Separating the champions from the crawlers: what really drives indirect tax compliance?

Business today looks a lot different than it did 20 years ago.

We have waved goodbye to dial-up internet, and slow, bulky desktop computers, and embraced a new era in technology – the latter end of what is often called the ‘information age’, where (almost) everything is online, portable, and available within a matter of clicks.

It is a world that continues to evolve rapidly. Many businesses today are still getting to grips with the likes of automation, edge computing, and the internet of things in a bid to drive efficiencies and improve processes. And some are even looking ahead to new, emerging technologies, such as generative AI.

Several factors have acted as catalysts for this change. The onset of COVID is an obvious one, bringing with it a shift to remote working, and widespread adoption of digital technologies, from cloud services to virtual communications.

And for tax teams, the proliferation of digital technologies has had a big impact, too. For a start, tax authorities across the globe are increasingly turning to technology in an attempt to close their ‘VAT gaps’. This should come as no surprise. EU countries lost an estimated €61 billion in VAT revenue in 2021 according to the VAT Gap Report 2023, and just recently, the UK reportedly fumbled a whopping £2 billion in unpaid ‘big tech’ tax due to lack of transparency, creating a real urgency to repatriate these misplaced funds.

What is more, this digital world has facilitated a fundamental shift from country-centric economies to a global business arena, powered in large by the likes of digital shopping experiences, e-commerce, and social media. Businesses are selling goods and services overseas more than ever before, including new digital offerings, such as on-demand content, subscriptions, and even NFTs.

It is great news from a sales revenue perspective, but for tax teams, these digital products and services come with their own unique tax regulations, as well as the platforms and online marketplaces they are being sold on, further contributing to the intricacies of indirect tax calculation and compliance.

With cross-border trade now the norm, and many EU countries mandating the likes of real-time reporting and e-invoicing to hold businesses more accountable, tax teams should be looking at ways to balance global expansion with compliance. Vertex, the tax technology solution provider, wanted to find out if this was the case, and learn more about how tax teams are adapting their VAT function to align with these ever-evolving (digital) compliance challenges.

Vertex recently gathered insights from 580 individuals around the world, who have an influence on indirect tax decisions within their organisation, for its latest report, Compliance’s complexity: Attitudes and barriers to getting it right in indirect tax. The respondents all represented organisations with an annual turnover of at least $50 million, spanning Benelux, the Nordics, Germany, Austria, Switzerland, Spain, France, Italy, the UK, Ireland, and the US.

While you would expect external forces, such as changing tax regulations for cross-border trade and increased governmental compliance pressures, to translate into more rigid indirect tax controls for businesses, Vertex’s research has painted a slightly different picture.

Of the global respondents, 74% described their organisation’s attitude to indirect tax compliance as risk prone, with only 16% describing themselves as risk averse. From an audit perspective, 62% said their organisation had been found to be publicly non-compliant in the past regarding indirect tax, and a staggering 75% of respondents said the same for internal non-compliance.

To better understand these attitudes towards compliance, and their key roadblocks and challenges, Vertex asked them to self-identify as:

• A champion – who believes they are protected and future-proofed with regard to indirect tax, armed with an efficient, technology-led approach to managing their responsibilities;

• A calculator – who believes they have a decent indirect tax compliance strategy implemented within their organisation, and are therefore willing to take some risks;

• A chancer – who prefers to power through and pay little attention to indirect tax, as ignorance is bliss and you “cannot fear what you don’t understand”; or

• A crawler – who believes indirect tax compliance is slowing down their business and stunting their ambitions for growth, due to the overwhelming amount of indirect tax rules and regulations they have to contend with from country to country.

On a global level, 19% of the businesses surveyed classified themselves as ‘crawlers’, and 10% said they were ‘chancers’, placing a serious portion of global respondents in a risk-prone category.

