In light of recent challenges to multilateral cooperation, global corporations, individual countries and tax administrations are striving to improve their coordination on numerous matters, including indirect taxation. One way to enhance this collaboration is through the implementation of technologies that enable the real-time – or near real-time – reporting of a company’s transaction data to tax administrations in certain jurisdictions. Hungary and Spain have already adopted real-time reporting requirements for transactions subject to value-added tax (VAT), and many more countries could soon follow. At least, that’s what one might believe from the large volume of articles and analysis extolling the rapid rise of real-time reporting.
In reality, though, the implementation of instantaneous transaction reporting has not been as widespread – nor as genuinely real-time – as initially predicted. There exists understandable resistance to this new requirement among companies, as well as plenty of confusion about the processes, technology and talent needed to make it work.
Global corporations, smaller to mid-sized companies and public sector organisations are all competing for the same tax technology talent
Hungary may have followed the lead of Spain – which implemented a near-real-time reporting system called Suministro Inmediato de Información (SII) in 2017, whereby companies digitally share VAT sales and purchase invoice data with tax administrators within four days of issuance or receipt – but several issues are slowing the adoption of similar proposals in other countries.
These obstacles must also be overcome if countries and companies are to optimise the potential benefits of real-time reporting, which include reducing a vast VAT revenue collection gap in Europe and avoiding lengthy (and disruptive) tax audits. Additionally, tax administrations will improve the processing time of exemptions, further helping revenue departments with cash flow and revenue cycle management, among other internal administration issues. Given the magnitude of the potential benefits and compliance risks, business and government leaders should develop a clear understanding of these issues and hurdles to implementation.
Not quite the real deal
Real-time reporting can help tax authorities detect suspicious transactions and uncooperative taxpayers at an early stage, as well as prevent tax avoidance and fraudulent activities. The VAT gap – the difference between expected VAT revenues and the VAT that is collected – has been the primary driver of EU countries’ interest in adopting real-time reporting requirements.
According to the European Commission’s 2019 VAT Gap in the EU-28 Member States report, the EU’s member states lost a combined €137bn ($151.5bn) in VAT revenue in 2017 due to tax fraud, tax evasion and inadequate tax collection systems (although bankruptcies, financial insolvencies and miscalculations also contributed to the gap). In the near future, the statistical data collection and analytics from combined taxpayers will provide tax administrations and revenue authorities with an improved understanding of taxpayer behaviour as it relates to compliance.
Although this shortfall has existed for years, in 2017 it finally motivated Spain to adopt its real-time reporting requirement, which has since shown positive results. According to a recent evaluation surveying a three-month period, SII covered 75 percent of the total turnover of VAT taxpayers in Spain, and the data supplied through SII matched the information given in VAT returns in 84 percent of cases. It is important to note, however, that 64,000 companies were initially obliged to join the new regime, but 10,000 companies left the monthly VAT refund regime or VAT grouping (both of which are optional) to avoid SII. Among the remaining companies within its scope, 90 percent complied with SII within the first three months of it being in effect.
While Spain’s foray into real-time reporting may have partly inspired Hungary to follow suit a year later, Hungarian tax administrators were also motivated by an exceptionally high rate of VAT fraud. Hungary’s requirements stand out because they require companies to digitally remit details on B2B sales transactions daily. Spain and Hungary’s adoption of real-time reporting requirements was widely viewed as a trend that would culminate in the adoption of similar tax reporting requirements in most, if not all, EU member states. Irish Revenue Chairman Niall Cody even recently described real-time VAT reporting as “inevitable”. To date, however, no other country has implemented such legislation.
As government leaders and business executives assess the viability and likelihood of new real-time reporting requirements, they should keep in mind several dynamics that affect how easily and cost-effectively these can be implemented. One issue to consider is that real-time reporting does not always translate to instantaneous data transfer or live-data transmission in practice.
