Rather than just keeping pace with the changes, companies should seize the opportunity to shape their tax functions to drive value and innovation beyond compliance and reporting.Digital technology is a double-edged sword. While it can enable tax functions to be smarter and better, tax administrations too are increasingly sophisticated and agile, and this can create more risks for businesses that lag behind. Consider how governments are harnessing digital tools to improve their administration of tax, where they are now interacting with taxpayers at source, simplifying and automating tax filing processes and requiring submission of source accounting and transactional data in digital format.Increasingly, governments are demanding real-time or near real-time information from businesses. This changes the way taxes are reported, filed and collected, disrupting the traditional compliance process and accelerating reporting and filing obligations for businesses. Countries are at very different stages of digitalizing tax administration.Singapore is at Level 1, characterized by the e-filing of various tax returns, including withholding tax returns, certificates of residence and e-payment of taxes. In particular, the simplification of electronic filing of individual tax returns and submission of employees’ records has been made less burdensome and makes compliance easier. The fact that Singapore is at Level 1 does not mean that it is “business as usual.” The opposite may be true – that Singapore could move far and fast when the time comes to automate its tax compliance regime.This is already seen in how the Singapore Infocomm Media Development Authority is the first Pan-European Public Procurement On-Line Authority outside of Europe – and the first in Asia – to launch a nationwide e-invoicing framework in January 2019.Importantly, tax professionals should ensure the tax department is “audit-ready” from a digital perspective. This is because going forward, virtually every company will be “digital” in some way.The Singapore government is committed to realizing its digital vision, and this further supports the digitization efforts of the tax authority. More widely, tax authorities are leveraging data collected and using data analytics tools to mine for errors, inconsistencies, anomalies and systemic frauds, enabling them to identify tax audit targets and controversies. In Singapore, the use of analytics and forensic tools has possibly helped in contributing to an increase of approximately S$53 million in taxes and penalties recovered through audit and investigation for 2018, an increase of 15.9% from 2017.Technology is also facilitating the sharing of information by tax administrations globally. The digitization of country-by-country reports filed by multinational companies enables tax au
As demands increase for tax transparency, the business of tax is undergoing a fundamental shift. We explore six steps to manage the risk.Enhanced transparency measures and new reporting requirements, many brought about by base erosion and profit shifting , have had profound implications for businesses’ tax compliance and reporting functions, audits and controversies, and reputational risk. This in turn has increased the need for companies to develop a cohesive approach to tax risk and controversy management.At the same time, tax administrations are harnessing the power of digitalization to make better use of limited resources and extract more value from the information they receive. Tax authorities are increasingly relying on digital methods to collect taxpayer data, and they are using data analytics to mine this data to help them boost tax collections, target compliance initiatives and improve overall efficiency.Tax authorities are making strategic use of data analytics to make compliance and audit determinations and are increasingly sharing this data with tax authorities in other jurisdictions. This exposes businesses to more risk if their people, processes and systems are dated or out of sync with government requirements and expectations.And just as companies are adjusting to the rapid changes to tax policy and enforcement brought by BEPS and the digital revolution, a wave of political uncertainty has added a new wrinkle to the tax risk environment. These “unknowns” have prompted many businesses to analyze the potential impact these events could have on their tax strategy and business operations.US Supreme Court Justice Louis Brandeis famously called sunlight the greatest disinfectant. But sunlight can also harm those who aren’t prepared to face the intensity of the sun’s rays. Our 2017 Tax Risk and Controversy Survey series indicates businesses around the world are currently regarding the compliance environment as a prism through which they interpret demands for greater transparency.The sunlight is being dispersed into a spectrum of red, orange, yellow, green, blue, indigo and violet. Each color deserves its own contemplation. And those who step into the light should consider the risks and take the necessary precautions before stepping into this new environment.For our 2017 Tax Risk and Controversy Survey series, we collected and analyzed input from taxpayers on what they are seeing in practice in a variety of aspects across the tax life cycle of planning, provision, compliance and reporting. Our survey included 901 tax and
