Tax Master Data Management: Challenges and Solutions

Tax Master Data Management is a popular topic these days, being discussed as part of a transformation project or more likely, its antecedent activity - master data cleanup. What does this mean for the tax team and how do tax requirements impact the overall organization goals around master data?

What is tax master data management (MDM)?

Let’s start with the basics. Master data is data which is core to the operations of your ERP and other financial systems including financial structures, locations, products, customers and vendors. Tax master data refers to the fields or elements within the master data that relate to tax. For most companies, this is VAT Registrations, place of establishment or locations, commodity code assignment in the product master, and incoterms, but, depending on your industry, could reach far into supply chain configurations, sustainability settings and for digital platforms, seller data.

Master Data Management (MDM) is a focus area for organizations going through transformation, where there is a focus on the structure and process around maintaining master data.

Is this related to KYC, KYV, KYP, and other “KY” buzz phrases I keep hearing about?

These acronyms refer to programs around knowing your customer, vendor, or partner.  KYP checks are being employed to make sure your partner complies with laws and regulations. In relation to tax, this means validating your vendor or customer's VAT (or GST)  identification number, confirming their business registration number and that their address matches the registration address. This goes far beyond your typical VIES check, which many European companies are currently relying on. And this isn’t static, it isn’t done once; this is a constant reassessment that who you are doing business with isn't fraudulent, and when they disappear, they take your VAT zero rating or input VAT deduction with them.

What is master data cleanup?

The challenge with master data is that many teams within your organization are using it for different purposes. Even within tax, you might have transfer pricing, direct and indirect tax, all using the same data and requiring different views on that data. In a legacy ERP environment (or many if your landscape is more complex), there will be a lot of data which is missing, out of date, no longer needed, not in the right format etc. With more and more users of the data, it’s also likely to have many different requirements. As part of a financial transformation, which many companies are undergoing as they move from on-premise solutions to cloud-based solutions, it's a great time to clean up the master data.

Where are the landmines for tax during a master data cleanup?

1. Not being involved or not asserting tax requirements. Tax is often underrepresented despite the potential impact on both the bottom line and the reputation of a company when tax compliance falls short.  Too many times, we’ve seen that decisions around master data are made without any regard to tax or limited regard (only considering what the HQ country requires and not considering what territories such as Brazil, India, and the EU might need).
2. Not defining a long-term maintenance program around tax master data (potentially feeding into a tax control framework). No matter how diligent the cleanup program is, the data starts to degrade immediately if there are no attempts to maintain it.  For tax master data, the important things are to perform periodic batch checks on existing master data and real-time checks as new data is created. This is especially important for B2B operations and marketplaces.
3. The defined structures are not flexible enough to allow for changes, local country requirements, and global language support. As topics like OECD’s data sharing, the EU’s ViDA and local country requirements continue to expand, more and more information is going to be needed. A great example, do you think C2C marketplaces define the date of birth in their required data fields for seller onboarding? Probably not, but now it's required for platforms obligated to report under DAC7 regulations in the EU.

Why is tax master data management such a hot topic?

There are a few reasons, but it begins with the fact that organizations and governments alike have finally realized the value of data and are all moving towards being “data-driven”. The only thing holding us back is that existing (legacy) data technologies cannot keep up with the new demands. Data technology and literacy are accelerating, and we are undergoing a data revolution. For in-house tax professionals, the main triggers are coming from a few places:

• Tax authorities are getting smarter. Tax authorities are asking for more data, are able to inspect and consolidate data across sources and have an expectation around the completeness and accuracy of data reported. Moreover, more and more authorities are asking for this in (near) real-time.
• Real-time (or near real-time) digital reporting is expanding quicker than expected, and (unfortunately) the quality of data matters. Digital reporting or e-Invoicing is about submitting accurate transaction and master data to the government as part of transaction processing. This means that not only does the transaction need to have accurate data, but the calculation of tax should also be accurate. Invoices which don’t meet the validation requirements are rejected, resulting in delayed customer billing or vendor payment and human intervention, both of which are costly to an organization.
• The role of the tax department is changing and requires skills more advanced than a spreadsheet tool like Excel. As data operations mature within your organization, the accessibility of data means manual data extraction and processing should become easier but also means that the tax department needs to harness the data using newer technologies.
• Expanding tax liabilities, especially for companies supplying digital goods and services. Without an understanding of who you are doing business with and their tax profile, your business cannot determine its own liability - especially for cross-border digital goods and services. If you are working in one of the fast-growing digital companies, your rapidly expanding global customer base is creating potential liabilities in countries around the world. In order to analyze the liability, you first need to know: is your customer a VAT-registered business or not?

This feels all very manual - where does technology fit in? How can Fonoa help?

For tax master data in respect of your business partners, you need to do the following:

1. Validate the data you do have.
2. Fill the gaps in the data
3. Maintain the master data going forward

There are a number of solutions on the market, but none are able to meet all three requirements in the way that Fonoa global tax ID validation solution can.

Instantly validate tax master data in well over 100 countries around the world. For cleanup, you would use the batch upload solution, which can check up to 50,000 tax IDs in one upload.

For filling gaps, Fonoa just launched a search-by-name solution whereby providing customer information to the portal will allow you to search for potential VAT ID matches so you can quickly determine which of your customers might be business customers.

For maintenance, you can either use an API, a batch process or both. Many companies deploy a periodic batch process which validates existing master data while using a direct connection to the master data creation within the ERP, eCommerce or marketplace onboarding allowing immediate confirmation of the tax status of your partner.

How can technology help with Tax Master Data Management?

There are a number of solutions on the market, but none are able to meet all requirements in the way that Fonoa can.

Contact Fonoa