Instead, real-time reporting rules may only require companies to submit VAT transaction data every few days, or weekly. Given that companies already collect, report and remit indirect taxes monthly in most EU countries, the actual time savings delivered via new real-time reporting requirements should be clarified and then compared to the potentially significant costs of the changes companies – as well as tax administrations – need to institute to comply.
This cost-benefit balance is crucial for businesses. If transaction data can be shared in real time (or close to it), these transactions can be immediately reviewed from an audit perspective by tax administrations. This would sniff out any inaccuracies within days of the transaction’s occurrence, enabling tax administrations and companies to resolve auditing issues at that point, rather than months or even years later, when the resolution process tends to involve far more time, effort, cost and disruption. This near-real-time assurance would greatly reduce the risk, disruption and cost of tax audits – benefits that can help companies offset the cost of implementing new tax management technology and related process changes.
The quick and secure exchange and storage of a company’s transaction data also requires relatively advanced adjustments to tax data management technology. While a growing number of global companies have this type of technology in place – in large part to keep pace with the competitive challenges posed by the digitalisation of the global economy – many enterprises still need to upgrade their tax technology. In fact, comparatively few tax administrations have the requisite tax data management technology in place.
It is also important to keep in mind that the impetus, receptivity and technological capabilities needed to support real-time reporting vary significantly across EU countries and other regions. Many developing countries with VAT regimes do not currently possess the appropriate technology to achieve automated real-time reporting systems. Even the EU’s 28 member states have different VAT compliance requirements and widely varying technology capabilities. This makes the widespread adoption of similar real-time reporting requirements unlikely.
In the US, for example, numerous state, municipal and local tax jurisdictions set their own unique sales and use tax rates and reporting requirements. There is also substantial pushback to real-time reporting in the US – due, in part, to resistance from credit card companies and retail and trade associations. Furthermore, many assert that this instantaneous reporting is not essential when considering the requirements of current regulation.
Bridging the gap
While the VAT gap represents a massive challenge for EU tax administrations and is a primary driver of the recent push for real-time reporting requirements, two other gaps also figure as major implementation obstacles.
The first is the technology gap. When governments want to implement real-time reporting, they quickly realise that they need systems in place to enable this capability. These systems must be able to accept transaction data from companies, run verification tests on the data and then store it securely. While tax data management systems with these capabilities exist, relatively few tax administrations currently have them in place. The cost-effective implementation of these systems depends on several factors that must be carefully evaluated, including the tax administration’s existing technology environment and any plans it has to alter or improve it.
While some tax administrations rely on traditional on-premises information systems, many government bodies are in the process of migrating technology functions to a private on-demand or public cloud model. Given this fluctuating IT setting, any real-time tax management system should be hybrid-cloud friendly. In other words, it should be able to exist within the three technology models: on-premise, private cloud and public cloud.
The other major challenge to implementing real-time reporting is the talent gap. Having advanced tax technology in place offers little value if an organisation doesn’t have access to the skills needed to operate these systems. And these relatively rare skills are in increasingly high demand: global corporations, smaller to mid-sized companies and public sector organisations are all competing for the same tax technology talent. The demand for technologically savvy tax professionals and the need for cutting-edge tax data management applications should only accelerate in the coming years, as tax compliance requirements intensify and more corporate tax functions implement additional technology such as robotic process automation, blockchain and artificial intelligence.
As the global economy becomes increasingly digitalised, governments and their tax administrations will face growing pressure to advance their technological transformations. This pressure is also likely to increase demand for more expedient data sharing among public and private entities. When this data sharing can be conducted and governed thoughtfully and securely, tax administrations and the companies they work with – not to mention the societies that both entities serve – have an opportunity to achieve significant mutual benefits.
Achieving this state of multilateral cooperation starts with a practical understanding of the issues, challenges, technology and skills needed to make these digital interactions thrive. In today’s modern digital tax compliance environment, both tax administrations and taxpayers should understand that the old technology that got them to where they are today will not be sufficient to take them where they want to go in the future.