Tax in Real Time: Navigating the Shift to Continuous Compliance

Tax in Real Time: Navigating the Shift to Continuous Compliance

TLDR: The global transition to continuous tax compliance is driven by technological advancements and real-time data reporting, transforming how businesses interact with tax authorities. Countries like Lithuania, Romania, and Hungary have begun implementing systems that leverage real-time transactional data to pre-fill VAT returns and flag discrepancies in taxpayer submissions.

Continuous compliance will significantly impact your tax team's workflows and technology needs. Accurate, high-quality data is essential and requires a consolidated and traceable data flow through the entire Record to Report (R2R) process. Teams must adopt scalable, unified platforms that support end-to-end compliance and facilitate easier audits. Immediate actions include educating your organization, building a cross-functional team to handle the transition, identifying manual processes ripe for automation, and improving data quality. Best practices focus on implementing future-proof, interconnected solutions for global tax compliance. The shift toward continuous compliance is already happening, and Fonoa offers a path forward.

The Transition to Continuous Compliance

If you’ve had any exposure to the indirect tax compliance process recently, you've undoubtedly faced a moment when you question the future of tax. With the implementation of new technologies and the amount of data in the hands of tax authorities, it's not a question of when tax compliance will change, but how fast.

As digital reporting requirements spread globally, we're shifting towards real or near real-time data reporting. Tax authorities now expect standardized data at the moment of the transaction, giving them immediate insight into business activities. 

The number of real-time reporting mandates continues to expand as more countries adopt measures to combat tax fraud and improve compliance. Over 40 countries have introduced or are in the process of implementing digital transactional reporting mandates. The European Commission anticipates 111 billion EUR in additional VAT revenue from 2023-2032, resulting from digital reporting requirement mandates alone.

Compliance has historically been an after-the-fact exercise, looking backward every month or quarter to reconcile and report to the tax authorities. The requirements for real-time data submission are propelling tax into a world of continuous compliance. Businesses need to be confident in the accuracy of their transactional data when it is submitted. In this new landscape of continuous compliance, manual processes and lengthy reconciliations will no longer be feasible.

The Transition to Continuous Compliance

How Tax Authorities Are Harnessing Transactional Data

Tax Authorities have begun implementing programs and processes that utilize transactional data reported to prepare pre-filled VAT returns. The timeframe between transaction processing and reporting is compressed to a point of continuous compliance. We’ve provided a few examples below, but note that other countries have implemented similar measures as well.

Lithuania’s near real-time VAT validation system

In Lithuania, the State Tax Inspectorate (STI) has initiated a pilot program to assess VAT declarations in near real-time. The goal is to validate the data reported in VAT returns against the data provided in the invoicing system, called SAF. Within two days of submitting a return, businesses are informed of any discrepancies between the two data sets and have the opportunity to correct them - within a limited timeframe. This real-time assessment will allow customers to identify inconsistencies in the declaration before the tax authority takes action, reducing the financial consequences of any mistakes made.

Romania’s e-VAT declaration and taxpayer audits

Romania has begun to leverage taxpayer transactional data to prefill VAT declarations and flag inconsistencies with taxpayer-prepared VAT returns. Referred to as the Romanian “e-VAT” declaration, the pre-filled form includes data and information transmitted to the Ministry of Finance and the National Agency for Fiscal Administration (ANAF), such as Romanian e-invoices, e-transport documents, SAF-T, customs documents, and Romanian e-Cash registers. Any significant differences between the taxpayer's e-VAT return and the traditional VAT declaration will be flagged by the ANAF, and the taxpayer must respond within 20 days. This process, in practice, puts the taxpayer in a monthly audit by default.

Hungary’s eVAT portal and draft return automation

Hungary has similarly implemented a voluntary eVAT system for taxpayers. Taxpayers who volunteer to test the eVAT system portal functionality have direct access to tax authority data within the portal, including issued and received invoices and customs information. The portal is able to automatically generate draft returns based on the submitted XML data. Once prepared, taxpayers have the opportunity to confirm or resubmit corrected data. While this system is still under development, Hungary aims to make the eVAT portal mandatory for all taxpayers in the coming years.

All three examples demonstrate a clear path to systems of continuous indirect tax compliance, creating significant business challenges.

The Impact of Continuous Compliance on Tax: What this means for your team

Continuous compliance will impact your team, workflows and needs in a number of ways. We’ve outlined a few examples below so you can begin to understand how you need to leverage technology to meet these new demands.

Reliable data is a necessity

Teams will need accurate, high-quality data. This requires a single source of truth of consistent data that will need to be reused across various tax processes and jurisdictions. Consolidating data will enable teams, whether it be finance or tax, to pull reliable data points and ensure consistency across processes.

Data needs to be traceable

Data needs to be traceable throughout the entire Record to Report (R2) process. Here’s an example of this that we’ve seen in practice - having reviewed your transactional data reported in real time, the Tax Authority comes back to you questioning the output tax amount on your monthly Return, stating that you under collected by not charging tax. To support your position, you need to be able to connect the return to the transactional data reported in real time, to the tax calculation, justifying the tax registered status of the customer. The transaction needs to be traceable and stem from reliable data.

