The complexity of ever-changing tax regulation and legislation has created a need for tax administration to adopt technology more than ever before. However, digital tax transformation is not merely a necessary transition in the quest to achieve compliance, but if done right, it can deliver valuable and tangible benefits to businesses.
Digital transformation - a definition
Digital transformation is defined as the process by which companies embed technologies across their business to drive fundamental change. The benefits include increased efficiency, greater business agility and, ultimately, the unlocking of new value for employees, customers and shareholders.
Some important themes of digital tax transformation
Adopting cloud-based technology is a key trend from the business taxpayer side and the tax authority’s side. The move to digital tax processes means that the limitations of legacy systems are felt more keenly by both sides, so it stands to reason that businesses are turning to the cloud in their digital transformation of tax to reap the agility and functionality it brings. In addition, COVID-19 has played a key role in accelerating this digital tax transformation trend. The pandemic kick-started change and forced many processes to be documented, digitised and enabled by technology.
The breadth of technology adoption in the transformation of tax administration has widened beyond addressing tax compliance, making tax more technology enabled in all businesses and across all industries. It’s meant that many organisations have created a robust technological basis from which to transform still further, and to better cope with challenges as they arise.
What’s more the speed of change experienced during the pandemic has not slowed, in fact, it has accelerated and continues to do so. Global economic challenges, Brexit and EU legislative activity around tax means that the pressure on businesses to adapt, at pace, remains high.
Data analytics delivering business value
When it comes to data analytics tools, the ability to have a centralised dashboard and control command centre is one of the biggest asks from our clients. All activities - happening at different times in different jurisdictions - are brought together to deliver powerful insights to the business. Today, an increasing number of tax teams are strategically supporting businesses by using tax data for more than just compliance; they are delivering valuable insights and employing mandatory tax compliance data to solve business-related issues. Through digital tax transformation and automation, tax teams have been unburdened. They are more effective, efficient and can spend time on higher value tasks. It’s a perfect illustration of how the role of tax teams is evolving alongside digital tax transformation.
The tax technologist
Digital tax transformation has created a new role in the tax team, that of tax technologist. This role combines the skills and knowledge of a tax professional with those of an IT systems professional. Having a tax technologist included in the tax team is invaluable both during the digital tax transformation and technology adoption and then as an ongoing role. It creates a best practice model for collaboration and understanding as digital tax administration evolves and matures.
Meeting the demands of tax authorities and the business
When businesses consider tax transformation it is about reviewing tax systems, tax administration methods and the tax technologies that might help and finding ways that can improve processes across the business. Process optimisation, effectiveness and efficiencies across countries and jurisdictions are all high on the wish list. This is because no matter what location or industry sector, there is a similar starting point in terms of the basics of how business works - there are inputs, outputs and VAT applied on digital goods and services.
On the other hand, authorities create their own specific country requirements in terms of reporting and compliance with an increasing focus on enhancing speed of revenue collection and recovering lost tax revenues. Authorities have country specific and changing demands. Their agenda is collecting tax efficiently that typically lacks harmonisation with other countries or jurisdictions.
For the business taxpayer this creates a complex landscape and friction. Technology and data barriers are created, and the pace of change required to meet both the demands of tax authorities and the goals of the business require skills and resources that are scarce.
Whilst businesses and tax authorities have different agendas, their requirements can be met with technology. Vertex is the bridge connecting tax authority and business requirements, far beyond tax compliance. Our solutions can be used to supplement and overcome the limitations of ERP-based data and processes through optimised processes. Businesses can then keep up with the breadth of changing requirements that come from tax authorities whilst also delivering valuable insights to the business.
Can digital tax transformation negate the increasing cost of compliance?
The cost of compliance is argued to be increasing, and as a proportion of revenue this trend is hitting small and medium-sized businesses especially hard.
One reason the cost of compliance is going up is that the ability to achieve compliance without using technology no longer exists – there are no manual workarounds. For example, with the dawn of e-invoicing a manual patchworking of processes is not an option. Billing, receiving and sending invoices can no longer be paper based. Even when using PDF invoicing, manual data entry or data entry via fallible OCR is needed for the process to be completed. True tax transformation means the process is automated and digitally streamlined end to end. Formats are completely machine readable and the data is exchanged and validated automatically – from issue to submission to tax authorities. This has benefits beyond mandatory reasons removing inefficiencies and risk, but initial investment is required.
With technology investment, spend is often documented so it’s very easy to see the cost of software and the implementation. However, it’s not often compared with the real cost of manual process nor with the hidden cost of staying still. Tax transformation is a journey, but broadly speaking, once an organisation has invested in the initial technology and skills to digitise tax, technology delivers savings far beyond meeting the legal requirements of tax authorities. It helps limit risk, reduce penalties, improves work quality and, ultimately, the data governance and processes of an organisation.
Vertex creates a ‘win-win’ situation. When businesses harness the data and compliance processes, collateral benefits beyond compliance follow. A simplistic view is that the cost of compliance is increasing, but considered more broadly the return on investment delivered through digital tax transformation is far more impressive.
Looking ahead in the digital tax transformation journey
It will come as no surprise to read here that artificial intelligence (AI) will become increasingly important for digital tax transformation. But amidst the excitement, it’s also important to remember that AI is not new. AI uses technology to achieve results that are as sophisticated as those based on human decision making. In a tax team context, a professional would review an invoice and make a decision regarding payment and process. With tax determination software such as a tax engine, this changes. Data points are read by the tax engine to provide a reliable and unambiguous output, thereby freeing professional tax people from complex yet repetitive decision-making tasks.
The landscape of tax administration and tax compliance is shifting. Embracing technology is no longer a choice but a necessity, and the challenge of increasing compliance costs and regulation must be met. Tax digital transformation is now an imperative. In response, the role of the tax team is evolving and combined with the adoption of tax technology, compliance requirements can be met whilst also unlocking strategic business value.
Please remember that Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.