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 “digitalisation” 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. Digitalisation 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 digitalisation. 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 digitalisation 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- Outdated tax operating models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 digitalised — 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.
Businesses will need to implement digital solutions that can work within and across countries.
Meeting the challenge
As tax authorities move at varying speeds toward greater digitalization of tax information, businesses need to develop a detailed understanding of digital tax requirements in their markets.
Following developments closely and engaging in conversations can help businesses better meet the challenges as governments expand their digital capabilities.
They must also determine whether their tax function is able to meet digital data and filing obligations in operating jurisdictions and is prepared to defend audits in real time or near real time.
Businesses will need to implement digital solutions that can work within and across countries and that can respond to evolving compliance and controversy requirements. They should explore the use of real-time data analytics for tax planning and compliance purposes, to measure and mitigate risk, to better target controversy interventions and to resolve issues as they occur.
Businesses should consider what investment may be needed to respond to the increasing demand for digital tax information and how to manage the risks inherent in the expansion of electronic data submission. Taking the time to understand these issues and explore forward-looking solutions today — and conveying these options to policymakers — may help avoid more costly and time-consuming remedies tomorrow.