In the not-too-distant future, tax administrations around the world will receive authenticated data from all your – and your trading partners’ – transactional systems in real time or near-real time. Your invoices will be tracked and approved through all stages, from issuance by the supplier to approval and payment by the buyer.
The massive amount of information tax administrations receive from SAP and other business systems will likely be triangulated with data captured from associated processes, such as your transport and financial partners. In short, the tax collector will become so confident he knows your tax position that he’ll start sending you what some call your “e-assessment,” which is basically a reverse tax return that states how much you owe for transaction tax — for example, value-added tax (VAT).
As tax administrations become more certain they can determine your indirect taxes by just tapping into your data flows, they might also gracefully offer to drop the requirement that you stop archiving your own original invoices and other tax-relevant documents.
An Infinitely Complex World of Business Systems and Structures
Sweet deal, right? Now all you need to do is require your software vendors to sync transaction data with tax administrations in every country, and you can stop worrying about those pesky transaction taxes, including the burden of maintaining auditable data for years or decades.
Think again. The world of business systems and structures is infinitely complex and subject to constant change. With every country’s e-invoicing and digital reporting data requirements also being fundamentally different and dynamic, chances are that these universes exchanging information with each other in real time doesn’t always yield a perfect result.
So you’ll need the ability to prove the tax administration wrong. Now, this burden of proof isn’t entirely unusual in the world of tax, but, in the past, the onus of providing evidence fell on businesses — where they often had a fighting chance as they were sitting on the files and the systems where traces of transactions were maintained that could together be viewed as a sufficient audit trail. With tax administrations investing billions in computer processing power and advanced analytics, their evidence will, in many cases, be based on massive amounts of objective data, which will make businesses’ audit trail-based proof quite weak.
As SAP customers start to contemplate this new reality, they realize that the trend toward continuous transaction controls and e-assessment means that they must become more — not less — serious about certain key processes.
Evidence-Enhancing Measures in Your Transaction Environment
To set themselves up for success in the new world of tax, SAP customers need to ensure their SAP system has clean master data and can produce error-free tax determinations. Let’s look at the importance of these factors:
Data quality: The challenges around maintaining a solid process, ideally including third-party validation, to establish and maintain trading partner master data has always been the Achilles heel of business automation — but in these new circumstances, it becomes mission-critical. You must know who you’re dealing with, as well as where your suppliers and buyers are established and registered for tax.
Tax determination: Making sure that the tax content of your invoices and other trading documents is accurate also takes on a much higher level of importance. First, in the transactional flows sent to them for approval or registration, tax administrations will increasingly have technological means to verify tax rates and associated notices on invoices based on invoice data points combined with master data that they maintain on your business.
When tax administrations come to a point where such controls are sufficiently reliable, errors in tax determination risk creating major supply chain interruptions. But we’re not there yet: Most tax administrations will not have such transactional tax content verification capabilities for many years to come. In the meantime, they are much more likely to use the power of modern analytics to detect anomalies in the data they collect and store afterward.
To level-set, ask yourself the following: Is your business deviating from normal invoicing flows and transaction setups? Is what you’re doing substantially different from comparable companies? Such post-transaction verifications can lead to tax administrations basing their e-assessments on their — rather than your — tax determination, which can create inconsistencies and lead to fines.
Stepping Up Your Evidence Levels to Match the Tax Administration’s
There are two ways SAP customers can improve their evidence levels to meet tax administration demands: they should focus on archiving improvements and solutions to automate the e-assessment report verification. Let’s look at each of these in turn:
Archiving: What happened in Italy earlier in 2019 is a good example of how businesses start to think about these issues. Prior to the e-invoice clearance mandate that entered into force at that moment, Italy had some of the toughest archiving requirements in the world. Since the introduction of the mandate, the Italian tax administration said it would be happy to take care of these archiving requirements for invoices on behalf of taxpayers.
Not a single SAP customer we have seen has reacted the way the Italian government anticipated: Instead of dropping their own archives, enterprises quickly figured out that they didn’t want to rely on the very administration whose records they might need to provide evidence against to also be the custodian of their audit defense data. As the tax administration gets better at proving the authenticity and integrity of transactions that it captures from your invoice flows, so should you.
E-assessment matching: You’ll start getting reverse indirect tax “e-assessment” returns in a growing number of countries over the next 5-10 years. Think about what you’ll do with them. Chances are that the complexity of your business and the way you maintain your records will make manual verification of what you believe your tax position to be against what the tax administration’s data very challenging.
You’ll need tools to compare these datasets on an apples-to-apples basis. If you haven’t started automating your current indirect tax reporting function and you’re still relying on spreadsheets and manual verification when these e-assessment reports start coming in, you won’t be in a good position to figure out whether you need to challenge the government within reasonable time limits. As with all things tax, you will want to counter these statements almost instantly (if at all possible before paying), otherwise, being right won’t help you protect your cash flow.
For more information on how SAP customers can thrive in today’s new world of tax, visit sovos.com.
Christiaan Van Der Valk is vice president of strategy at Sovos. Elected a World Economic Forum Global Leader for Tomorrow in 2000, Christiaan is an internationally recognized voice on e-business strategy, law, policy, best practice, and commercial issues.