VAT Process in the Digital Tax Environment

The digital revolution in VAT compliance is a fact. More and more countries are introducing comprehensive VAT requirements, such as SAF-T, mandatory e-invoicing or real-time reporting. Meeting new obligations is a big challenge in itself. It becomes an even bigger challenge if a company struggles with common problems in the VAT process.

I would like to emphasize a few points worth considering in order to be ready for expanding digital tax requirements.

Garbage in, garbage out

Data for VAT reporting come from various sources: AP, AR, GL, different ERP systems, paper invoices, electronic invoices and so on. When requirements are moving towards real-time reporting, there is no time to correct data before submission to tax authorities, whereas the quality of “raw” source data is not always perfect.?

For instance, the VAT treatment determination of purchase invoices is still a manual process to a great extent. Often, tax codes are assigned by AP accountants during invoice posting. Human errors occur and may lead to inappropriate deduction or even more serious consequences.

Another example: incorrectly working VAT codes, mistakes in transaction flow design, invalid customer and vendor VAT IDs, missing commodity codes. These are common master data and ERP setup issues in the VAT process. Often, instead of resolving root causes, companies find some workarounds as a “solution”. Usually, this requires additional manual effort, mostly in Excel.

The above problems are also the cause of implementation failures of many indirect tax compliance tools. Currently, there is a big focus on process automation. Businesses buy expensive reporting tools that may automate VAT compliance. However, the quality of the input data is still poor. Consequently, what is automated? Reporting of inaccurate data.

Therefore, ensuring the quality of source data is absolutely a prerequisite to prepare for new reporting requirements, especially for real-time reporting.

Taxologists - a key pillar of the tax department

The role of technology in the work of tax departments is changing. In the past, it was more supportive. Data for reporting were stored in ERP, calculations were done in spreadsheets. Often, even electronic reporting was done by typing numbers into interactive forms (online or PDF). Tax specialists were able to verify reported values before submission because they were represented in a human-readable format.

Currently, technology is not only supported by tax departments. On the other hand, we cannot say (yet) that tax departments are only a support for the technology. However, the role of technology in the tax (VAT) process is crucial.

At present, the majority of changes in VAT regulations introduce new digital requirements. These obligations are new challenges for tax departments. For example, SAF-T introduction is not a case that requires hiring best-in-class tax advisors, lawyers who will prepare sophisticated opinions as in, for example, chain transactions. The challenge is different – technology.

Different challenges require different skills from tax department employees. Specialists combining in-depth tax knowledge and technology understanding should be a key pillar of tax departments in digital tax environments. There is even a catchy name for such professionals – taxicologists.

It is not precisely defined who taxicologists are. They are not coders. They do not have to have core IT skills. Their role may be understood as consultants working in the middle between IT and core tax functions. When the new digital VAT obligation is put into place, tax technology specialists will be able to understand technical outlines of the requirement and work closely with IT by, for example, providing mapping of required data from ERP systems to new reports, as they are tax experts as well.

Considering the current big focus on automation of any finance and accounting process, tax technology specialists should be the main advisors on the digitalization of tax departments. Having an overview of the VAT process, taxicologists can identify repeatable steps in processes that might be potential business cases for RPA implementation. They should also be a part of the decision-making in selecting tax (VAT) reporting tools because they know all potential issues in input data, the complexity of the reporting process, and process standardization levels, taxicologists’ opinions should be considered.

What to do with so much data?

Thanks to new reporting requirements, businesses (and tax authorities) have huge amounts of data in a structured format, e.g., XML. These data might be a great input for analytics purposes.

There are several disruptive technologies and “trendy” concepts in data analytics: big data, machine learning, AI, and business intelligence. Until very recently, the analytics part has been missing in tax departments. Right now, the situation is changing.

Businesses are investing in these technologies more often. Thanks to them, tax managers have insight into the process, even in real-time. Benefits of using tax analytics are significant: tax risk mitigation, support for tax planning and key decision- making, identifying tax opportunities, e.g., unclaimed foreign VAT or overview of VAT positions globally and on a very detailed level.

Needless to say, engaging tax technology specialists is a must when implementing tax analytics tools in organizations.?

Does the centralized VAT process become an issue?

Many big organizations outsource and centralize their finance and accounting activities. They set up their own SSC/ GBS structures or rely on third-party BPO providers. Outsourcing centers are usually located in countries where labor costs are relatively low, like India, Malaysia, Poland or Hungary. In the past businesses were making transitions of non-complex processes, such as posting journal entries. Then, when some of SSCs/ BPOs became mature enough, businesses decided to outsource more advanced activities, including VAT compliance.

Although VAT is harmonized at the EU level, there are a lot of nuances at the country level. Also, value-added tax regulations change constantly. When VAT is centralized, numbers of local tax specialists are reduced. Knowledge management then becomes a serious challenge. The business still need to track all changes in VAT law and reflect them in the VAT process centrally, from a single location.

Tracking changes is easier than implementing them. In the “old times”, when there was a change in the VAT rate, businesses had to create new tax codes in ERP, and the new VAT return form should be delivered to a central compliance team. In most cases, it required only “mapping” of new tax code to some spreadsheet, with no significant changes in the process.

Right now, almost every change in VAT reporting has an enormous impact on the VAT process. Implementing new reporting requirements like SAF-T is a separate project engaging many stakeholders. Unfortunately, digital VAT obligations are not harmonized and differ per country. Regulations and technical details still need to be in English sometimes. When VAT resources are centralized (and, quite often, IT), conducting such an implementation project might be a real challenge.

Therefore, it is worth reviewing company VAT governance models, considering that digital tax obligations are spreading across countries. The division of responsibilities between local retained tax functions and SSC/ BPO should be precisely agreed upon to avoid non-compliance.?

You can take a look at the below links as some examples of new regulations that will be mandatory in the next three months. You will also have an idea about how to be compliant with all these new legal requirements.

RTC provides an SAP BTP-powered cloud-based solution to make multinational companies comply with these new regulations.

For further details, do not hesitate to comment or contact me.

+44 7833 537388 | [email protected]

Ridvan Yigit