How Digital Transformation is Shaping Future of Global Indirect Tax Systems

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Economic incidents like the 2008 financial crisis caused public discourse about tax services and their role in society. More and more taxpayers today want greater government transparency as well as easy indirect tax systems, prompting officials around the globe to evaluate and change their tax structure accordingly - with digitizing tax functions often as an outcome of such efforts.

Governments and tax authorities worldwide are increasing their methods for collecting taxes. When it comes to digitizing tax compliance processes, tax authorities there have recently invested heavily in technology in order to access more business information in real-time through electronic invoicing.

Therefore, increasing adoption of technology is helping organizations embark on their digital transformation journey, equipping CFOs with the necessary tools to enhance finance operations.

Why Digital Transformation Matters for Global Indirect Tax Systems?

With the global recession refocusing attention on revenue strategies, tax administrations are finding themselves at the forefront of an extensive digital transformation effort, looking for ways to conduct daily and emergency business while remaining compliant with mandates designed to preserve social relations.

Digital transformation can be likened to lifting a boulder uphill; it requires persistence and can lead to slip-ups along the way. Furthermore, many economies - particularly developing nations - rely on deeply entrenched systems which make trust-building difficult.

Many of the world's lowest-income economies need help to collect enough taxes to cover basic state functions, which only compounds their difficulty. Add global turmoil into this equation, and it becomes even more likely for taxman and citizen relationships to break down completely.

Tax administrations should transition away from simply processing taxpayer data towards improving compliance, policies and efficiency proactively. Modern revenue strategies rely heavily on digital platforms because this enables the effective pursuit of key policy objectives such as:

Reason 1: Broadening the Tax Base

Data-centric approaches can broaden tax bases without necessarily increasing taxation levels. Measures could include:

  • Requiring online marketplaces to report sales for purposes of collecting VAT and customs duties.

  • Analyzing past tax filings submitted under current stimulus programs as a way of verifying compliance.

  • Assisting with the collection of property taxes by matching up the land registry with taxpayer files.

Reason 2: Increase Transparency and Trust

Establishing electronic platforms for tax registration, filing, payment, and dispute resolution helps citizens navigate these processes more smoothly, provides assurances that tax payments reach actual government accounts, and decreases risks of officials misusing their discretion.

Implementation of technologies like the OPAL (Open Algorithm) developed at MIT will give researchers, think tanks, or any citizen the ability to analyze tax data without access to personally identifiable information independently - creating unparalleled transparency.

Reason 3: Reducing Compliance Burden

According to our survey of 190 economies, people and businesses are finding it easier than ever before to pay their taxes. A record number of economies now utilize electronic filing systems - double what existed back in 2004! Digital technology is making paying taxes simpler both in terms of time spent paying them as well as individual payments made per year.

Reason 4: Enhancing Administrative Efficiency

As governments become adept in their use of IT, they will see noticeable efficiency gains. Countries just starting their digital transition can leverage AI-enabled data capture of paper records for faster digitalization and reliability of the information; others gain value through simplified procedures or matching filed statements against third-party datasets.

Advanced tax administrations will find using advanced analytics to detect underreporting invaluable. With today's financial instability, some administrations may also reconsider their balance between offsite and onsite audits as an additional value driver.

Reason 5: Advancing Growth and other Policy Objectives

Tax administrations play an increasingly significant role in furthering non-tax-related goals as a central depository of citizen data.

By using taxpayer data to verify beneficiaries of cash transfer programs, monitor consumption of products with detrimental health impacts (e.g. alcohol and cigarettes), model tax policy responses to reduce carbon emissions, identify growth drivers within an economy, detect labour market violations and evaluate the wellbeing of vulnerable groups in society, data can help create value and safeguard lives.

Digital Transformation Trends that are Shaping Global Indirect Tax Systems

Below are trends driving global transformation that indirect tax functions should recognize to optimize value creation.

Trend 1: Data Drives Transformation

One trend with significant transformational impacts on tax authorities' approaches to indirect tax administration has been the shift away from paper-based reporting toward real-time digital reporting in various forms. For instance, e-invoicing is making waves within indirect tax circles.

Organizations today face both the old world of reports and compliance returns as well as daily invoice submissions to tax authorities - this presents them with the complex challenge of keeping up with compliance when implementing new systems and processes, which is incredibly daunting for clients.

Data is at the core of successful transformation for indirect tax functions. Businesses require an approach for managing data requirements as they change, and indirect tax departments need to collaborate closely with wider business initiatives.

Continuous Transaction Control (CTC) models are becoming an increasing burden for taxpayers to manage accurately their indirect tax data at source. Their complexity increases further due to each country implementing different versions of CTC.

