Indirect tax regimes have led the way in digitalising tax compliance processes, such as e-invoicing requirements, real-time reporting, SAF-T, and much more. As digital tax compliance expands into wider corporate tax and transfer pricing areas, direct tax teams are using the experience of their indirect tax colleagues as they transform their tax processes.
Direct tax teams are “having a rude awakening” on digitalisation, said one indirect tax associate director at a multinational pharmaceutical company. “The difference between the indirect tax functions and the rest of the tax function, from a digitalisation point of view, is that we're generally at the forefront of it.”
The associate director added that direct tax teams have “come on our coattails… to replicate the relationship we have with the IT function”.
The reporting requirements of direct and indirect tax are different, but the introduction of country-by-country reporting (CbCR) and the need to extract data, the European Union’s directive on administrative cooperation (DAC6), digital audits, and other global measures, mean direct tax teams cannot wait much longer to utilise tax technology.
As with all transformation projects, the challenges of gaining budget, stakeholder buy-in and finding the right solutions remain. At a roundtable held by ITR, in association with Thomson Reuters, indirect tax leaders shared their experiences.
COVID-19 could restrict tax technology advancements
Although indirect tax teams have been among the first to switch to digital practices, many are still on their transformation journeys.
Jeroen van Asch, who works on Thomson Reuters’ ONESOURCE tax solutions, said indirect tax managers find it tough to stay ahead of local and global regulations.
“Everybody is quite involved in the in the day-to-day activities, really trying to manage what is around the corner in six months, 12 months or 18 months. This is quite challenging. We also see that authorities are demanding not only more information, but also more frequently,” said van Asch.
In Spain, where the VAT reporting system, Suministro Inmediato de Información (SII), was introduced in 2017, there have been numerous amendments to the regime. In October 2020, significant changes were announced to the regime that will require additional information from January 2021 and include more data checks.
In Norway, where SAF-T became compulsory in January 2020, a large amount of information has to be submitted, with additional demands being added before an audit.
Add to this the difficulties posed by COVID-19, which has limited resources and budgets, as well as more scrutiny from boardrooms, and the squeeze on tax functions becomes noticeably tighter.
For one indirect tax team leader from a multinational industrial equipment supplier company, the economic impact of COVID risks slowing down technological advancements in the tax function. “There are other issues where the company needs to invest currently. So it concentrates on other tasks than VAT,” they said.
One European VAT Leader from the Netherlands said he finds it really hard to get visibility at the board level to be granted budget or IT resources.
“One of the biggest hurdles that we have is our IT department,” said the European VAT leader. “They are always busy with other projects that are more urgent or more important than VAT.”
“I'm using my tax director as a wedge to get a foot in the door and it looks like we might be getting some traction right now, but it is really hard,” added the VAT leader.
Demonstrating value
A survey of more than 300 tax departments conducted by Thomson Reuters in March 2020 found that only 4% had an optimised tax department, whereas most said their departments were chaotic (25%), reactive (33%) or proactive (28%).
When the survey was repeated at ITR’s roundtable, the results showed that things have not changed in six months, meaning many companies are still relying on Excel and are struggling to become strategic partners in their business.
No matter what the business sector, indirect tax leaders say demonstrating the value and return on investment is essential to getting the buy-in required from the boardroom and IT department.
“You need to demonstrate the value and explain VAT to a lot of people so that they understand where the risks lie, where the issues can occur, and where the penalties might be,” explained the indirect tax team leader.
“After those explanations, they are willing to decide to go with the project to set up our systems better, etc. But you need to first explain and demonstrate the value,” said the team leader.
For some indirect tax directors, their IT departments only provide support for simple requirements or small projects, but getting agreement on the more valuable projects is a challenge. However, some suggest that changing the way the conversation is framed, or pivoting from boardroom buy-in to focus on the IT department can make the difference.
“If you can demonstrate that there is value for the business and in any projects that are to be performed, whether that be FT reduction, demonstrable risk reduction or, in the best scenario, an actual cash flow or trapped VAT improvement,” then resources are often available, said the associate director.
“It changes that conversation from crying wolf all the time that the world is going to end we if we don't do X as the most important compliance project in the world, to a conversation on the return on investment, which I think was the key for us.”
The tax team has to ensure it is engaged with the IT department to show what the value of the project is upon completion across both departments and for the business.
“The important step for us over the last number of years is having a seat at the table. We're involved in the in the global IT roadmap, we sit at the IT table during budget, we have a dedicated tax budget each year within the IT roadmap,” said the associate director.
“So, for example, take transparency reporting, we have carved out a separate team within our IT department to deal with transparency reporting alone. We just roll that from country to country as we work through it, but the enabler was having the seat at the table with IT in the first instance,”
The associate director explained that the tax function has to demonstrate the value returned for the IT department, as well as the board, and ensure it is not a one-way relationship.
Three indirect tax directors suggested integrating key tax projects into annual objectives. “We all have year-end reviews, so they [the IT department] can say at the year-end review that we delivered this tax project, this is the saving out of that project,” said the associate director.
A ‘beauty contest’ of software
Finding the right software is another hurdle in the tax transformation journey, which is made more difficult by the type and structure of the business, the differences in country-specific compliance rules and the need to predict possible risks.
“We went through a beauty contest of all the relevant software available four years ago,” said one head of indirect tax from Germany. “Finally the decision was taken to develop a home-grown solution that best fits to our needs together with an external software company based in Cologne.”
For the indirect tax team leader, the use of two parallel software programs has worked well, with one that can deliver on country-specific compliance requirements and another that enables data analytics. They said the right solution requires a combination of internal software, internal development and external programs.
However, without fixing the master data, all efforts are void. “There is no point buying so-called push the button software if your underlying data is incorrect,” said the associate director.
“You’re just going to create incorrect reporting. The journey towards automation, as much as you can, does start from fixing your master data before you can move anywhere forward. Otherwise, you are just reporting the incorrect data quicker,” said the associate director.
Several users of the Thomson Reuters’ ONESOURCE solution recommended cleansing the master data for errors regularly.
“What the tax department has decided to do is not download the data on a monthly basis for the monthly return preparation, but to download this usage data on a weekly basis and send all these exception reports straight back to the [relevant] teams, where the problems are actually being caused,” said van Asch.
“This means the team leaders every Monday morning have this big Excel sheet in their email inbox with all the errors that the tax department or the software solution has found and with instruction to rectify this master data,” he said.
“That means that at the end of the month when you are preparing your return filing, hopefully during the month you have cleansed the master data and you will be able to do your returns and compliance process much quicker,” van Asch continued.
Data management is crucial to the process and the wrong data will produce the wrong results.
“If you send the wrong master data back to the teams who own this data, you’ll find that they are basically so fed up with the email on Monday morning that they actually start improving the core processes at the source and you will find that you get less wrong master data over time,” said van Asch.
Transforming the tax function to suit the digital age is not a simple or short journey for tax directors. However, many tax departments would do well to note the success and failures of their indirect tax colleagues to ensure the path is smoother for them.
