Adapting to the New Era: Tax Authorities and the Digital Compliance Revolution

Governments worldwide introduce various digital reporting mandates and use technology to improve tax collection efficiency and close tax gaps. Tax compliance is becoming more digital and real-time. As a result, global businesses face a "digital reporting tsunami" and constantly evolving regulations across multiple countries, demanding a significant shift in how they approach tax compliance.

Here's what global companies need to understand and act upon:

• Think Digital: Invest in technology to keep up with tax authorities and meet the evolving demands.
• Think Global: Develop a unified approach to tax compliance across all countries of operation.
• Elevate Your Tax Team: Empower the tax team to become a strategic cornerstone in your global business operations.

The Era Of New Tax Authorities

Real-time digital reporting requirements

The global tax landscape is undergoing a significant transformation. Governments worldwide seek to maximize revenue collection. This includes a growing focus on value-added tax (VAT), goods and services tax (GST), and other consumption-based taxes playing an increasingly central role in government budgets.

Just like every other industry, tax authorities are embracing the digital age. They are turning to digitalization as a key tool for enhancing efficiency in tax collection and closing tax gaps. Governments are rolling out digital reporting requirements to replace the traditional, periodic submission of tax data with a more immediate approach.

“Digital reporting” is an umbrella term for electronically sending transaction details to tax authorities, either as they happen, shortly after, or even before they occur. Understanding the e-invoicing and digital reporting terminology is of the utmost importance. Here are a few examples.

Continuous Transaction Controls (CTC): It requires taxpayers to submit data to the tax authority (or a designated platform) either before or shortly after the transaction occurs.

• For instance, in Poland, Brazil, and Italy, taxpayers must submit their invoices to the tax authorities for clearance before these documents are sent to their trading partners. Invoices gain legal and fiscal validity only after they have been validated and approved by the tax authority (pre-clearance).
• In some other countries, like Peru and Uruguay, the tax authority approves transactional documents after they have already been issued and exchanged between the trading parties (post-clearance).
• In other countries, no tax authority approvals are needed for issuing transactional documents, but taxpayers must provide the transactional data to the authorities in (near) real-time. In Portugal and Hungary, for example, invoice data must be reported to the tax authority immediately after issuance (real-time). In Spain and the Philippines, taxpayers have a few days to report the data (near real-time).

Periodic Transaction Controls (PTC): This is the traditional method where you submit data periodically (monthly, quarterly, or annually). It's still around, but with digital reporting, it might change, and also new types are coming into the picture.

• SAF-T (Standard Audit File for Tax) is a standardized format for submitting various tax-related data.
• DAC 7 requires online platforms to collect seller information and report it to tax authorities.
• There are also the periodic VAT/GST returns. With more digital data available, tax authorities will likely pre-populate VAT returns (like they already do in Hungary), potentially eliminating the need to file them altogether in the future. This underscores the importance of accurate data submission from the start.

Many countries have already adopted these mandates, and more are on the way (see our e-invoicing and digital reporting in the EU summary). (Near) real-time reporting is becoming the norm. As tax administrations worldwide continue to evolve and invest in technology, the landscape of tax compliance is becoming more digital and instantaneous, making it a more complex challenge for global companies.

How do tax authorities use the data?

Things are getting a big digital upgrade in the world of taxes as well. With digital reporting mandates, governments interpose themselves into the transaction/invoicing chain and harness the power of (near) real-time data to keep a close watch on the taxpayers’ economic activities. They are now equipped with unprecedented amounts of data and are far from shy about leveraging it to its full potential. This shift is also highlighted in the OECD's "Tax Administration 3.0: The Digital Transformation of Tax Administration" report.

Tax authorities are ramping up their investment in digital technologies and artificial intelligence to boost their analytical capabilities. These tools are capable of parsing through large datasets, diving deep into extensive transaction data, and spotting patterns and anomalies that could suggest potential non-compliance. Here are some practical cases in which tax authorities use the massive amount of data they collect.

