Around the world, tax authorities are increasingly going digital to achieve frictionless tax collection. By 2025, companies in industrialized and emerging economies will exchange more than 75% of all invoices electronically with tax administrations in real time or very shortly after the invoice-exchange process. Such interconnection with companies’ business systems enables tax authorities to harvest data from transactions as they happen, improving tax collection and minimizing fraud.
While it may seem that these tax compliance changes are accounts receivable (AR) issues, in the new world of tax digitalization, it is just as big a concern for accounts payable (AP) departments. Companies that are not prepared to address domestic and international tax mandates can find themselves entwined in costly audits, while cash flow is disrupted, supply chains are interrupted, and supplier relationships are strained.
Here’s a look at five key challenges AP departments face in the era of tax digitalization:
1. Supplier errors and AP system diversification
Supplier invoicing errors have led companies to adopt specialized AP automation systems to minimize inefficiencies and reduce risk. Complicating the situation is piecemeal adoption, as solutions have been rolled out for specific categories of suppliers or the territory in which the supplier operated. Multinational companies face even more issues, with different tax rules from country to country.
This confluence of factors leaves companies with multiple systems, exposing them to greater potential for errors and corrupt data. Finding and fixing supplier errors is exponentially more difficult, as mistakes can lurk in various systems that don’t communicate with each other.
With different AP systems living side-by-side, companies can’t easily apply best practices for dealing with supplier errors and data quality management. Additionally, most AP automation vendors are highly specialized in business controls but are not tax experts. The lack of data and process consistency, coupled with insufficient tax domain knowledge going into the design of AP systems, can cause significant problems in the world of digital tax and real-time controls.
2. E-invoicing compliance
About a decade ago, countries in Latin America moved toward electronic methods of billing and completing payments. In this clearance model, the government plays an active role at the point of transaction and validates the invoice before the transaction is complete.
While much of the tax compliance responsibility in this scenario falls on AR, the buyer often carries greater risks. To start with, countries with clearance e-invoicing requirements all use different invoice file formats, which requires buyers to ensure that their systems can process and map such invoices into formats that can be used in their workflows.
Ultimately, the buyer is responsible for checking that its invoice is tax compliant. Many countries with clearance rules aren’t explicit about the buyer’s obligations to “reverse clear” the invoice. But they provide functionality – through a portal or application programming interface – that enables buyers to get into the tax administration’s cloud platform to confirm that the supplier received the required approval before issuing the invoice to the buyer.
Rejecting an invoice in countries with clearance e-invoicing systems may lead to country-specific invoice-correction processes. That might require a single AP system to manage supplier-only cancellations, buyer-approved cancellations, credit notes, and other correction processes, depending on the applicable indirect tax law.
3. Indirect tax determination
Trading partners must determine the taxing jurisdiction and apply the right tax rate for every item in the supply chain. In real-time tax control environments, getting invoices right or correcting them quickly has become critical to keep supply chains moving.
In clearance model e-invoicing, tax administrations need to approve a company’s invoices before the next step in the transaction can proceed, meaning it’s not only up to the supplier to ensure a correct tax rate. Having the wrong tax rate on invoices exposes buyers to fines and can damage operations when shipments don’t arrive on time or suppliers don’t get paid.
Blindly relying on suppliers to determine indirect tax rates is not a sustainable plan. While paying too little in indirect tax can lead to regulatory trouble, paying too much can dent profitability and diminish cash flow.
4. Value-added tax (VAT) reporting
VAT reporting has moved almost entirely online, requiring taxpayers to send more detailed transaction-level information. This approach enables tax administrations to analyze much more granular data much closer in time to business transactions. And it has strengthened tax authorities’ VAT reporting enforcement capabilities, reducing the potential for fraud and allowing for more thorough, agile, and targeted audits.
A growing number of EU member states have adopted the Standard Audit File for Tax (SAF-T) for digital reporting, but others have proprietary digital-invoice reporting standards. Latin American countries have their own standards and still require different types of periodic reports, too. There are also variations in reporting frequency, granularity, scope, and responsibility for data reported to tax administrations.
Tax administrations use transaction-level data for triangulation and electronic VAT auditing – matching buyer, supplier, and government records. With that data, the government can subsequently trigger, substantiate, and prosecute audits; validate deductions; and assess penalties for non-compliance, late registration, and invoicing discrepancies. VAT reporting can have a major and immediate financial impact, potentially leading to penalties for lack of compliance and cash flow issues due to loss or delay of VAT deductions.
5. E-archiving compliance
Some countries are rapidly moving to “e-assessment,” in which tax administrations send taxpayers statements. In those markets, it’s important to also have strong evidence to challenge a payment request that the tax administration has calculated from real-time transactions. With governments turning to such extreme digital methods to boost tax revenues, compliant archiving will only grow in importance.
The e-invoice archive should not be an afterthought. Fortunately, e-archiving has benefits that go beyond audit defense. It provides a common architecture for all applications in the broader ecosystem, facilitating global compliance. Organizations can quickly pinpoint where they store their original e-invoices, then trace a “compliant path” back from the archive to the different applications, service providers, trading partners, processes, product lines, and countries where e-invoices originate.
While the digitalization of tax has raised a number of challenges for AP departments across the globe, the only way to overcome these barriers is through technology automation. Finding a method for automatically updating all AP systems for tax compliance, essentially automating compliance, is a necessity for companies looking not only to avoid audits but also cut costs and protect supplier relationships and cash flow.
For more on this topic, please read “New Digital Tax Mandates Pose Big Risk In Procure-To-Pay Processes.”