Initiatives such as VAT in the Digital Age (VIDA) aim to harmonize e-invoicing and reporting across Europe to create a consistent real-time reporting regime across countries; however, this goal remains years away.

Today's businesses must plan for an uncertain business landscape where their processes, technology and people must evolve quickly in order to deal with various data reporting requirements launching at different points in time and frequency - this presents both an immense challenge and opportunity for indirect tax professionals.

Indirect tax applies to every transaction, underscoring the importance of data for accurate reporting. Businesses should ask themselves: Have I got enough accurate and correct data in my system to generate accurate reports? Can I extract it easily and know its location? Additionally, what steps must be taken in order to transform and report my data effectively and how often must it be submitted for filing?

Digital transformation of VAT is an exciting concept. Still, its implementation involves more than writing legislation and assigning implementation tasks to organizations. Instead, this transformation must happen from within tax authorities themselves, using technology to enhance performance while developing new skill sets.

Tax authorities face a novel and difficult challenge with digital invoicing, and tax authorities need to share detailed roadmaps for implementation that allow businesses enough time to invest in the necessary technologies and adapt their processes in order to reach compliance. With digital invoicing on the rise, how data is transmitted, utilized, managed and visualized will become even more essential in defining indirect tax functions in future.

Trend 2: The Rise of e-invoicing

Electronic invoicing has revolutionized the global indirect tax landscape. E-invoicing provides tax administrations with an effective tool to close VAT gaps, prevent unintended errors, enhance risk management capabilities and detect fraud schemes early. Some countries found out during the pandemic outbreak that digital invoice data offers an invaluable source of economic intelligence.

Near real-time availability allows for even greater opportunities to analyze economic developments and forecasts quickly and more thoroughly than before. While implementation costs can be high, electronic invoicing has the potential to reduce business expenses over time and help digitalize taxation processes more broadly.

With electronic invoicing, the government gains real-time access to invoice-related data - revolutionizing tax administration and compliance processes while giving policymakers better insights into economic activity, nature of supplies, and logistics - enabling more informed decisions. Likewise, private companies use this digital data for the transformation of pre- and post-shipment loans, leading to improved financial inclusion.

Numerous internal business functions and processes are being automated, making the use of invoice data the gold standard in terms of real-time, validated, reliable information. With its rich granularity, it enables economic research and policymakers to map supply chains as well as identify areas of noncompliance or tax evasion more effectively than ever.

Trend 3: Find the Right Resources and Technology

Two major obstacles facing indirect tax teams today are resources and technology - resources are limited. In contrast, technology options can be overwhelming, making it hard to know which are appropriate. Teams often face cost pressures that force them to do more with less, making it harder to keep pace with increasing compliance obligations and demands.

To meet these challenges, companies are evaluating their operating model to decide what tasks can be outsourced vs. what should remain in-house, which can involve activities like compliance, determination, managed services or invoicing. Decisions depend on factors like complexity, local teams and budget concerns - with some adopting hybrid solutions as a result.

Once you know your goals, choose the technology necessary to support them. Coverage should include all countries and obligations. That is why the Global VAT Reporting Tool (GVRT) tool has expanded to cover VAT/GST reporting in more jurisdictions, as well as developing an electronic invoicing solution, ultimately enabling businesses to use an invoicing service alongside reporting.

Trend 4: Effective Tax Management: The Importance of Collaboration

Effective indirect tax management software for transformation relies on collaboration. Tax and finance functions should work together towards creating an integrated approach. Otherwise, duplication may result in missed deadlines, duplicate efforts, and missed compliance requirements.

At many businesses, no single individual is solely accountable for indirect tax management. This responsibility has been spread throughout the organization. Companies should establish a tax governance structure to define responsibilities, roles and accountabilities clearly. Although it might be tempting to spread out VAT management responsibilities throughout an organization, having one centralized approach to VAT management is crucial.

What Types of Indirect Tax Automation Make the Greatest Impact?

Below is a list of these indirect tax automation techniques:

Checking Your Customer's Tax Registration Status

Customers typically fall into one of two tax categories for accounting purposes: businesses or consumers. Digital service companies generally only charge indirect tax to non-business end consumers, and therefore, to determine whether taxes should be applied, you need to verify their business status by validating a Tax ID Number in each country they operate in.

As tax deadlines approach and you must verify thousands of tax IDs manually or using outdated tools, the experience can be stressful and daunting. VIES (EU-wide VAT ID validation tool) can take hours to validate thousands of IDs; tax-ID validation tools in other countries may be harder to come by and even slower; should something break, you may have to start over, which can be an inconvenience if your business operates globally.