Governments are using technology and cooperating in new ways to achieve an unprecedented understanding of their taxpayers.Three years into his tenure as Mexico’s President, Vicente Fox installed a mechanical-engineer-turned-finance-executive as head of the country’s tax authority, the Servicio de Administración Tributaria .The move may have seemed unusual, but Fox wanted José María Zubiría Maqueo for a specific purpose: his ability to use technology to boost collections. Zubiría Maqueo used what he’d learned from his previous role reforming the billing department at a large Brazilian telecommunications company.Under his leadership, SAT expanded beyond electronic filing, adding more services online and building databases of information about its taxpayers. By 2006, Zubiría Maqueo was hiring analysts to mine the databases for insights, and was kept on when Fox stepped down and Felipe Calderón took over the presidency.By 2012, the tax authorities had collected enough information at hand to justify a more robust approach with multinationals operating within Mexico.SAT withheld US$384 million in value-added tax refunds from international companies that it was examining for the possible avoidance of tax.Mexico today can now use its decade-long digitalization process in two ways: to learn more about taxpayers and as a warning shot.“What they really want is to send a message to taxpayers,” says Calafia Franco Jaramillo, an EY Tax Controversy Leader at the Latin America Business Center in New York. “They want everyone to know that audits can be more efficient and targeted because they have this data.”Mexico is not alone. Tax authorities worldwide are in the midst of a golden era of innovation. They are upgrading old systems or switching to new ones, gleaning insights as they go. The results have often been immediate.The Canada Revenue Agency used its databases to predict which taxpayers might not comply, and then communicated with them to boost collections, bringing in an additional C$127.6 million in the first tax cycle in which they introduced this new approach. When Russia digitalized its VAT system, revenue increased within months.The evolution goes far beyond archiving the information taxpayers provide; the passive approach of waiting for an annual tax return to evaluate is gone. Tax authorities are now collecting information daily and incorporating third-party information, rather than just relying on what taxpayers disclose.In the UK, Her Majesty’s Revenue and Customs pledges that by 2020 there will be no need to file a tax return. The tax authority will provide one, based on information requested and collected over the reporting period, and taxpayers will have the choice to accept or contest it.There’s another tangential effect from the current era of innovation underway: it is easier than ever for tax authorities to share data with each other, swap insights on new tax
Organizations need a global perspective and policies that cover all jurisdictions in which they do business.Tax controversy is not a new issue. At any given time, an organization’s tax team may be dealing with disputes in a number of countries around the world. What has changed is how governments approach tax collection.Until recently, tax administrations had little or no information about an organization’s operations outside of their own jurisdiction. A local tax dispute stayed local.But tax administrations are going digital, moving to a system in which businesses file data electronically on a regular or even real-time basis, giving governments additional insight into an organization’s tax affairs.At the same time, governments around the world are adopting tax reforms through which businesses must share more details about their operations, including country-by-country reports that list revenue, profits, income tax paid, taxes accrued and employees for each tax jurisdiction in which the organization does business.The Organisation for Economic Co-operation and Development anticipates that countries will eventually automatically exchange “key indicators” with each other.These developments are changing the nature of tax controversy itself, transforming disagreements between a business and its local tax authority into a multi-territory inquiry.Businesses should prepare now for greater tax controversy going forward. Get ready.Many businesses are uncertain about their level of knowledge concerning their organization’s tax disputes around the world. In our 2017 Tax Risk and Controversy Survey, almost half of respondents said they have no visibility over active tax disputes.The chart below shows that most businesses are somewhat, very or extremely concerned that tax transparency initiatives and information sharing could lead to a higher level of tax inquiries.Percentage of multinational enterprises that are concerned government transparency initiatives and information sharing could lead to a higher level of tax inquiries.The course of action is clear. Businesses need a global perspective and policies that cover all jurisdictions in which they do business.This includes a comprehensive approach that lets organizations identify potential issues that could later evolve into disputes. And they need a centralized strategy to manage tax controversy based on these global policies.This article was originally published in Tax Insights on 4 May 2018.
