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VAT/GST compliance and tax administration controls

Managing indirect taxes in the digital age

New facilities and new controls: e-invoicing, e-filing and e-audits

As businesses transform through digitization, VAT/GST compliance procedures and tax administration controls are also moving rapidly into the digital age. They are using technology to improve tax administration and facilitate taxpayer compliance. Most tax administrations now require electronic filing of periodic VAT/GST returns.

In addition, many are also requesting that taxpayers submit additional data electronically. Increasingly, tax administrations are allowing or imposing the use of e-invoicing for VAT/GST accounting. This is a useful tool for businesses, as e-invoices generally cost significantly less to produce and process than printed documents; at the same time e-invoices can also provide a useful source of data for tax administrations and a more transparent audit trail.

Tax and customs administrations are entering the digital age

Every aspect of how tax and customs authorities operate is being transformed by technology — from the collection of taxpayer data to how tax and customs administrations conduct audits and inspections.

In some countries, such as Brazil and China, taxpayers submit detailed transactional information directly to the tax administration. In others, tax administrations collect and analyze a range of taxpayer information electronically through customs declarations, VAT/ GST returns and tax accounts. This detailed transactional data allow indirect tax auditors to build up an accurate picture of activity for individual traders and for whole industry sectors.

Electronic data processing audits (e-audits) are becoming the norm and some countries (such as France and Portugal) are imposing legal obligations on taxpayers to maintain standard tax audit files (e.g., SAF-T) for this purpose. Currently, there is no common standard format for data, which can add to the burden for multinational companies that must comply in multiple jurisdictions.

By using technology tax and customs administrations are able to carry out more audits, including more off-site and post-clearance audits, and perform them more efficiently and more thoroughly. As a result, e-audits may uncover more errors, leading to more assessments and higher penalties for taxpayers.

Even for formal errors, the sanctions for errors may be significant — especially when multiplied across years or if they are applied to individual tax invoices. Taxpayers and traders need to prepare to meet the challenge that e-audits present by focusing on indirect tax compliance and systems integrity.

Customized accounting systems

Digital companies generally employ large numbers of IT professionals who assist in building applications for every part of the business, including back office functions such as tax compliance. Due to their increasing involvement, a lot of the data collection related to indirect taxes may also no longer be performed by standard versions of ERP systems; instead, digital companies often make use of tailored- made systems or even use in-house programs created by their own engineers.

Using an in-house resource provides many benefits. But this approach can also bring unexpected pitfalls for indirect tax. For example, in-house systems may not comply with complex rules for determining tax liability, or with the data formats and data content demanded for standard audit files required in some countries.

In general, it can create risks that essential indirect tax data is not properly captured and that VAT/ GST reports are incomplete or incorrect. Digital companies need to involve tax specialists at the outset to assist them in developing in-house solutions, for example by navigating through the complexities of VAT/GST and international trade legislation and translating it into something that companies’ in-house IT engineers can build.

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