Even the threat of digitalization can improve returns. In Russia, VAT collection jumped 12% in the quarter before a digital system was implemented, based solely on the fact that the system was about to take effect.
Different levels of sophistication
Overall, countries can be grouped into six categories based on their progress toward digitalizing tax administration. There are those countries, that have yet to achieve a meaningful level of digitalization. Several dozen countries have some digital tax administration activity but have yet to mandate specific files and data formats which must be used to provide information to the tax authorities. This group includes many of the world’s most-developed jurisdictions outside of Europe, such as Canada, the US, Australia and Japan.
At the next level of sophistication are a group – featuring Argentina, South Africa, Indonesia and a host of European countries including the UK – that require the electronic submission of general ledgers, trial balances and journal entries. Eight countries now request information and other data in specific formats so they can check for consistency across multiple documents. This group includes Poland, Hungary, France, Turkey, India and Peru. Four countries can use digitalization to do electronic audits: Russia, Brazil, Chile and China.
EY teams probably have 30 to 40 different types of digital reports of various kinds required by tax authorities worldwide, and none of them are identical.
The most sophisticated category includes Spain, Poland and Mexico. These countries can use databases to calculate electronic assessments it believes are due from taxpayers. As an example, the Spanish government’s Agencia Tributaria eliminated certain VAT returns when digital reporting of invoices was introduced, and the Polish tax authority is looking to eliminate the VAT return altogether with its introduction of the most recent SAF-T submission. This essentially shifts the onus of validation and audit of information on companies instead of the tax authority.8
“At this point EY teams probably have 30 to 40 different types of digital reports of various kinds required by tax authorities worldwide, and none of them are identical,” says Gwenaelle Bernier, EY Tax Technology & Transformation Partner, based in Paris.
Implications for business
Many businesses are finding that the process changes resulting from the increasing digitalization of tax administration adds to the challenges they are experiencing in an increasingly complex tax compliance environment. In addition, implementation by individual countries of recommendations in the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan also is creating new tax compliance obligations.
One of those recommendations is to require businesses to report more information about their tax and business activities in every jurisdiction in which they operate, in an effort to better tax profits at their source. Around 130 jurisdictions around the world have adopted some variation of these so-called “country-by-country reporting requirements,” resulting in a maze of different rules and format requirements.
While the use of SAF-T has enabled the Polish tax authority to reduce the amount of VAT revenue it was not collecting, the associated compliance burden for companies consumes more time than VAT compliance almost anywhere else in Europe. A medium-sized company in Poland typically spends 335 hours a year on tax administration, the second-highest figure in the EU after Bulgaria. That compares with 105 hours a year on average in the UK, according to the World Bank’s Doing Business index, which ranks countries according to the administrative burdens they place on companies.9
Around 130 jurisdictions around the world have adopted some variation of so-called country-by-country reporting requirements, resulting in a maze of different rules and format requirements.
Telling the story
As digitalization begins to take hold, companies have less and less time to prepare and vet the information they share with tax authorities. The automatic exchange of information between company and tax authority requires raw and unchecked data in the specified formats to avoid rejected submissions, declined transactions and audits. “Almost every company might face data-quality issues as a result,” says Cambie.
To successfully address the various challenges, businesses need to invest in automated processes and systems that generate digital submissions to different tax authorities in accordance with their varied formats. New types of talent are also required. Tax authorities used to be staffed by a mix of accountants and lawyers, but have added statisticians, data analysts and engineers in recent times. Company tax employees now also need these skills, along with the ability to collaborate across company departments – notably IT – and to stay abreast of fast-changing guidance.
The good news is that the compliance burden should decrease if authorities decide processes such as tax returns are no longer necessary. Poland is phasing out VAT returns this year as it gets what it needs from the SAF-T process, for example. “It's easy to digitize a process, but governments should also be looking at processes and declaring them redundant if possible,” says Sanger. “Digital taxation has been sold in part as a way to make tax simple, and so that should be a feature moving forward.”
Summary
Tax authorities in many countries are enhancing their digital capabilities to close the VAT gap. The Russian Federal Tax Service, for instance, introduced online cash registers in 2017, and other countries are likely to follow. Other types of direct communication between tax authorities and companies are also on the rise. The trends are creating new compliance challenges, including talent shortages and inadequate technology, that companies must address to stay competitive.