Value-added tax and goods and services tax should be broad-based and integrate a long-term perspective to be effective.Value-added tax is continuing to evolve and expand as new systems roll out and existing ones adapt to digital disruption and other forces.In the six decades since the value-added tax first made its debut in France, this broad-based consumption tax has spread rapidly across the globe. Governments are fond of VAT and its cousin, the goods and services tax , for many reasons. The levies are considered one of the least harmful taxes for economic growth and can raise large amounts of revenue because they apply to a significant proportion of economic activity.According to the Organisation for Economic Co-operation and Development , some 166 countries operated VAT or GST in 2016 – twice as many as 25 years ago. Many countries have had a VAT or GST system for decades. Other jurisdictions are recent adopters, such as Malaysia and Tanzania , Egypt , India and member states of the Middle East’s Gulf Cooperation Council .Today, VAT and GST continue to expand and evolve as new systems roll out and existing ones adapt to the implications of digital disruption and other forces. This transformation has consequences for businesses, which must adequately prepare for new VAT and GST rules and procedures, and update their technology to comply with new e-filing requirements.Countries planning to introduce a new VAT or GST system should keep in mind that a well-planned transition is important. The introduction of such a tax requires adequate administrative capacity, training and technology on the part of both businesses and the government.“There’s typically a broad public education program, as well as a lot of publicity about the resources that will be attached to enforcing the tax,” says Alan Schenk, distinguished Professor at Wayne State University Law School in Detroit, who drafted VAT legislations for numerous Caribbean and African countries.Royal Malaysian Customs Department Director General Dato’ Sri Subromaniam Tholasy says that it’s critical for businesses to start preparing for new VAT and GST systems far in advance.“One of the biggest issues we had was businesses that did not prepare early enough in terms of systems testing and training,” says Subromaniam Tholasy.“Some companies left the implementation to the finance and accounting staff, but it requires much broader involvement. People from the sales and marketing sides also need to be involved since, for example, agreements may need to be renegotiated. It was also our experience that many small- and medium-sized businesses waited until the last minute, then had issues when it came to filing.”VAT and GST systems should be broad-based. They should take a long-term view rather than short-term to be effective. Many jurisdictions have learned the hard way that if their initial VAT and GST systems
OECD pushes inclusive growth but critics are concerned that policies could weigh on innovation.The Organisation for Economic Co-operation and Development believes there is an opportunity to achieve more inclusive growth through tax policy. Critics, however, are concerned that such policies could weigh on innovation and growth.Removing tax expenditures that are not well-targeted at redistributive goals. Taxing capital and its returns in efficient and equitable ways. Introducing or strengthening progressivity beyond personal income tax. Strengthening the link between taxes paid and benefits received across the life cycle. Providing adequate and targeted compensation or relief to the losers of pro-growth tax reforms. Incentivizing agents operating in the informal economy to become formal. Promoting greater equality of market income and opportunity through taxes. Aligning private and social costs and returns through tax reform. Solidifying the administrative feasibility of tax policy design. Strengthening tax administration and increasing “value for tax money”。Embedding inter-generational and gender equity in tax policy design. Improving the quality of tax statistics, data and tax policy indicators. Source: “Tax Design for Inclusive Economic Growth,” OECD, 2016. This article was originally published in Tax Insights on 7 September 2017.
Tax and finance departments can deliver value by using data analytics to manage risk, control costs and drive business decisions.Driven by revenue pressures and shrinking headcounts, tax authorities across the globe are increasingly relying on digital methods to collect taxpayer data and administer their tax systems.Amid increasing demands for tax transparency by governments and supranational organizations, many tax authorities are building sophisticated data-gathering platforms that enable matching and sharing of taxpayer data. They are then using data analytics to mine this data to help increase tax collections, target compliance initiatives and improve overall efficiency.Practically speaking, this means an unprecedented amount of taxpayer information is flowing between governments and businesses. This data is being analyzed and used in new and more expansive ways.Big data refers to the increasing volume of data now available, as well as its variety and the speed at which it can be processed. Analytics is the means for extracting value from this data — the tool that generates actionable insights.The Organisation for Economic Co-operation and Development’s country-by-country reporting requirements mandate increased data collection and disclosure. With several countries, including the United States, having adopted the CbCR requirements and many more countries soon to follow, the volume and pace of data collection and analysis will only continue to grow.The tax department has an opportunity to deliver value in this new era of digital tax by embracing enterprise initiatives and transformations that facilitate enhanced data management.Technology defines and underpins the workings of the new digital tax function, making it possible to answer the mandates of the global digital economy. Managing tax big data enables efficient compliance and provides insights that facilitate strategic business decisions.Data and analytics drive all things digital. You may already be using big data to track and improve customer activities and experience. Now, managing tax big data and leveraging it for better visibility of your tax obligations has become a critical success factor as well.
As tax authorities demand more data, faster, companies may have unpleasant results including disruption, operational risks and “surprise” audits.Today, new, digitally enabled business models can be activated overnight — a complete sea change from how business has traditionally been conducted.A start-up company can sell into more than 100 markets within 24 hours. Likewise, established businesses in all sectors are finding new ways for digital to create innovative new revenue streams and support their global brand efforts.Tax administrations around the world are going digital at a rapid pace, too. With increasing frequency, they are creating new capabilities to interact with taxpayers at source, instead of relying on historical information from the tax return.In some cases, they are actually demanding taxpayer data even before a transaction has occurred, turning the whole model of tax compliance on its head. When combined with the global revolution in tax transparency, companies old and new are finding that revenue authorities everywhere are forging ahead at a pace that has the potential to outstrip their ability to keep up.The results can be unpleasant and include internal disruption, operational risks, “surprise” tax assessments or audits, financial penalties and reputational risk. Boards and senior executives may not be aware of quite how high the new risks may be.Governments are reaping significant returns on their investment in digital. Starting in 2015, for example, Russian taxpayers were required to submit value-added tax transactional data along with their electronic VAT returns. That year, domestic VAT revenues increased by more than 12%, the equivalent of around US$4 billion .increase without an increase in headline corporate tax rate.increase after implementing a series of new digital reporting requirements.Although not the initial focus of attention, corporate business taxes are now in the spotlight.New digital technologies have caught many companies off guard. Through EY Digital Tax Administration Services, we help taxpayers navigate the increasing number of taxation authorities globally that use technology to collect, verify, audit and assess tax faster and more objectively.Electronic invoices are an early sign that a revenue authority is digitalizing more widely.
