A new digital era for revenue authorities

December 14, 2017

For the past couple of years, many commentators have used the term “disruption,” sometimes without much forethought, writes Carolyn Bailey, Americas digital tax administration services leader at EY. It sells newspapers, magazines and journals, and it attracts television viewers.

Disruption is the corporate buzzword of the week – but what does it mean for taxpayers?

In most cases, though, observers detail the opportunities ascribed to disruption, not the underlying challenges. They talk of growing market share; getting to market sooner; and developing new tools, products and offerings. That's great, but it's only one side of the coin. The challenges of disruption in the tax world are becoming more and more apparent. Taxpayers are hit especially hard as they struggle to keep up with voluminous, fast-paced and inconsistently designed changes – on both the tax policy and tax administration fronts.

Tax administration disruption begins

Many countries are implementing new data submission and electronic auditing requirements, creating a whole new set of challenges. For starters, businesses must overcome difficulties in accessing their tax and financial data, especially when it is spread out among multiple enterprise resource planning (ERP) systems; tax processes may not support new submission requirements. Businesses must also keep abreast of new rules, understand their impact and cope with the speed of change, among other challenges.

Norway and Poland provide similar case studies of ongoing change, and they exemplify how requirements differ. Both are implementing Standard Audit File for Tax (SAF-T) electronic auditing, but we expect that they will differ in the ultimate format of each file, the submission requirements (and timing) and the types of tests that the revenue authority will run on the data. That poses a real challenge for the tax director or financial controller who is trying to devise a multi-country response.

The impacts of change are many, but one really stands out. As countries move data gathering (i.e. compliance) closer to the point where a transaction originally occurred ("moving upstream"), companies must understand that the data they are submitting may well be less "polished" than data that has been tax-sensitised, checked for errors and generally prepared for final submission. One can foresee new friction between taxpayers and taxing authorities, centred on the testing of data that hasn't been quality-checked as closely as it should be. The results? Audit notices might increase, and companies will have to respond to incoming inquiries in an efficient and timely manner, creating a litter of penalties if they fail to keep up and disagreements may arise over the amount of tax assessed. In some unfortunate cases, requests for refunds may be rejected should the taxpayer be deemed to be noncompliant in other areas.

Tax administration goes digital

As more tax administrations go digital, there are clear parallels with the Base Erosion and Profit Shifting (BEPS) project. Tax authority digitalisation seeks to crack down on evasion and fraud. All governments have essentially the same set of overarching goals (to collect more tax and to collect it more efficiently). There are some standards, such as the SAF-T requirements from the OECD, which are gaining traction in Europe. But design and implementation generally occur at the national level, resulting in numerous differences.

What does the future look like?

The tax administration model of yesterday is going. Today, you must be prepared to supply new, accurate and quality-checked data on demand, monthly, quarterly or on a mix of all these schedules. Bid farewell to the once-yearly process of submitting a finely polished set of numbers. Some governments now expect data in real time or near real time.

As a result, digitalisation is accelerating the timing of tax reporting and filing obligations for businesses, upping the pressure on data governance, availability and quality, as well as refocusing controversy professionals on "digital audit defence".

Tax administrations – because of both the pressure to perform and enhanced collaboration via the OECD forum – are outpacing business in going digital. That's a big risk for a company that may already be struggling to comply.

Unfortunately, the pace of change is only likely to increase in the short and medium terms. Many tax authorities are examining how one or more blockchains could sit as the heart of tax administration. Data analytics is becoming more commonplace. Artificial intelligence is rapidly rising up the agenda. And many countries are studying the feasibility of creating direct access into company ERP systems. That's a highly challenging proposition, in terms of not only data assurance but also cybersecurity.

Coordination within the tax authority is a good thing, but it is only one vital dimension. Collaboration with the developers of new and disruptive technology, as well as the taxpayers using it, is also essential. And that's where tax authorities must strive to bring business with them on the journey.

It's a massive, transformative change that is bigger than any single stakeholder.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.