4 minute read 27 May 2019
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How data analytics is transforming tax administration

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US Americas

Multidisciplinary professional services organization

4 minute read 27 May 2019

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Tax and finance departments can deliver value by using data analytics to manage risk, control costs and drive business decisions.

Driven by revenue pressures and shrinking headcounts, tax authorities across the globe 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.

Big data refers to the increasing volume of data now available, as well as its variety and the speed at which it can be processed. Analytics is the means for extracting value from this data — the tool that generates actionable insights.

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

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.

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 lag 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.

What it means for companies

Tax authorities’ enhanced use of data analytics means that companies — and their tax and finance departments — need a shift in mindset around how they collect, store and analyze tax and financial data. Documents may be stored in various places, such as network shared drives, personal hard drives, external providers’ systems, document management systems and emails.

Adding to the challenge, the requested information may be spread across different functions and geographic locations. This can make it hard to find data when it’s needed and know when that data has been collected or delivered. These challenges can be mitigated through development of a robust data management and analytics system.

The volume of requests and short response time for compliance means that companies need sophisticated data management and analytic capabilities that meet or exceed those used by tax authorities. They also need people familiar with these enhanced data requirements to develop and maintain those systems.

Further, they must take proactive steps to create files that are “audit ready” when submitting requested information to tax authorities — particularly in this environment of increased transparency and information exchange.

Action steps

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

Conclusion

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.

This article was originally published in Tax Insights on 9 Nov 2016.

Summary

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.

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By

US Americas

Multidisciplinary professional services organization