Technology & data are revolutionising the world of tax

COVID-19 has increased the reliance on technology in every aspect of our lives. The management and administration of taxes is no different, writes James Kelly, Tax Partner.

As we look ahead to 2021, the impact of COVID-19 and Brexit together with the increased pace of regulatory change will make technology and the availability of quality data even more critical to the tax function.

For many tax and finance professionals a changed work environment has highlighted the benefits of robust operating procedures and technology in supporting the tax function. This comes at a time when tax authorities are becoming increasingly sophisticated in the use of technology to focus on the underlying data behind a tax return.

Obtaining the data and information required to support the tax compliance process, respond to tax authorities’ enquiries and allow for effective decision-making is a common challenge. Where businesses have taken measures to automate the capture and flow of key tax data, this has helped ensure that the tax function remains effective whilst working remotely and allowed for rapid decision-making as the COVID-19 crisis has evolved and caused business models change. 

Data driven change

Data evolution is at the centre of most modern tax authorities, including the Irish Revenue. While historically the tax return was the focal point of tax authority reviews and audits, the underlying data supporting the tax return is now becoming more important. Put simply, tax authorities are now directly accessing, often in real time, the source data underpinning the tax return to identify unpaid taxes. 

The significant increase in the volume and quality of data available to Revenue is also driving the design and administration of new tax regimes. Taxpayer data has been central to the design of certain COVID-19 based measures introduced in 2020. For example, the enhanced collection of data under PAYE modernisation is critical to the administration of the Tax Wage Subsidy Scheme (TWSS) and its successor, the Employment Wage Subsidy Scheme (EWSS).

This fundamental change in how tax is administered and collected may result in certain tax returns becoming redundant and being replaced with real time or near time reporting regimes, whereby the tax authorities prepare a draft return based on taxpayer data. This is evident to a certain extent in the PAYE modernisation regime which was introduced in 2019, while similar measures in relation to VAT are thought to be on the horizon. The OECD has highlighted benefits, such as improved compliance and enhanced tax collection, that have been delivered to tax authorities that have implemented similar changes and embraced the power of enhanced data reporting.

Revenue audits and interventions

Perhaps the greatest evolution in the tax compliance process as a result of technology lies in the tax audit process. Revenue now utilise their data analytics and risk assessment capabilities to better target tax risk and utilise their resources as efficiently as possible. In 2019, Revenue’s PAYE and VAT Real-Time Risk systems allowed a reduction in the overall number of taxpayer audit and other interventions, but at the same time, the audits were more effective and resulted in an increased overall tax yield.

For taxpayers who are selected for audit, the audit process now typically includes an e-audit component, whereby Revenue review or electronically interrogate source data and records. Depending on the tax type, this might require the business to provide large volumes of data to Revenue, which is then analysed and reconciled to the numbers already disclosed in tax returns and financial statements, in addition to being compared to available industry and third-party information.  

Preparing for change

The evolving technological and tax landscapes clearly present a risk as well as an opportunity for businesses. In order to succeed, it is critical that tax and finance leaders have a deep knowledge of their tax data and related processes. There is an increasing need for businesses to be ‘audit ready’. Conducting a ‘health check’ that includes a review of the data underpinning tax returns can prove to be a very worthwhile exercise that can identify both opportunities as well as risks. 

In addition to being ‘audit ready’, by harnessing technology and deploying efficient and automated processes, both tax risks and compliance can be managed effectively - allowing tax and finance teams to focus on supporting their business in these challenging times.

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