The rise of digital has transformed how businesses interact with each other and with their customers. Welcome to the next shift in this digital revolution – in how regulators and tax authorities interact with businesses.
Governments are under pressure to do more with less while raising revenues. New digital services taxes are being brought in which are aimed at companies’ new business models. Many of these taxes are being introduced unilaterally, with different countries taking different approaches to defining what is taxable, and how. At the same time, tax authorities are introducing digital reporting requirements; by using technology to increase collections and cut costs, these measures are improving tax authorities’ effectiveness and efficiency.
The pressure is on for companies as they need to navigate their way through these new taxes: collecting the right data to ensure they are compliant whilst being agile enough to respond to the rapidly-changing tax landscape.
No business is immune from these pressures. They affect all businesses operating everywhere, no matter what their business model. The current proposals at the OECD are broader and far more reaching than envisaged: these proposals will alter the international tax landscape in a way that catches every business with any kind of digital presence.
How should tax functions prepare? We believe they need to make a fundamental shift in their connectedness with business operations. In the past, tax was only about the bottom line. That is no longer the case. New ways of collecting data and pre-population of tax returns (such as is happening in Brazil) mean that businesses have to be one step ahead of the tax authorities in order to validate or challenge the returns the tax authorities send them.
The only way to do this is for the tax mindset to change. Tax must take its place in the forefront of operations planning. This means both assessing the opportunities and risks of changes in regulations and laws to make sure the path is clear for the business to operate smoothly and efficiently, and enabling agile business responses that keep the operational wheels oiled. Consequently, a consistent narrative thread must run through the entire business, with tax playing a leading role in creating and maintaining the narrative.
This is now crucial as tax authorities are showing higher levels of audit aggressiveness. Many are already implementing higher levels of data analytics and data matching, consuming information from many different sources, including social media, to generate a greater number of incoming inquiries.
Having a consistent and active connection between tax and the rest of the business can enable companies to prepare themselves for the tax authorities’ changing approach. However, too many companies still have a lag between the tax function and business model, leading to the creation of separate bodies of evidence that contradict the business narrative, opening the business up to compliance and reputational risks. The perception of compliance failure alone can damage the brand, reduce trust in the company and deter talent – all issues which companies have faced.
Many companies are aware of the problems. They are upgrading their systems, inserting better controls over the data, performing more analytics to test the data on a real-time basis to ensure its quality. The biggest challenge is that, too often, their systems and data are not tax sensitised and therefore not able to meet current, never mind future, requirements.
The financial and reputational risks that businesses face over tax are not going away – they will only become more acute. In order to manage them, businesses need a global digital strategy with tax a proactive partner with finance, IT and operations.
The combined finance-IT-ops-tax leadership needs to understand both the impact of the global business model and new digital taxing obligations, now and in the future. They need to identify digital reporting requirements, regularly assessing their obligations to comply. They must ensure tax has the right skills and that the systems can generate tax sensitised data and digital links in real-time.
Agility is vital in the fast-changing digital services tax landscape, as is a strong governance framework that understands the risks involved and the importance of managing them holistically. Communications must be consistent with the data in the public realm, from policies to statutory and reporting, painting a clear and constant narrative of the business’s tax affairs.
The lynchpin is integration. Only with all elements from the business and finance to tax and systems working together can an organisation be prepared for the changes in compliance that we already see taking place – changes which will only accelerate. The risks involved will not go away, but will heighten. Tax having a central voice in a seamless team will be the best defence against them.
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