Charging Tax Correctly

Many businesses now utilize indirect tax automation through ERP or billing systems. Still, the downside of this setup can be significant changes to a company's business model or expansion to new jurisdictions requiring tremendous modifications to automation settings requiring extensive human and IT resources for configuration as well as modification processes.

Management of foreign currencies is another challenge faced by businesses. Tax must be declared and paid to tax authorities in their native cash; however, that might not necessarily be the transaction currency. There may also be specific rules concerning which sources should be used for currency conversion, which vary from country to country; doing this manually for each indirect tax return could prove hauntingly tedious for tax professionals.

Tax Compliance

Filing indirect tax returns worldwide can be an enormously challenging endeavour. Much of the difficulty stems from dealing with data that needs to be manually adjusted from ERP or billing systems before being submitted for return filing. This undertaking requires more effort for in-house tax teams to handle on their own.

Tax compliance outsourcing to traditional law firms or consulting firms comes at a significant price, which becomes even more prohibitive when they need to spend time manually adjusting data manually.

Automating the tax compliance process can decrease time spent manually inputting data, reconciling and filing tax forms - freeing up resources for more important strategic tasks. Automation also lowers error risk in filings and payments, reducing costly penalties, interest payments and audits.

Other Methods in Global Indirect Tax Automation

So far, we've covered why and where automation should be applied within your business. Still, every company's needs vary and complex issues require unique solutions.

Digital Transformation Services and tax professionals rely on various technologies, with automation methods becoming an increasingly important aspect. Being aware of these tools will allow for improved efficiency, reduced errors, and freeing employees up for higher-value tasks.

International tax teams have already utilized many of these solutions, while others, like AI, are becoming more widespread with the launch of general-purpose technologies like ChatGPT. Importantly, these methods apply to automating both VAT/GST and income taxes.

Method 1: Robotic Process Automation (RPA)

RPA refers to the use of software robots or "bots" to perform repetitive, rule-based tasks that humans typically carry out. Bots can be programmed to mimic human actions like clicking buttons, entering data and performing calculations, freeing employees up for more valuable tasks and increasing efficiency. RPA can be found widely used across financial, healthcare and manufacturing industries for streamlining operations and improving efficiency.

Method 2: Business Process Automation (BPA)

Automating entire business processes end-to-end rather than individual tasks is key for efficient functioning. It can involve various technologies including RPA, workflow automation and artificial intelligence.

Method 3: Artificial Intelligence (AI)

Artificial intelligence refers to machine learning, natural language processing and other methods used to build intelligent computer systems capable of performing tasks that typically require human intelligence such as decision-making and problem-solving.

Method 4: Machine Learning

This subfield of artificial intelligence (AI) employs algorithms and statistical models to enable computer systems to learn from data without being explicitly programmed autonomously. Machine learning algorithms can be trained on large datasets to spot patterns or reveal insights within them that allow predictions or decisions on new, previously unseen data sets.

Machine learning has numerous applications, such as image and speech recognition, natural language processing, fraud detection and personalized recommendations.

Method 5: Cognitive Automation

This combination of AI technologies with RPA enables systems to understand, reason with, and learn from data in order to automate complex processes that involve cognitive tasks.

Method 6: Robotic Desktop Automation (RDA)

Automating desktop-based tasks, such as data entry and report generation, using software robots is key to increasing efficiency on a desktop PC.

Conclusion

Digital transformation is revolutionizing global indirect tax systems, ushering in a new era of taxation. This transformation is being led by technology advancements such as artificial intelligence, blockchain and data analytics, which are allowing tax authorities to collect and analyze data more efficiently and accurately - increasing compliance rates while decreasing the burden for businesses while simultaneously increasing tax revenue collection.

Digital platforms and e-commerce are expanding the tax base, making it easier for tax authorities to track cross-border transactions. Yet these developments also bring challenges, including harmonization and standardization of tax rules globally.

Digital transformation is revolutionizing indirect tax system solutions, making them more responsive, transparent and equitable. To remain successful in this ever-evolving landscape, businesses must adapt by investing in technology and staying informed on any alterations to tax regulations affecting compliance or competitiveness in the global marketplace.

Engage with us today and learn how digital transformation will affect global indirect taxes!

Author

Assim Gupta

Saurabh Sharma linkedin-icon-squre

VP of Engineering

VP of Engineering at Closeloop, a seasoned technology guru and a rational individual, who we call the captain of the Closeloop team. He writes about technology, software tools, trends, and everything in between. He is brilliant at the coding game and a go-to person for software strategy and development. He is proactive, analytical, and responsible. Besides accomplishing his duties, you can find him conversing with people, sharing ideas, and solving puzzles.

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