Tax data needs to be unified

Tax will need a unified data flow. All tax related data should flow through one channel, ensuring consistency and reducing the likelihood of errors caused by fragmented data sources or inconsistent formats. Having a single platform ensures consistent tax calculations, reporting, and compliance practices across multiple regions, reducing the risk of errors or inconsistencies introduced by using fragmented solutions. This will ease the burden of audits and reporting - with all tax data in one system, it becomes significantly easier to generate reports and respond to audits. There's no need to aggregate data from different systems or worry about discrepancies between providers.

Automation is a necessity, not a nice to have

You’ll need to lean into automation throughout your workflows. Not only will you not have time for manual work, automating indirect tax processes such as tax calculation, currency conversion, TIN validation, and filing reduces manual errors and improves efficiency.

Solutions need to be scalable

The solutions you buy, build, or implement will need to scale with you, and must be able to do so quickly. The best solutions will provide connected support for the entire R2R process. One problem we see implementing a technology on a mandate by mandate basis, is that the solutions are not interconnected. They are fragmented - each has different data requirements, makes it difficult to trace data and to reconcile. Data in the return may not match transactional data reported in real time, causing discrepancies.

Steps to Prepare for Continuous Compliance

We recognize that meeting the demands of continuous compliance is daunting. It will take time, significant energy, and resources. Consider the effort it took to implement your last e-invoicing mandate. Now, imagine that workload multiplied by ten—and then by the number of countries accelerating their digitization process. This isn’t far off; you need to start today to be prepared.

We’ve compiled a few actions you can take now - with little or no extra cost to your organization - to get you started on your journey.

  1. Educate Stakeholders: Start sharing where you see the future of tax headed with others in your organization. This includes your CFO and CTO, but also others who may have a stake in the solution, like the cross-functional team we’ve noted below. Explain where the world of tax is heading and keep them up to date with significant developments. Plant the seed now so they understand the significance of this change.
  2. Build a Cross-Functional Team: Begin to build a cross-functional team that can support the tech transition to continuous compliance. The team will involve Tax, IT, Finance and perhaps product.
  3. Stay Informed: Keep up with future developments, both for your understanding and so you can keep others apprised of developments. Our Blog is an excellent resource for this.
  4. Automate Manual Processes: Identify and take note of aspects of your processes that are highly manual. Manual processes present an opportunity to build a business impact case for technology, demonstrating the return on investment (ROI) that comes with automation. Showing your CFO or CTO that you could significantly save money by automating a process is a great way to get buy-in for your tech transformation journey.
  5. Improve Data Quality: Start working on your data quality, as data is key and of utmost importance. Build an impact case for a data quality project, based on the ROI that can be achieved by automating a manual process. We have seen many companies succeed with an impact case for implementing our TIN Validation tool, Lookup.

Best practices to meet continuous compliance demands

As we move into this world of continuous compliance, some systems just fundamentally won’t work. Below is a list of best practices that we have observed from Tax departments at various stages in their tech transition to support continuous compliance.

  • Choose to buy, build, and implement technology today with continuous compliance and the future of tax in mind. Will this support my entire R2R process globally in the future? Focus on flexible, scalable, and future-proof solutions.
  • Seek to understand which solutions and processes work, but even better, what DOESN’T work well. Some existing solutions cannot handle the R2R process needed for continuous compliance. As noted above, data is KEY. Multiple data sources and a lack of interconnectivity between systems will set you up for failure. E-invoicing providers that have grown by acquisition will struggle to support the entire R2R process.
  • Learn from your Tax peers and other companies. How have other teams developed a mature tech-driven tax function? What has worked well? Ask and observe what challenges they have overcome.

Conclusion: The Path to Continuous Compliance

Recent years have illuminated a pivotal shift in the evolving landscape of tax compliance, pointing towards a future shaped by continuous compliance. Businesses must now ensure the accuracy of their transactional data at the point of submission, adapting to a world where immediate compliance is not just preferred but required. Recent developments in Lithuania, Romania, and Hungary demonstrate that the future of tax, defined by continuous compliance, is near.

As a provider of technology supporting the entire global record-to-report process, we would love to exchange thoughts with you on this topic. We’ve seen companies at varying levels of tax tech maturity address these challenges—we know what works well and are here to support you as you navigate this journey. Understanding best practices is essential for successfully implementing new technologies and processes while transitioning to continuous compliance.

The only effective solution to meet the challenges of continuous compliance is to build an advanced tax function powered by software and automation solutions that ensure accuracy, scalability, and audibility.

Additional Resources

Interested in learning more about how senior Tax leaders are approaching this move to continuous compliance?

Webinars

Guides

  • E-invoicing Procurement guide: this guide is packed with information and additional materials. It also contains 70 of the most common questions asked by companies looking to buy an e-invoicing or digital reporting solution. If you are already considering buying a solution, this guide is for you.
  • Fonoa Country Tax Guides: this is one of our most visited (and praised) public resources. We have made available summaries of e-invoicing and reporting requirements in easy-to-read tables.
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