At the end of 2020, the OECD published a keystone discussion paper outlining its vision of a digital future in tax administration. This document sets out a new model of tax administration needed to reflect the increasing digitalisation of commerce, business administration, and society.
In this new world, tax administration systems work seamlessly across tax authority and business boundaries to ensure the correct tax is paid on time, every time – through real-time, data-driven tax compliance. Systems become tax-compliant by design, and taxation becomes a more seamless, frictionless process over time.
The biggest shift foreseen is a move away from the current approach of ensuring tax compliance ‘after the event’ – with filings and payments typically made many months, or even years, after the relevant transactions have occurred, and frequently followed up with costly and time-consuming audits or investigations. Instead, the OECD sees tax processes – and compliance – moving ever closer to the actual transactions themselves and inhabiting the ‘natural systems’ that taxpayer businesses use day to day.
For most enterprises, this will mean implementing tax administration and compliance within their own enterprise resource planning (ERP) systems, where most transactions are handled. The integration of tax rules into ERP systems is vital to maximise flexibility and agility and avoid being locked into outdated solutions.
The big question is: how should businesses and their ERP vendors go about preparing for this ‘tax administration 3.0’ future?
ERP transformation needs tax experts
It is often tempting to think of tax digitalisation as a challenge that IT technologists alone can easily solve, given the right input data and the correct rules. However, the global tax accounting and compliance picture is a very complex one. Rules and regulations tend to be very localised; no two countries have the same requirements for tax reporting and compliance. In a world where even small and mid-size enterprises can do business around the globe in-house local tax expertise for every single market is a very rare commodity. For companies with no or low physical presence in a particular jurisdiction, tax localisation is very difficult without access to local knowledge.
As tax compliance moves upstream, closer to the point where transactions originally take place, tax data is much greater in volume and less sanitised than the highly prepared tax data that is included in final submissions to tax authorities today. Companies do not have time to check data at month-end; if the input is wrong, the submission is wrong, with the potential for fines and penalties down the line. That is why it is so important to have the right configuration in the ERP systems from the outset.
This implies a greater focus on validating and accrediting the ERP systems themselves rather than the data being submitted. At the same time, if submissions are incorrect, companies may see increased tax audit notices and will have to respond to incoming inquiries in an efficient and timely way.
Tax authorities that have started to move towards real- or near-real-time data submissions tend to ‘layer’ new data submission requirements on top of each other. For example, the past few years have seen Brazil rapidly increase the regular data submissions that companies must make. Today, Brazilian companies must comply with 29 submission requirements, many of them monthly.
If the future vision of automated systems taking in complex and sensitive datasets to calculate tax liability in real time is to be realised, tax experts with localised knowledge and expertise need to be deeply involved in the design of the systems from the outset – and be on hand when rules change over time. Companies will need to be highly agile in their respond to changes in local accounting and tax rules.
This means tax experts with an understanding of technology will need to be involved in the ongoing development, configuration, maintenance, and assurance of ERP systems. It is also important that tax professionals with good project management and stakeholder management skills are involved in the ERP projects.
The time to localise is now
Perhaps the biggest step companies can take towards ensuring their systems are ready for the ‘tax administration 3.0’ future is to implement tax localisation during ERP upgrade or transformation projects.
The goal is for tax to be an integrated part of the central ‘global’ ERP, and not calculated and reported in separate systems. For businesses, compliance-by-design and automation of tax submissions in ERP systems promise seamless, frictionless dealings with tax authorities, as well as potential step-change reductions in compliance costs.
However, tax has not historically been part of end-to-end business process and systems design in most companies. According to a European tax technology survey by Thomson Reuters, 61% of enterprises do not have tax technology specialists in their organisation.
Tax has often been covered within the finance process workstream, leading to a ‘lift and shift’ type approach to ERP transformation. Tax processes are simply copied from the legacy environment into the new ERP system, increasing the risk that relevant tax requirements are not fully considered, and that global tax compliance and reporting obligations may not be met.
It is vital that companies involve tax professionals in the configuration of domestic and international rules into the ERP systems, the identification of possible compliance issues and in dealing with more complex cases.
Tax professionals and localisation experts bring essential knowledge of both domestic and international rules, and how to embed these to ERP solutions. They can translate tax rules into instructions to ERP implementation companies, which can be incorporated into the different ERP systems used by businesses and can validate the results. They can find workaround solutions and assist with the testing and validation of ERP systems to ensure the setup follows local requirements. They can also document ERP taxation processes and provide tax compliance training on the ERP systems tailored to company needs.
It is important for companies to start planning their ERP localisation exercises, as they will likely require reskilling initiatives, upskilling for existing professionals, making new hires within the business, or hiring external consultants.
Cloud-based ERP solutions smooth the way
Cloud-based ERP solutions offer significant benefits in terms of data management for tax administration, as well as reducing complexity and implementation costs for many companies – although localisation is still required.
As they offer a centralised, uniform approach from the outset cloud-based ERP systems offer an opportunity to structure and standardise data and promise a single source of truth for tax submissions. This will save time for tax departments, which currently spend significant amounts of time manually cleaning data for various tax processes. This should free the tax team to spend more time on analytics, scenario planning, and providing value-added input to the business.
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