• Combating tax evasion: Imagine tax authorities instantly comparing what a supplier and customer reports. Discrepancies become red flags, making hiding income or underpaying taxes much harder (even unintentionally).
• Taxpayer risk scoring: By analyzing digital data, tax authorities can identify businesses with a higher risk of non-compliance. This allows for focused audits, maximizing efficiency and minimizing disruption for compliant businesses.
• Data-driven tax audits: A high-precision, data-driven approach also transforms how tax audits are conducted. No longer casting a wide net in the hopes of catching a few: the big data allows audits to be run with pinpoint accuracy, allocate tax office resources more effectively, and direct their auditing efforts toward the most promising areas for detecting discrepancies.
• Economic insights: The data from digital reporting provides valuable economic information for policymakers. For example, Brazil's real-time sales data during the Covid-19 pandemic offered a clear picture of the country's economic health, allowing for targeted tax policy measurements.

Tax authorities are changing their mindset

Tax offices around the world are embracing a significant shift in their approach. Traditionally, tax authorities have focused on reactive measures, responding to issues after they arise. Now, a data-driven revolution is leading to a more proactive focus. Analyzing big data enables tax authorities to identify and act right upon signs of non-compliance. This proactive approach allows them to intervene early, preventing minor issues from escalating into major problems.

This transformation is accompanied by a change in tone from tax authorities, just like it happened in Hungary for instance (NAV 2.0. initiative). As they gain a clearer view of the transactions in the economy through technology, many are adopting a more supportive and helpful demeanor toward taxpayers, offering guidance and assistance to help them meet their obligations.

Conversely, those who choose to disregard tax regulations can expect more severe consequences. The message is clear: cooperation is rewarded, while non-compliance is met with stricter enforcement.

The results so far

The shift to an immediate data reporting model is already delivering significant benefits, with one of the most notable being the reduction of the “VAT gap”. This gap represents the difference between the expected theoretical VAT revenue that would be collected in the case of full compliance and the actual amount collected. The VAT compliance gap encompasses issues beyond fraud and evasion, including losses from administrative errors, and other forms of non-compliance. The “VAT gap” has long been a challenge for governments, who do everything to optimize tax collection and get more revenue.

A great example of the impact of this shift can be seen in the European Union, where the “VAT gap” significantly decreased, dropping from €99 billion in 2020 to €61 billion in 2021, as reported in the 2023 EU VAT Gap report.

This remarkable improvement is largely attributed to the implementation of digital reporting mandates. By ensuring more accurate and timely reporting, governments are better positioned to address discrepancies and enforce compliance, which play a crucial role in cleaning up the economy and making tax collection more efficient.

What is coming next?

The near future is fueled by relentless government spending on tax technology. Unlike the private sector, which focuses on profit margins and return on investment, tax authorities are motivated by their ability to maximize tax collection. This allows them to invest in robust technology frameworks, even if the immediate financial gains aren't clear.

Learning from the successes and challenges of other regions is also becoming a common practice among tax authorities. Success stories from various jurisdictions encourage governments to double down on tax technology investments. They are keen to adopt proven strategies and best practices, although each country tends to add its own twist and requirements to suit its own specific needs.

What Does The New Era Of Tax Authorities Mean For Your Tax Team?

The rise of technology has fundamentally altered the business landscape. Gone are the days of geographical limitations. Thanks to digitalization, businesses can now operate on a global scale from day one. While this offers exciting opportunities, it also throws a complex curveball at the tax teams of companies operating globally.

With digital reporting mandates kicking in, companies have to report their data digitally and at a granular level, with condensed reporting cycles getting closer and closer to real-time. The benefits for governments are evident: increased data and automated analysis lead to real-time visibility over compliance, thus reducing the "VAT gap" and enhancing overall compliance levels.

Therefore, the expectation is that every major country will implement some form of (near) real-time tax data reporting in the coming years. The question isn't whether but when these countries will introduce their specific rules and in what unique way they'll choose to do so. Also, it’s not just about the new mandates, we need to keep in mind that existing regulations are constantly evolving. All of this creates a digital reporting tsunami with a constantly shifting landscape of requirements across multiple jurisdictions.

This also means that tax is moving away from a grey area of risk management towards a black-and-white world of compliance—you either are compliant, or you aren't. Businesses have to react to that and transform how they approach tax. Unfortunately, there's no global harmonization of these rules or reporting systems, leading to a patchwork of requirements.

