Driven by a desire for more revenue, greater efficiency and improved compliance in an atmosphere of shrinking resources, tax authorities are increasingly relying on digital tax data gathering and analysis — using digital platforms to facilitate real-time or near real-time collection and assessment of taxpayer data.
This move toward tax “digitalization” is allowing tax authorities to collect tax data in real time or near real time; they can then use the information to respond quickly and in more targeted ways to perceived compliance risks. Digitalization is, in some cases, allowing taxpayer information to be cross-referenced and shared among governments and agencies.
Some countries are leading the digital revolution, others are forming a second wave and still others are years away from embracing digitalization. Some Latin American countries, such as Brazil, are among the more advanced, while the United States is not as far along in its efforts.
As countries move toward digitalizing their tax administration, their efforts can often follow a similar pattern. Of course, the move to digitalization is not necessarily linear, nor should higher levels of digitalization be viewed as the ultimate goal of either taxpayers or tax authorities.
The data businesses are being asked to submit under tax digitalization reaches far beyond tax forms, and often includes accounting and sales data. Legacy systems and processes may not be able to support these and other government requirements.
Challenges may include:
- Lack of data available in the required formats
- Difficulty submitting data
- Inefficient processes for transforming data
- Lack of process support for new data requirements
- Outdated tax operating models
- More frequent need for more comprehensive analytics, in advance of submission to tax authorities
- Inability to respond to audit notices in a timely or effective manner
- Inability to respond quickly when there is disagreement with a tax assessment
A detailed review and possible re-engineering of the processes companies use to record and report their data may be required. Businesses that outsource these and related functions need to make sure that their third-party solutions are flexible and updated frequently.
Businesses will also experience a financial impact as tax administration is digitalizalized — more complex data requirements, delayed refunds, construction of new systems, retooling of processes and more time spent on compliance could negatively affect cash flow. Data security will also be a major concern as governments share data and BEPS reports.