are new dependencies among stakeholders who previously had no reason to interact.
- Traditional solutions are not equipped for continuous tax controls. Most compliance solutions were built for static reporting of aggregate business data. Now, companies need robust and scalable solutions that can manage the complex data-exchange choreography that includes the tax authority as the third trading partner within sales and procurement processes. These systems and processes must be perfectly aligned and automated, so there are no gaps or discrepancies that will trigger an audit or stop supply chains from moving.
- Companies must keep up with changing rules. Tax administrations frequently change their specifications for sending and receiving invoice data, and specifications vary from country to country. All combined business and tax transaction processes must be continuously updated to ensure that they reflect changes in the tax laws of the countries in which a company does business. This issue is particularly challenging for multinational companies that want global control of their accounts payable processes, but are unable to adjust global processes each time country-specific mandates change.
The risks are great
Companies that do not address these challenges can expect penalties ranging from significant fees to time-sensitive audits that can halt business operations.
For example, in 2018, the European Commission backed Italy’s request to implement mandatory e-invoicing, making the regulation effective this year. This compliance requires all taxpayers to submit e-invoices through the governmental platform, Sistema di Interscambio (SDI). Failure to comply will result in penalties ranging anywhere from 90% to 180% of the VAT inaccuracy.
Perhaps even riskier is that, with these real-time “clearance” processes of business transaction data, every major step toward completing a sale or purchase may need to be approved by the tax administration before the next step can be initiated. This means that the quality of data – all the way from master data to tax identification data and rates – becomes critical.
Think about it this way: With real-time controls, if tax authorities don’t approve an invoice, a company’s trucks can’t leave, costing precious time getting products in customers’ hands. For perishable goods, that could even mean total product loss. Therefore, verifying tax before accepting and processing invoices is becoming a mission-critical responsibility.
Next steps: a global procure-to-pay strategy
Staring down a tsunami of digital tax initiatives and real-time controls that vary from one country to the next, businesses need to consider a global approach to compliance and procure-to-pay processes. This is where modern cloud, API, and user experience technologies come into play. By embedding these technologies into business applications, companies can meet the variations of digital tax requirements transparently from any system or process. This approach can minimize the risk of audit, financial penalties, or operations being brought to a standstill by the tax administration.
Even as momentum has picked up across Latin America and Europe, we are still only at the beginning of this dramatic shift in the way buyers, sellers, and tax authorities interact. Some of the largest countries are just beginning to implement digital tax mandates. China, for example, launched blockchain-based experiments, while Russia has developed an elaborate point-of-sale tax-enforcement scheme that relies on the Internet of Things (IoT).
Now is the time for businesses to take a holistic approach, with a flexible, scalable, technology-driven global strategy to handle procure-to-pay under the ever-changing tax regimes worldwide.
For information on how you can prepare your business for the future of real-time tax control, visit Sovos online. Sovos is an SAP silver partner.
For more on this topic, read “How EU Countries Are Following Latin America’s Technology Lead To Narrow Their VAT Gap.”