Getting tax data right with compliance by design
Tax technology solutions for real-time reporting and analytics
Many tax teams spend the bulk of their time dealing with tax data — finding it, correcting it, reconciling it and formatting it for tax reporting and other compliance needs. But processes like these are under rising pressure as tax authorities demand more tax data, in greater detail, and ever closer to real time.
Now, advancing technologies offer tax teams opportunities take a powerful new approach to their tax data. With compliance by design, organizations can ensure their systems and data management solutions deliver tax data that’s right the first time, vastly improving the efficiency and accuracy of tax compliance processes while delivering the high-quality, highly detailed transactional tax data that tax authorities increasingly require.
Rising demand for detailed tax data
Indeed, over the last years, tax authority demands for detailed digital data have grown extensively worldwide. More and more countries are requiring the electronic submission of detailed transactional data. In many Latin American countries, such as Mexico, tax authorities have set up e-invoice systems for indirect taxes that require transactions to be validated by and reported to the tax authorities in real time. This trend is already being seen in several Asia-Pacific jurisdictions and some countries in Europe as well.
Many tax authorities are also investing more and more in data mining and other analytic techniques to test data accuracy, verify tax compliance, and discover tax compliance patterns across businesses and industries. With an increasing number of jurisdictions imposing Standard Audit File for Tax (SAF-T) reporting requirements for indirect and other taxes, it seems predictions about the impending death of the tax return could be on the mark.
Whereas before, tax teams could examine and, if needed, correct data before reporting it on tax returns, now an increasing number of tax authorities are receiving that data directly in real time. This means tax authorities may have eyes on your organization’s tax data at the same time as your tax team does, and they will assess your organization’s tax compliance on that basis. Tax data quality and data governance are becoming much more important as a result.
Intensifying tax data challenges
However, many organizations that have not yet invested in digitalizing their tax data processes struggle to produce the right tax data at the end of monthly, quarterly or other reporting cycles. As tax authorities step up their tax data reporting requirements, we expect these challenges to intensify for a number of reasons:
- Growing volumes of data: For indirect and other transactional taxes, the amount of data that is generated and stored increases daily. Many organizations have difficulty aggregating, managing and creating value from all that data without getting overwhelmed by it.
- Data quality: The need to make manual corrections often points to problems with quality of data produced by an organization’s systems. Incorrect data often results from a lack of data ownership and the sharing of data across multiple departments, such as finance, procurement and sales. Inconsistencies, duplication and other data quality issues can also arise when data is extracted from disparate sources.
- Access to data: Tax functions often only have access to a fixed set of reports and have challenges to get access to all relevant tax data, creating dependencies on the IT department when additional data is required. When additional data is made available, it often comes in separate reports that needs to be reconciled.
- Lack of data management technology: Many organizations use spreadsheet tools to store and work with data, which is easy to use and flexible but lacks the more sophisticated capabilities that new tax technologies can bring. These technologies allow organizations to work more efficiently with big data volumes and automate many routine data management activities.
Compliance by design can go a long way towards solving these problems. Rather than spending time chasing and cleansing data after the fact, data management solutions can be designed to satisfy tax compliance needs in mind right at the outset. By building standardized, automated tax data processes and controls into company-wide, end-to-end data management frameworks — often leveraging broader finance transformation investments — tax teams can get the right tax data in the right format when they need it, with little need for re-calculations, corrections, reconciliations or manual intervention.
Benefits beyond better compliance
The potential benefits of this approach go beyond more efficient, timely and accurate compliance. The ability to produce and analyze transaction data on a company-wide basis can enable more strategic tax decisions and capture opportunities that you might not otherwise identify. For example:
- Reducing errors can eliminate the need for amendments and recovery claims, which can generate significant cash flow savings.
- Easier access to organization-wide tax data can facilitate quicker responses to questions from management, other internal functions, tax authorities and other stakeholders.
- The same tax data can be reused across different tax specialties, such as indirect tax, corporate income tax and transfer pricing, eliminating duplicated efforts and creating synergies.
- A global view of transactions can help tax teams spot problems in their supply chains and identify opportunities to derive more value.
- With standardized, common tax processes across operating companies, businesses can benchmark their control and performance, and open global visibility of total tax throughput and contributions.
- Having a single, tightly controlled set of tax data globally allows your organization to demonstrate good tax governance and mitigate reputational risk arising from tax transparency measures in the jurisdictions your business operates in.
While these are important benefits to busy tax functions seeking to add more value as partners to the business, compliance by design is typically not a tax-specific initiative. Usually, it comes as part of a broader finance and IT transformation to upgrade or replace enterprise resource planning (ERP) or other key systems — and only then after the tax function has contributed to the broader business case for investing in technology tools that enable quicker, more proactive financial reporting.
There’s little doubt that the business case for investing in compliance by design is a strong one. Major ERP migrations and other organization-wide digital transformations bring new capabilities, and opportunities can be missed if existing tax processes, controls and templates are merely ported to the new system. When major new IT investments are being made, tax teams should take their place at the design table so the organization can leverage these investments to build a better tax data foundation, strengthen their analytic capabilities, elevate their tax function’s value and reduce their overall cost of compliance.