Data analytics and tax administration

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Driven by revenue pressures and shrinking headcounts, tax authorities in the Americas and elsewhere are increasingly relying on digital methods to collect taxpayer data and administer their tax systems. Amid increasing demands for tax transparency by governments and supranational organizations, many tax authorities are building sophisticated data-gathering platforms that enable matching and sharing of taxpayer data.

They are then using data analytics to mine this data to help increase tax collections, target compliance initiatives and improve overall efficiency. Practically speaking, this means an unprecedented amount of taxpayer information is flowing between governments and businesses. This data is being analyzed and used in new and more expansive ways.

The Organisation for Economic Co-operation and Development’s country-by-country (CbC) reporting requirements mandate increased data collection and disclosure. With several countries, including the United States, having adopted the CbC requirements and many more countries soon to follow, the volume and pace of data collection and analysis will only continue to grow.

In this environment, companies, and especially their tax and finance functions, need to know what information they are expected to share and have confidence that it is accurate, secure and formatted correctly.

Data is the foundation upon which this new digital tax world is being built, and the quality of the outcomes that result will depend on the quality of the data that goes in. To match what governments are doing and stay one step ahead, tax departments must look at the tax function through the lens of big data and data analytics.

How tax authorities are using data analytics

Many tax authorities pull together data from a variety of sources to develop a more complete picture of companies’ tax profiles. Companies are increasingly being asked to submit client invoices, statements of accounts, customs declarations, vendor invoices and bank records, all in formats specified by the government — and on an accelerated schedule (often in real or near-real time). Moreover, the formats in which these data are submitted may differ from how companies track and collect the data themselves.

Tax authorities are using real-time or near real-time data analytics engines to validate invoices and flag discrepancies, verify sales and purchase declarations, verify payroll and withholding declarations and compare data across jurisdictions and taxpayers.

Based on these analyses, tax authorities make determinations, including tax and audit assessments. While countries such as China, France and Russia have advanced digital authorities, some of the other leaders in digital tax are in the Americas.

Action steps to compliance

While companies can face significant challenges in modifying their data management and analytics capabilities to meet the requests and rapid turnaround times requested by tax authorities, it is critical that they face this challenge head on. We see forward-looking companies taking the following steps to develop a new approach to compliance in this digital environment:

  • Performing detailed reviews of data requirements, processes and technologies that support digital tax authority requests across the globe
  • Testing and reviewing submitted data to provide the company with visibility into what tax authorities are doing with the transmitted data — quantifying and mitigating risks as issues are found
  • Developing multi-country data management and analytic capabilities to create efficiencies and provide real-time visibility into the transmitted data
  • Shifting focus from traditional compliance activities to real time digital audit readiness activities — changing technologies, processes and people to support this shift
  • Keeping abreast of legislative and regulatory changes affecting tax data collection and submission — and providing input to policymakers as appropriate

Harnessing data analytics

As tax authorities rely more on data to make compliance and audit determinations, and are increasingly sharing this data with tax authorities in other jurisdictions, companies will face risks and exposure if their people, processes and systems are dated or out of sync with government requirements and expectations.

The tax department has an opportunity to deliver value in this new era of digital tax by embracing enterprise initiatives and transformations that facilitate enhanced data management. Companies can realize this value by harnessing data analytics to manage risk, control costs, and inform communications and business decisions.