The global taxation landscape is in a state of flux. Government tax regulations have always been complex, but a sweeping shift towards digitisation – and the need for businesses to remain compliant – can often result in confusion, particularly for smaller businesses who have long been reliant on paper-based invoicing and receipts.
The move to digital processes can be hugely beneficial, however; not just from a compliance perspective, but also with regards to “acts of business” such as recovering cross-border VAT. It’s important, therefore, that organisations understand the reasons for this move, and how they can take advantage of the opportunities it can offer.
Following the considerable success of mandatory electronic invoicing since it was introduced in Latin America almost 20 years ago, the move to digital, real-time reporting has seen increasing momentum across Europe, with even tighter controls beginning to emerge from countries in Asia and the Middle East.
But, while it may have improved transparency – allowing tax authorities to more closely insert themselves into transactions – this shift to real-time, or near real-time reporting has put considerable strain on the financial infrastructure of companies required to comply with the accompanying raft of new rules and regulations. And this strain has been exacerbated by the regional variations in these regulations.
Italy, for example, was the first country in the European Union to make electronic invoicing mandatory by way of gaining exemption from the EU’s VAT directive, while Spain’s SII (Immediate Information Supply) requires businesses to electronically report invoices within four days of issue. The UK has approached the realm of digitising tax processes by rolling out Making Tax Digital last year in a bid to plug some of the financial loss caused by incorrect returns. France is also looking to come down on VAT fraud by entering the path of mandatory B2B e-invoicing, as well as Hungary and Poland who are reviewing the process.
The Indian government has gone even further; all business-to-business invoices over a certain value must be generated using a central government-operated portal. The penalties for non-compliance with any of these schemes can be steep – ranging from fines to sanctions under criminal law.
Given the risk of non-compliance with various different VAT structures around the world – not to mention the sheer scale of money that can go unclaimed – it’s vital that businesses take steps to address head-on the issues arising from the increasingly widespread adoption of digital and real-time reporting.
Knowledge is power
As well as VAT compliance, there is a secondary focus required – companies need to map their tax structures to ensure as little money as possible is left behind. Although around 80 VAT-enabled countries don’t allow cross-border reclamation, it is possible to claim tax back under domestic policy in these regimes. Companies with international VAT registrations in all of the eligible countries in which they have a presence must be willing to share transactional data as required by those countries in order to free up the money typically blocked by a lack of cross-border reclamation.
Knowledge of global taxation rules is again key to this. This can be gained through ongoing, diligent study of the current landscape and the continuous regulatory updates. However, this is likely to divert considerable time and resources from a company’s main business. Instead, this knowledge can be provided by external experts – there are many third-party consultants whose job it is to keep up with the ever-changing minutiae of global tax rules so that business leaders don’t have to. The global market potential for VAT reclamation comes in at 61 billion pounds ($74.9 billion), with only a fraction of that amount being recovered, so it’s definitely worth investing in.
Alternatively, an organisation can remain informed through the use of technology, automatically updating its invoicing and reporting systems and processes each time an authority implements or changes tax regulations. Indeed, this is just one example of where the move toward digitisation can be beneficial.
Savings through automation
Among the greatest benefits of going digital are the cost savings it can deliver. Financial non-compliance penalties aside, continuing to use legacy paper-based invoicing and reporting processes can be hugely expensive.
Automation can significantly reduce the cost of avoidable errors and fraud, as well as minimising valuable time wasted on unnecessarily burdensome administrative tasks. The visibility it offers over a company’s cashflow can save considerable time and resources too – especially when you consider that the typical SME can spend an average of 16 days a year simply chasing late payments.
Technology can also play a crucial role in enabling those companies that are unsure about the correct procedures to access money owed to them that would otherwise go unclaimed. For example, solutions that employ AI and optical character recognition to automatically assess expense reports for taxation information will not only help a business adhere to shortening windows for VAT reporting and reclamation, thus ensuring compliance, but will also minimise the risk of error.
Look to the future
On average, VAT accounts for more than 30 per cent of all public revenue. It’s little surprise, therefore, that tax authorities are implementing ever tighter, real-time, digital controls in order to claim what they’re owed and minimise their VAT gap. The end goal is likely to be direct reporting from businesses’ ERP systems to the tax authority in real time.
Businesses need to be prepared for this, arming themselves with the necessary knowledge, third-party expertise, and technology to ensure they comply with evolving regulations. What’s more, with billions in businesses’ own money being left on the table, they should also ensure they have a reclamation function built into all of their future dealings with international tax authorities. Global taxation is in a state of flux. But knowledge and preparation can help businesses ride the waves.
Martin Leonard, EMEA Business Development Director – FSI – SAP Concur