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Daily Tax Report: International

INSIGHT: Why Business Needs to Understand Digital Tax Processes

July 13, 2020, 7:00 AM

A broadening international reach is a goal for all businesses and a huge part of this is driven by digitization and information. For many companies, the scope for international reach has moved from a dream to a realistic and tangible reality—at least since they have had access to technology and logistics to aid this process. The business an organization secures is no longer limited by borders.

However, this seamless access has opened the door to some less pleasant realities of international trade. The more data businesses are generating, the more complex the analysis landscape becomes. How are finance teams expected to cope with these new volumes of information? Moving out of home territory and into unknown government trading law is an underlying issue firms often overlook. The fact is, in each government jurisdiction the tax transactions taking place and regulations around this are an ever-shifting minefield of compliance complexity.

Misunderstandings are costly in business, that much is true. For multinational businesses, there can be some serious missed opportunities where finance teams are not fully acquainted with the detail of tax law or are too time-poor to dedicate hours to unraveling complex value-added tax (VAT) regulation. Even businesses with roots firmly in one country will likely need to outsource some resources to cover international markets or supply chains; physical goods trading between organizations is only a very small piece of the financial puzzle.

The Compliance Maze

International markets are intricately connected and inherently complex. What we have seen coinciding with the adoption of new technology is an increase in new regulations and processes to manage them—and they are constantly evolving. Today, this presents significant amounts of data to sift through, making compliance particularly difficult to navigate.

For those involved with the financial and taxation tasks, these unfamiliar moving parts come in the form of tightening tax controls, digital real-time reporting and extensive auditing criteria, as governments, just the same as private businesses, look to drive benefits from new technology. These developments have gradually spread across global economies, from Latin American countries as taxation pioneers through to widespread change across the rest of the world. These government mandates signal a shift in tolerance around VAT law; in other words, stricter legislation, and compliance procedure, driven by data and edging closer to real-time.

Businesses, both domestic or international, are now expected to submit far more information in the name of transparency, and in ever-shortening windows. Every invoice, transaction and interaction needs to be meticulously logged, submitted and filed away for e-archiving regulation, alongside any reporting on a transaction-by-transaction basis.

Looking globally, Italy has region-leading real-time requirements around tax reporting and transparency, and Poland is rolling out regulations around VAT reclaiming (the new JFK format) and aiming for full e-invoicing by 2022. Finland is another country that has recently changed its invoicing regulation to try to reduce its VAT gap and access more real-time data. In Asia, India’s new continuous tax controls are still developing, which means thousands of companies that utilize India in their supply chain may suddenly face compliance challenges. In short, businesses need to be alert if they hope to avoid running into non-compliance issues wherever they or their supply chain operate in the world. More and more tax authorities now expect an x-ray view into business transactions as well as continuous and transparent dialogue, and this is only going to increase.

When it comes to reclaiming VAT, a vital subset of the overall compliance issue, there are again regional nuances to consider. Germany enforces strict claim procedures; if your country does not have a VAT mechanism, then you can recover VAT from a trip to Germany. But if you do have a VAT mechanism which does not allow cross-border reclamation by those visiting from Germany, then you are cut off. Canada also has very specific requirements for VAT reclaim, presenting hurdles for firms less familiar with operating in this area. Similarly, Ireland is reasonably strict with what it considers to be valid claims; taking hotel accommodation as an example—only very specific business processes warrant a VAT reclaim submission. There is also much associated administration to submit alongside any claim, which is time-intensive for teams to collate, and differs from country to country.

Navigating International VAT Reclamation

In the past, VAT and tax reclaim activity was generally undertaken manually by teams of finance professionals, tasked with calculating the appropriate rates for expenditure such as invoicing and expenses. Accurately logging the paper trail and storing it in the physical archives was considered best practice, and any dispute would mean looking through reports in files. Reclaiming VAT would involve combing through reports line by line for eligible items. The scale of this for large enterprises often meant that money was being lost due to time restraints.

A brief example of how a business can utilize technology in this process is described below.

Company A is a health-tech manufacturer with a global reach; accessibility and understanding of the 180 different countries’ rules and rates where the company operates is a core part of operations. The audit requirement for this number of jurisdictions is vast.

The situation the world is currently facing means there is also increasing demand for the company’s products, and it is therefore pivoting to support the Covid-19 relief efforts by manufacturing additional ventilators to meet global demand. As a result, the company has had to quadruple production of ventilators and supporting technology in recent months.

Company A therefore partnered with a VAT reclaim and compliance consultant to help manage its VAT returns and indirect tax processes, with the aim of reducing the administrative load on its finance team and digitalizing its processes. Insight into spending patterns was a key focus, together with the use of technology to make the VAT reclaim process more efficient.

For the VAT consultant to perform this analysis, access to secure data was key. Company A also implemented specialized software to support expense management: this meant that it was possible to access relevant invoice and expense data from databases in seconds.

Since the global health crisis began, travel expenses have of course reduced significantly; but in a new remote working landscape, expenses relating to home technology have increased, meaning there are still invoices to be logged and processed against a backdrop of varied and complex digital government regulations. However, the technology means it is possible to tap into data and deliver digital reports in the differing formats, keeping compliant with international tax authorities as well as analyzing comparisons with previous data sets and monitoring regulatory changes.

The challenge of being constantly in dialogue with global tax offices, interpreting the legislation and ensuring accuracy can be handled by a symbiotic partner network, considerably easing the pressure on employees, and allowing them to think more strategically.

Automation: Moving the Needle

In-depth market knowledge and rich data is the core to successfully navigating the world of digital tax. The key to unlocking the potential profit from VAT claims is to fully understand each differing tax jurisdiction’s compliance regulations.

Managing these complexities involves working with local partners to understand each specific requirement—because each tax regime and auditor team operates differently, with different expectations.

Working in tandem, an ecosystem of data-sharing is crucial for aligning with tax compliance standards across the globe. In practical terms, streamlining tax processes involves logging data accurately and meticulously; this is why businesses must stress the importance of digitally archiving expenses and invoices. Missing and misplaced information can reduce the chances of negotiating tax reclaim on international expenditure.

Looking to the Future

Digital transformation has now enhanced the way enterprises engage with tax authorities across the world. Technology is the driving force behind the monumental shifts occurring and much of what we view as arduous, complex administrative work would benefit from being underpinned by compliance technologies.

For corporations to run at their best, a constant data flow from an ecosystem of like-minded businesses is key. Through this approach, there is an opportunity to turn digital tax regulation from a burden to insight that can benefit organizations now and in the future.

Joe Healy is Director of Strategic Partnerships, Taxback International; Martin Leonard is Director of Business Development, FSI, EMEA, SAP Concur; and Joe Power is EMEA VAT Director, Medtronic.

The authors may be contacted at: jhealy@taxbackinternational.com; martin.leonard@sap.com

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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