As tax administrations around the world continue to evolve and invest in technology, the landscape of tax compliance is becoming more digital and instantaneous. Staying ahead of the curve, matching the pace of tax authorities, and adapting to the rapidly shifting tax environment is the real challenge for global tax teams.

How Can Tax Teams Overcome the Challenges of The New Era?

Think Digital

Traditionally, tax functions have been focused on ensuring compliance – a backward-looking approach where the focus lies on submitting filings and paying taxes accurately, albeit after the fact. This includes the processes of calculating, reporting, and paying taxes, which are completed after a tax period. Following this, the submitted information undergoes verification within the tax authority, and audits are initiated based on identified risks or, occasionally, through random selection.

However, we're shifting from an era of after-the-fact compliance to a dynamic real-time tax environment. This transformation is fueled by a potent mix of forces, mostly from governments and tax authorities, that are focusing on increasing their revenues by digital reporting mandates.

In today’s digital landscape, sticking to old-fashioned manual methods for managing compliance is becoming impractical.

Data quality needs to be overhauled to align with tax authorities' evolving demands. Both master data and transaction data must be accurate, as they are now directly shared with tax authorities. As the demand for real-time reporting and digital tax compliance grows, the management of tax data will increasingly become a cornerstone for success in the digital age, necessitating a proactive, comprehensive approach from businesses worldwide.

Companies that postpone modernizing their operations and automating essential activities risk falling behind not only the modern tax authorities but also their more digitally agile competitors.

Tax departments need to move away from traditional, manual processes toward digital solutions to meet the evolving demands of tax authorities. Accurate, real-time data reporting and compliance are becoming essential, and companies that delay embracing digital transformation risk falling behind.

Think Global

The complexity is that digital reporting mandates vary from country to country, each adding unique flavor to the mix. Staying on top of all changes required across all its jurisdictions is challenging for any worldwide business.

For global businesses, steering through the maze of government tax mandates is a task that knows no borders. This calls for a unified global strategy rather than isolated, country-specific approaches. Addressing these requirements locally can lead to a fragmented collection of solutions, causing continuous complications as you attempt to make your strategy resilient for the future. Such an approach may significantly hinder the progress of your digital transformation journey.

Tax requirements should not be a barrier to scaling and expanding the business. Selecting a vendor that not only understands the nuances and commonalities in regulations across various locales but also boasts a truly global presence can be advantageous. Quality vendors stay prepared, so you don’t have to, and you can focus on your core business without the constant worry of keeping up with the ever-changing requirements.

The diverse and changing digital reporting mandates across countries necessitate a unified approach to tax compliance for global businesses. Localized solutions lead to fragmentation and challenges in scaling operations. A global perspective, supported by technology with worldwide capabilities, ensures businesses can expand without being hindered by tax compliance complexities.

Elevate Your Tax Team

The introduction of digital reporting mandates is reshaping the landscape of indirect tax compliance, expanding beyond the traditional realm of the tax department. Tax obligations are now deeply integrated with supply chain management and invoicing practices, impacting the entire business operation. The challenges of adhering to tax regulations in new markets can even hinder global expansion.

As a result, the network of stakeholders involved in tax compliance has broadened. To be successful, tax compliance now demands a holistic, global strategy that covers other areas of operation. It calls for a coordinated effort across various departments — tax, finance, IT, sales, procurement, and leadership — all moving together under a shared strategic vision to ensure readiness.

The key is transforming the tax function from its traditional technical focus to a strategic role within the organization. The secret to success now lies in transforming the tax function from a purely technical role to a strategic cornerstone of the business.

The shift to digital reporting mandates requires the tax function to integrate more closely with all aspects of business operations. Success in the digital age means elevating the tax department from a technical role to a strategic partner in the business, facilitating expansion, and ensuring global compliance.

How Fonoa Can Help

Fonoa is a global tax automation and compliance solution provider that helps companies automate their tax processes in a digital, borderless economy.

​​Talk to us and learn how Fonoa can help your business automate global tax compliance.