Global and Digital Economy
In a global digital economy, tax authorities are constantly looking for opportunities to have full visibility on supplies, sales transactions, accounting entries and invoicing. For this reason, many tax authorities have already started (years ago or recently) implementing and/or further developing technology-assisted, digital tax reporting requirements (such as real-time invoice reporting, SAF-T, eInvoicing, making tax digital etc.).
Organizations’ Finance and Tax functions operating in different jurisdictions should proactively monitor these legislative updates and have a well-defined approach on how to react to these changes, including defining tax processes as well as a tax technology strategy, having a vision about resource and knowledge management and identifying the pillars of the tax governance control framework.
Challenges and Operating Models
When we are talking about digital reporting requirements in indirect taxation, taxpayers are usually facing the same challenges.
One of the options is to develop a solution in-house. However, this hinges on several prerequisites. The organization must understand the up-to-date local legal requirements, contact to the local tax authority in case there is a need for clarification, understand the local language and have adequate resources to cover the technical and functional requirements. The fiscal requirements could be covered directly by a tax expert (remotely or locally) if that person has the above-mentioned relevant country knowledge. One of the challenges would be a tax function that operates with a limited number of people, e.g. with a Center of Excellence model or with a limited number of local tax experts onboarded only in key jurisdictions (decentralized).
One solution to this staffing problem is the tax function collaborating with the Finance or Controlling function to obtain additional, country-specific support. In such a situation the creation of a RACI matrix is essential to understanding who the project owner is and thus has ultimate responsibility on the deliverable, who is leading the project discussions and what resources are allocated per workstreams. Apart from the fiscal knowledge, the organization should also understand the functional needs that necessitate the involvement of either a specialized tax technology team (if such exists) or with the organization’s IT function.
The IT function is, however, typically not designed to develop solutions for statutory tax or accounting requirements. Therefore, it should be verified whether the IT function has enough resources to support all the legislative changes. If there are several legislative change requests in the IT ticketing queue, they will have to be prioritized. However, when it comes to tax reporting requirements, it is quite impossible to say that one is more important than the other. Non-compliance with tax reporting requirements can have negative financial consequences (interest, penalty), but also a loss of reputation when for example a customer’s VAT deduction is rejected. There is another point to be considered: budgeting. Should the tax function compensate the IT department if the workload exceeds its capacity and is then forced to hire new employees? Alternatively, if IT decides to involve an external service provider, should the costs be covered by the IT budget or the tax budget? And finally, a couple of thoughts on vendor selection. Who should monitor the procurement procedure and manage the vendor relationship: tax, finance or IT? Once all the issues raised above are clarified, the project team can focus on the operational aspects; i.e. on implementing and maintaining the solution, which requires a continuous and close collaboration between IT and tax experts.
There are of course other options for the tax functions such as insourcing a vendor solution (SaaS) or outsourcing the entire tax compliance (managed service) to a service provider such as KPMG.
Managing indirect tax compliance with a tax engine, the help of an ERP add-on solution or with other cloud-based tax platforms has several advantages. The vendor selection, budgeting and project management can be handled centrally by the tax function, dependency on the internal IT function can be eliminated and the governance frameworks can be based on a tax owned central tool instead of on a decentralized, multi-owner matrix structure. External software solutions can also provide more flexibility without the need to touch the ERP system.
When the tax function decides to in-source a vendor solution, there are several selection criteria (IT landscape, functional capabilities, general procurement, legal, tax technical, pricing) that have to be reviewed to understand which vendor is the best fit for the organization. In addition, the tax function must develop its business case why that solution is needed and what its expectation on the return of investment (RoI) is.
Indirect Tax Compliance Outsourcing.
Asking an external service provider such as KPMG to manage the indirect tax compliance activities of a firm (or the full spectrum including direct tax, withholding tax and payroll) has several advantages. When the tax compliance tasks are centrally managed (e.g. in KPMG’s global delivery centers), there is a possibility to replace manual steps with automated control processes, rely on data analytics technology solutions in an innovative environment, work with a global network of accounting, tax and IT specialists understanding the local languages, tax regimes. Advanced digital workflow tools (such as KPMG’s Digital Gateway) can help you track the status of the compliance and demonstrate the compliance control with a Dashboard-based visualization solution for top management in an easy way. The tax compliance outsourcing can help reduce the costs by working with the IT team to develop the required solutions and reports from the ERP.
In the beginning of this blog we were talking about the rapid changes, especially in digital reporting requirements. Even in the European Union with theoretically unified VAT framework rules, companies will not encounter the same technical and functional structure of existing and upcoming digital reporting requirements in the near future and likely not even in the medium term. Therefore, companies should accept the current environment and shape their tax strategy accordingly.
In this table we collected some relevant indirect tax developments around eInvoicing that are essential in 2022-2024 according to our current knowledge. The information contained herein is of general nature and based on local authorities’ communications, and are subject to change. Whether the information applies to a specific situation should be determined by consulting with KPMG AG or with your usual KPMG contact.