The list of disruptive forces CFOs face seems to grow daily. The latest addition to this list is the increasing reliance by tax authorities on digital methods to collect and analyze taxpayer data. These tax authorities then use this data to facilitate real-time or near real-time collection and audits — and so much more. They’re reviewing, questioning and comparing this information to fulfil current and future needs.Tax authorities across the globe are ramping up their technology and analytics capabilities quickly, and simply put, companies don’t have the same visibility or understanding of their data as the government does. CFOs need to know what information tax authorities are requesting and how they are using, analyzing and leveraging this data. It’s crucial for CFOs to develop a strategy to make the most of the wealth of insights gleaned from data analytics, particularly as drivers of growth and value.Meeting the requirements of digital tax administration is just the starting point, not the endpoint. Forward-looking CFOs have the opportunity to establish an organizational framework that allows them to be proactive in this new digital environment. Now is the time for planning, insight and action.Digital tax administration: How did we get here?Globalization and increasing complexity have changed how businesses work, and tax authorities across the globe have responded, with many now leading the way in data analytics. Budget deficits and inefficiencies in existing methodologies left many governments operating in the red and accelerated the creation of digital tax administration.Facing budget and staffing challenges, tax administrations invested in technology that would provide a clear, accurate view of business transactions, financials and compliance, in real or near-real time. This change has allowed them to:. Meet budget demands through efficient tax revenue collections. Streamline their processes to review, compare and analyze tax payer data. Becoming digital has given these governments new ways to source funds, offering efficiency and accuracy that some countries have never seen.Tax authorities are quickly increasing their digital capabilities, and companies need to understand what tax authorities know and how they are using the information. This leaves CFOs with an immediate responsibility — to develop comparable analytics capabilities and become as digitally savvy as the new digital tax authorities.The reality of digital disruption for tax is an opportunity for the enterprise. EY worked with a multinational agribusiness to build access and analytics capabilities that would collect, manage and transmit the tax-related data that the government required as well as provide visibility into what was being done with the data.
Consumption taxes as a percentage of total tax revenue have remained stable across members of the Organisation for Economic Co-operation and Development.The indirect tax world is experiencing an unprecedented era of expansion and transformation, forcing businesses to prioritize how these levies are managed and paid. We began to see the rise of indirect tax at the turn of the millennium, specifically value-added tax and goods and services tax , as well as special consumption taxes on items such as cars, cigarettes and alcohol.Consumption taxes as a percentage of total tax revenue have remained stable across members of the Organisation for Economic Co-operation and Development , with an average of 30.5% in 2014 compared with 30% in 2004. But these taxes are being applied to an ever-widening range of products and services. Some of the most recent examples include new levies on sugar, carbon emissions, plastic bags and e-cigarettes, along with goods and services sold online.The compliance burden has expanded in tandem. This represents a significant challenge and risk for the tax function today, considering the wide range of detailed data and technological processes required by each jurisdiction, not to mention the perpetual revisions in indirect tax policies.While customs duties have been around a long time , general taxes on goods and services are a modern phenomenon.France was the first country to introduce a general consumption tax, in this case VAT, in the early 1950s. It took a few decades to catch on — in the late 1960s only 10 countries had introduced a VAT or GST, according to the OECD — but by 2016 some 166 jurisdictions across the world had one.The OECD calls VAT “among the most important developments in taxation over the last half century.” Governments like VAT/GST for a few reasons: it’s a stable source of revenue, especially in times of recession; it’s efficient to levy in terms of costs and time; and it tends to weigh less on economic growth than other taxes.Globalization has also boosted the appeal of this tax. As global trade took off in the 1990s and more jurisdictions opened their borders via free trade agreements, many developing countries introduced a VAT/GST to compensate for lower trade duties and tariffs, according to the OECD.The adoption of VAT/GST has altered the mix of taxes collected by governments, shifting from specific to general consumpti