The Era of Real-Time Compliance

Ensuring compliance with tax laws to governments through periodic tax filings is, arguably, the single most important deliverable for tax teams worldwide. Without compliance, all business comes to a halt. Admittedly, in some jurisdictions, it is faster than in others. That is why tax compliance naturally aligns with the CFO’s broader goals of risk management, control, and predictability.

However, tax compliance requirements globally are rapidly shifting as we enter the era of real-time compliance.

Tax to Date

For decades, tax processes have followed a cyclical pattern: plan, execute, record, reconcile, pay, and report periodically to governments. Governments, in turn, would review these filings and select companies for further scrutiny through tax audits (the field of tax controversy). For the typical small in-house tax team, this process is challenging as it is.

Two additional factors played a role:

1. Periodic reporting: data often reaches governments sometimes after a taxable event (sale, purchase, movement of goods) occurs. Typically, a month, a quarter or a year. This “lag” allowed tax departments to make the necessary.
2. Detection risk: transaction errors were not easy to identify because transaction-level reporting of data was not common. Again this allows some unintentional mistakes to slip past unnoticed.

From a government point of view, they were receiving data late, with errors that were hard to spot. Coupled with bad actors (e.g., fraudsters) in the economy, this was a recipe for disaster. Actually, that particular recipe has a name—the Tax Gap.

No more.

Tax Going Forward

A major shift is underway as the tax landscape enters a new phase, driven by government legislation, the digitalization of the economy, the abundance of data, technological advancements, and the need for governments globally to increase tax revenue.

Put bluntly, governments want more granular data, faster.

This new phase emphasizes companies having 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.

Countries have already demonstrated significant budgetary success with real-time tax data reporting mandates.

Mexico: The introduction of e-invoicing in 2014 (adding to the real-time reporting obligations in force since 2004) saw non-compliance rates slashed from 29.08% in 2014 to 16.04% in 2016. The Inter-American Center of Tax Administration also reported in 2020 that while the Mexican economy grew by 75% in the last two decades, tax collection grew by more than twice that number—by 172%.

Spain: For the first year the real-time reporting regime was introduced (Summinsitro Immediato de Informacion or “SII in July 2017”), the authorities reported that activities subject to VAT increased by 6.5% while the VAT revenue increased by 9.1%. Moreover, the Spanish Tax Agency estimates that in addition to being instrumental in combating VAT fraud, the SII caused a significant reduction in costs for the tax administration.

European Union: In 2023, the European Commission reported that the overall EU VAT gap decreased by around €38 billion—from €99 billion in 2020 to €61 billion in 2021—an unprecedented improvement from previous years. The commission noted that while the COVID-19 pandemic may have temporarily contributed to the drop, the introduction of e-invoicing and digital reporting is central to the success story.

That is why it is no surprise to see fast global adoption of more real-time data reporting obligations by countries around the world.

Every major country is expected to introduce some form of real-time tax data reporting in the coming years, quickly making real-time reporting the new norm. The question is, therefore, not if but when countries introduce their rules and in what quirky and ‘unique’ way. Unfortunately, there is no harmonization of rules and reporting systems.

Implications for Tax Professionals

The shift from periodic to real-time has profound implications for businesses, particularly for tax functions. The real-time nature of these new reporting rules makes manual processes impossible. No matter how many resources you deploy, you cannot achieve real-time compliance manually.

This means that automation through tax technology will become a key strategic theme in tax, finance, and overall business for all companies with a global footprint.

This sentiment was echoed in discussions with senior tax professionals at leading tech companies, including Airbnb, Booking.com, Google, Meta, and Uber (links to webinars at the end of this article).

While the trend to real-time tax compliance drives automation, automation is only possible and predicated on having complete and accurate tax data. Put differently; tax is quickly moving from a risk management area with various “shades of gray” towards a complete binary system where you either are or aren’t compliant.

Collaboration Across Functions

The move to real-time reporting, high dependence on technology, and impact on wider business practices mean the Tax function has to become a true cross-functional domain with close collaboration between Finance, Tax, and IT/Engineering departments.

A tax professional cannot automate without IT's help, and a developer cannot know what to develop without input from Tax. It’s a new symbiotic relationship between different functions that was never required before.

Tax professionals must now take on a strategic role in identifying, analyzing, and predicting tax data requirements globally to avoid business disruptions. Not being able to receive and pay invoices or generate invoices for sales can quickly destroy even the best of businesses. Real-time compliance checks by tax authorities mean there is no room for after-the-fact clean-ups or phased approaches to compliance, either.

The Path Forward

In this new and quickly evolving tax landscape, indirect tax and compliance processes have to become low to no-touch processes, which is far from today’s practice in most global companies. Most companies will need a redesign of all data flows and processes.

Practically, this means the cross-functional groups within global companies responsible for complying with real-time transactional data reporting need to quickly adapt and gain new skills that exceed their traditional backgrounds. For example, Tax technologists and Tax PMs are a quickly emerging new breed in the world’s leading companies, for good reasons.

Empowering Tax Professionals

As former in-house tax professionals, we recognize these challenges firsthand. That's why we started our mission to create tax technology for the future. Ready for modern global businesses.

We believe businesses and cross-functional teams dealing with tax need a global platform that covers the entire transactional lifecycle and indirect tax processes. We place a great emphasis on fast and simple integration, ease of use, smooth collaboration, and advanced analytics.

Perhaps most importantly, a solution built upon a single, easily accessible source of truth: complete and accurate Tax Data. Data is the main cornerstone of tax going forward, the condition sine qua non for tax compliance and adding business value.

Practical Guides, Tools and Solutions

Driving change within large companies can be hard. But new legislation is quickly dictating the pace. To help in-house tax teams, we've developed practical guides and resources. Drawing on our experiences, we offer pragmatic solutions, tools, and insights aimed at unlocking the full potential of tax functions to add tangible business value.

In the era of real-time compliance, embracing automation, collaboration, and innovation is not just a choice but a necessity for tax teams looking to thrive in today’s tax landscape.

Resources

• Webinars: if you are keen to learn more about how senior leaders at some of the best-known multinationals think about the future of real-time reporting, data, and compliance check out these resources:
  • The Era of Real-Time Compliance: Building a Future-Proof Tax Function, with Erich Tschopp (AirBnB) and our friends at Thought Leader Global
  • In-House Strategies for Indirect Tax Compliance, with Liz Gallagher (Meta) and Stef van Heugten (Adyen)
• 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.
• Fonoa Master Data: This page explains the master data requirements for e-invoicing and digital reporting in each country. It is incredibly helpful to check what additional work is required from a data standpoint to launch an additional country. The Fonoa Master Data is accessible by clients only, but if you want to know how we support our clients and what resources we offer, reach out to our teams today.