Digitalisation of VAT compliance
The direction of travel for international indirect tax compliance is very clear, it’s digital and near real-time. Historically, tax authorities accepted paper invoicing and adopted a ‘post-audit’ approach, where the taxpayer charged tax on an invoice and this would only be audited after the fact. Often by a tax inspector or auditor physically looking at invoices and records. This would often be based on sampling – a risk based approach to compliance.
Taxpayers themselves may have only needed to physically submit a periodic summary VAT/GST return, often paper. However, the trends seen across the globe include a shift to mandatory electronic invoicing, and providing real-time information direct to the tax authorities through Standard Audit Files for Tax (SAF-T). The problem is that these are not standard or harmonised globally, and the format, contents and filing frequency differs between countries – for example, some are submitted periodically while others are only upon request or during an audit.
Taxpayers are also facing new requirements to submit VAT/GST returns electronically, for example the UK’s ‘Making Tax Digital’ initiative which mandates businesses to submit their VAT returns via an application programming interface (API) direct to the Tax authority, either direct from approved software or via an API-enabled spreadsheet.
Tax authorities are then making use of the tax data they receive by carrying out sophisticated data analytics, reviewing the full data set looking for anomalies and errors to form the basis for assessments of tax and penalties. Tax authorities are also comparing data submitted by different taxpayers, for example matching a customer’s claim for input tax on a purchase against a supplier’s declared output tax on the sale.
This all means that businesses need to make sure they have confidence in the quality and integrity of their data that the tax authorities now have access to. Businesses should not only guarantee the completeness of customer and supplier master data that may drive a tax determination decision, but also run proactive data analytics on historic transactions to highlight any systematic errors. How long is it before VAT and GST are administered every time a credit card or digital payment solution is entered at source and the VAT/GST is automatically populated to a return? Buying a coffee at the local café will never be the same!