VAT and GST tax compliance in a data-driven digital age

Recent advancements in digitalisation and the use of data have transformed the way that businesses engage with global revenue authorities. Today, tax and customs authorities have an increasing ability to automatically process and analyse information supplied by taxpayers. In this article, our global tax experts consider how critical data integrity will be in the digital era of Indirect Tax, with real-life examples from around the world.

The tech opportunity

Over the years, we have seen the rise of systems developed that make it easier for taxpayers to comply, but yet hard for them not to do so. At the forefront of this evolution is a sharp focus on technology. This is only going to continue to increase as more information is filed and exchanged electronically around the world than ever before.

Therefore, businesses are going to need to focus a great deal more on the quality of their data, and to understand the risk areas in terms of what the tax authorities are likely to focus on, now and in the future. Indirect taxes are at the front of that digital transformation. When it comes to audit for example, it creates a data trail that tax authorities are very active in pursuing.

This presents a significant number of opportunities for companies to seize, but effective data management is critical if they are to capitalise on them.

Australia leads the way

Australia is a great example of a country that has embraced digitisation and is now at the forefront of this movement. We have already seen a significant amount of data analysis sharing across Australia and the power of this is now coming to light.

In Australia for example, there is a high compliance rate for tax. Approximately 93% of all tax collected is voluntarily, 3% is paid involuntarily as a result of audit and other compliance activities, and there is roughly about a 4% tax gap.

The reason that Australia has such a high compliance rate is because there are six States, and only one Federal tax authority. Therefore, there is a significant amount of data sharing already in place. That means that if you file a tax return at the Federal level, you can be assured that that data is going to be shared with the State tax authorities. If a business fails to record certain employee expenses for a State payroll tax, then this will be flagged to the Federal (income) tax authorities as a result.

When it comes to Goods and Services Tax (GST) returns, there are a number of disclosure labels that must be completed. The Australian Tax Office then takes the data and it essentially places the business into certain categories. For example, it may expect the company’s sales to sit in a certain range because of their purchase history. Therefore, the company’s margin typically might be 60%, and as soon as they start going outside of that, they can expect a call from the tax authority.

The global data dilemma

However, these issues are not just being felt in Australia but around the world. Tax authorities and governments globally are approaching revenue collection on the basis that there remains a significant global tax and VAT gap.

We already know that tax authorities are leveraging advanced technology in their fight against non-compliance, which includes data analytic tools. When the information is being collected digitally and it is automated, it is easier for the authorities to spot areas of concern. On the other hand, we are seeing a change in how businesses behave as filing and reporting systems are increasingly underpinned by technology and data.

The primary target of revenue authorities is non-compliant taxpayers. However, the revenue authority activities cast the net far and wide and as a result all taxpayers are impacted due to increased compliance costs.   

The benefits of digitalising tax returns

For businesses, the need for change is driven by more than just the need to comply, such as filing their tax returns on time so that they avoid penalties and unwanted scrutiny. There are a few different upsides. It is an opportunity to improve their systems and processes by embracing technology. By automating the data collection process for example, there is a reduced level of risk when it comes to errors.

Secondly, there is a credit component as well as a payable aspect to consider also. By improving the data flow and its quality, the business can ensure they are maximizing their ability to claim their entitlement to the tax that results from the indirect tax collection process. Thirdly, as the business will then have implemented robust systems with high quality data, it will be in a strong position when the organisation comes to be audited. It will be less invasive and much quicker to process as a result. A fourth aspect is that technology improves process efficiency and reduces operational costs allowing valuable resources to be deployed elsewhere.

In our experience, this means that tax authorities spend less time with those taxpayers that have better controls in place. Instead, they can focus more time on the high-risk taxpayers.

An automation case study

A common problem that we see come up time and time again at RSM is that not enough data is being captured, or that it is not being stored in the right way and it is therefore not accessible when needed. RSM recently supported a multinational business that did not have total visibility or control over its multiple VAT processes. This was manifesting itself through the number of errors that were being made and the remediation steps that had to be taken.

The business is robust, well run and compliant, but key factors were creating issues including data quality and data accessibility. In addition, there was a concern that some of the system configurations around tax codes and transaction management were not adequate - multiple systems in multiple territories with multiple processes. Through the development of a data management application, RSM was able to consolidate the available data on a multi-territory basis and analyse and present it through a dynamic dashboard. The resulting effect was to provide focus for further remediation.

The winners

Regardless of its global location or where the business sits in its digital transformation journey, a data-based approach to tax compliance is only going to grow in importance. The winners will be the businesses who have taken a proactive approach and are seeking expert support to revaluate their strategies, processes and systems to safeguard them for the long run. Furthermore, those that are willing to invest in the technology that will allow them to embed high quality data collection and management techniques, and automate reporting, will be well positioned to stay on the right side of the authorities in a digital-first future.

If you have any questions about any of the discussion points, please get in touch with one of our subject matter experts.

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