When Vertex looked at the unique challenges of selling cross-border, it is easy to see why. There are more than 80 jurisdictions worldwide applying their own unique indirect tax rates at destination, meaning businesses must charge the tax rate of their customer’s country, and account for that tax with the relevant domestic tax administration. When this is taken into consideration – along with different tax registration thresholds, foreign exchange rates, and invoice and other local compliance requirements – it can be seen just how big an undertaking this can be for tax teams without the necessary support in place.

That said, there is still a large proportion of businesses (35%) globally that consider themselves compliance ‘champions’.

So, what are the key drivers separating the crawlers from the champions? If you look at country comparisons, you can start to uncover some of these.

Across Southern Europe, for example, a large proportion (38%) of businesses consider themselves to be ‘champions’, followed closely by ‘calculators’ (29%), indicating that they take a measured approach to managing their indirect tax compliance. The majority (61%) of respondents in this region whose companies were found to be non-compliant said this was financially material for their organisation, which is likely why they are more careful to avoid future risks. Frequent changes to EU VAT rates during the pandemic, and new e-invoicing and real-time reporting mandates may also be driving this cautious approach.

In other European countries and regions, many respondents claim their organisation has a solid indirect tax strategy, with an acceptable level of risk, such as in Benelux (46%) and Germany (39%). Similarly, across the pond in the US, 43% say their organisation is a ‘champion’, equipped to tackle indirect tax compliance head on with an efficient, technology-led approach.

This is in stark contrast to the UK and Ireland, where 25% deemed themselves to be ‘crawlers’, and 72% describe their business as being risk prone. A lack of the right internal skills and talent, to address current indirect tax challenges, may be one factor holding the crawler organisations back. Over a third (36%) of UK respondents identify this as a critical gap to achieving compliance.

When considering the global playing field, skills are clearly an area within tax departments that require attention and investment across the board – listed as one of the top ‘gaps’ (or barriers) to achieving indirect tax compliance.

This has likely been sparked by the need for new, digital skills within tax departments in recent years. ERP integrations and selling to a global customer base have changed how tax teams engage with technology, and the scope of IT systems has changed to accommodate these global sales. One example of this is ERP systems, which are increasingly globally integrated to meet global requirements and offer centralised insights for finance and tax teams.

As a result, 47% of the global tax decision-makers surveyed said they have centralised controls in place for their compliance operations. Having centralised systems provides a great opportunity to standardise business processes, automate indirect tax calculations, and improve data accuracy, but it has also created a global technology skills gap within tax teams that must be addressed to improve compliance.

However, the arrival of technology has also been a force for good for tax departments, as having an end-to-end, streamlined process to automate indirect tax calculation has become key. A tax engine – with its ability to accurately determine VAT on sales and procurement transactions, and provide the latest content on indirect tax worldwide – can significantly reduce the risk of non-compliance. So much so that 74% of global tax decision-makers said having the correct tax engine technology in place is the most important factor to achieving indirect tax compliance, and one in five agreed that their indirect tax compliance strategy needs a key focus on specialist tax technology.

It is an area that some regions have championed, with 46% of US respondents claiming that the implementation of specialist tax technology has made maintaining compliance easier for them, and 81% claiming they are well equipped to handle changing tax regulations and digitalisation.

It is clear that compliance will continue to be a key challenge for tax departments. With the myriad of tax rules and regulations around the world that businesses must comply with, paired with the doubling down of tax authorities to repatriate lost VAT revenue, a ‘tax transformation’ is needed for many organisations to restructure their tax function and review their controls and systems to stay compliant.

To achieve this, more and more organisations are turning to technology to avoid costly fines in the event of an audit, and reputational damage, if found to be non-compliant. However, to usher in this new wave of centralised controls and tax technology, they must also be willing to invest more in the skills and development of their tax teams, specifically around IT and data analysis.

The future does look promising, though. In the UK, 56% believe their organisation will become more compliant with indirect tax by 2030.

To learn more and explore Vertex’s latest findings on global indirect tax compliance, download your copy of its latest report – Compliance’s complexity: Attitudes and barriers to getting it right in indirect tax – here.