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The surprising ways governments and tech companies are working together to close tax loopholes and promote compliance

Historically, there has been long-standing friction between governments and businesses due to complexities within outdated tax laws and compliance processes. As a result, businesses face many obstacles and take on additional costs as they look to grow and expand, while governments fail to collect the true taxes owed, hurting their ability to effectively serve their community.

As the world continues to digitise, tax regulators see an opportunity for more efficient, automated tax collection. Businesses can also understand the potential benefits of this due to the cost effectiveness of tax automation.

While both sides agree that this digital revolution is inexorable, governments simply don’t have the digital tools and resources necessary to meet their goals of closing tax loopholes, further enforcing tax compliance, and making the shift toward real-time, detailed tax reporting and electronic invoicing. Therefore, governments worldwide are turning to technology companies to assist them in validating and authorising data submitted by businesses, ensuring that information is in the correct formats and removing some of this legwork from themselves.

The National Superintendence of Tax Administration (SUNAT) in Peru took a similar approach recently when it announced that select technology providers – termed operators of electronic services (OSEs) ­– will now be in charge of validating and authorising all invoices submitted by Peruvian companies.

More than 53,000 companies in Peru utilise electronic invoices to comply with tax rules in real time, but the SUNAT’s goal is to enroll 90,000 more small and medium-sized companies in e-invoice compliance by 2018. In order to make the transition as smooth as possible, the SUNAT recognised it would need the assistance of the OSEs to lead this charge and help take the burden off the government. In doing so, the entire process of invoice and tax reporting will be more effective and efficient. While this initiative has just recently kicked off in Peru, it is expected that the new process will assist in closing long-standing tax loopholes.

Another example of this strategy is being executed in the US, and occurred after the Colorado Office of the State Auditor found that the Colorado Department of Revenue did not register more than 11,000 retail business sites to the proper local sales and use tax jurisdictions, resulting in misclassifications and inaccurate tax collections. This caused about $3.3 million in over-collections and $3.8 million in under-collections during one full calendar year. To address these issues, the Department of Revenue (DOR) announced it would certify select sales and use tax compliance vendors to ensure businesses calculate tax liabilities accurately and reduce the resources they are spending on compliance.

Dual benefits

The benefits of this type of approach are twofold. Through this partnership, the DOR was able to work with one of the state’s strongest software and technology companies to develop a geographic-information system that automatically ensured businesses were properly registered to the applicable local tax jurisdictions. Moving forward, this will enable the DOR to improve performance and provide better service to Colorado  taxpayers. For businesses, the partnership allows them to focus more of their efforts and resources on driving business growth, rather than determining whether or not they are complaint with the complex sales and use tax laws in the state.

With the rapid pace of globalisation, businesses can and should expect to see more governments adapting new technology-driven processes to curb tax evasion. As such, 60% of manufacturers and nearly 50% of retailers believe audit frequency will continue to increase over the next 3-5 years, according to an Aberdeen report commissioned by Sovos.

But what exactly does this mean for businesses? First, it means increased transparency, as governments will have access to company records like never before, allowing them to drive deep into a company’s finances and operations. Businesses – particularly multinational companies – can also expect improved efficiency. Since many companies today operate in more than one country – each with its own mandates and tax reporting regulations – tax reporting is a huge undertaking and burden. Working through a designated vendor, such as an OSE, gives companies access to a holistic solution for almost-always accurate regulatory analysis on one platform.

In order to prepare for this change, businesses should start by centralising tax compliance to ensure they have a full view of their risk and liabilities and a global source of truth. They should also seek to automate tax processes when possible, which will help to improve accuracy and make the transition to tech-based solutions easier. In addition, companies must stay up to date on the latest trends and changes in tax regulations to ensure they can proactively adapt to what’s ahead.

A trend to watch

While this trend of governments and tech companies working together has been slow to start, it will dominate in the years to come. There are other large government entities – including Massachusetts and Colombia’s tax administration ­– considering similar processes.

Not only does this approach raise the bar and strengthen relationships between governments and tech companies, it also benefits businesses, offering them greater speed, security and scalability while ensuring they stay compliant.

This article was prepared by Alfredo Guardiola, CEO of Paperless by Sovos

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