Indirect tax specialists in North America and Europe expect to see more digitized tax filing and real-time remittance requirements in the next two years — and they lack the technology and operational processes to meet these demands.
That’s a key finding from the 2021 State of the Corporate Tax Department report from Thomson Reuters. The report is based on a survey of 821 tax specialists in the US, UK, Canada, and mainland Europe (with a small representation from other regions).
About half of the respondents are responsible for indirect tax including their companies’ determination, collection, and remittance of value-added taxes (VAT), sales and use taxes, and other indirect or transactional taxes. Their survey responses tell a compelling story:
- A majority (57%) anticipate significant changes to regulations governing indirect taxation. Specifically, they expect to see more regulations that will require their companies to file taxes digitally and remit tax payments in real time. This expectation is highest in Europe, where the trend toward digital tax reporting has advanced further than it has in the US and Canada. Nearly two-thirds of respondents from companies in mainland Europe expect significant changes in regulatory requirements, compared with 62% in the UK, 56% in Canada, and 52% in the US.
- Four out of five tax departments said digitized tax filing and real-time remittance requirements will be a significant or moderate challenge to comply with — particularly the technological and operational demands. Again, the concern is more intense in the region with the most experience managing these heightened demands already — mainland Europe.
- Eighty percent of respondents said their departments are responsible for tax compliance in multiple countries. The median number of countries is five; the average is 17. Jurisdictions cited as challenging include the US (particularly California), the UK, Canada, India, Germany (and Europe more broadly), Mexico, and Brazil.
- Seventy percent of corporate tax departments said their indirect tax work is managed either predominantly or completely in-house.
- Companies have adapted to the changing requirements through a mix of added resources, specialized skillsets, and technology adoption. Specific strategies mentioned, in ranking order, are hiring external consultants, automation, streamlining processes, keeping up with legislation, and adding staff.
Download the full 2021 State of the Corporate Tax Department report to learn how 800+ tax professionals have upskilled team members, met multi-jurisdictional tax demands, and effectively adopted new technology solutions.
The bigger picture: Common and new corporate tax challenges
Across tax types and regions, tax reform was cited as the most common challenge facing tax departments in 2021, similar to the findings from the 2020 corporate tax department survey. “Many tax departments are monitoring for further change ahead arising from new administrations across the world, combined with the continued impact of the COVID-19 pandemic,” the report says. Specific tax workstreams were the second biggest challenge cited, followed by new technology and automation projects.
“Four new challenges emerged in 2021 which are not mentioned in our pre-pandemic survey last year — all four pertain to the new and dynamic environments that we now all work within,” the report states. “These include keeping track of macro-changes (political and economic), generally coping with the impact of the pandemic, staying abreast of business changes, and enabling effective remote working.”
Leveraging technology to improve indirect tax operations and meet regulatory demands
The study found that most corporate tax departments have substantial work to do in preparing for more widespread digitized tax filing and real-time remittance of indirect taxes. As noted above, seven in 10 departments manage indirect tax work in-house, which creates enormous pressure to ensure their companies stay abreast of and comply with new regulations across multiple jurisdictions.
Throughout the survey, technology is consistently mentioned as a priority for tax departments. “Implementing new technology was a top-three goal for corporate tax departments this year,” the report says. “Advanced technology skills show up as the major skills gap most likely to be lacking in existing team members.”
While tax technology is seen as a key part of the tax compliance strategy, however, adoption continues to lag. Fewer than 60% of survey respondents have implemented direct tax and tax provision software, and adoption of indirect tax technology is even lower.
- Only 32% use indirect tax compliance technology.
- One-quarter use indirect tax determination software.
- Only 10% have implemented digital tax reporting.
The positive impact of indirect tax technology is high among tax departments that are using it. The survey asked respondents to rank the positive impact of 11 types of tax software. Indirect tax determination software ranked third and digital tax reporting ranked fourth; only direct tax compliance and tax provision technologies ranked higher.
Use of indirect tax compliance solutions is highest in the UK where 44% of tax departments have adopted the technology, compared with 33% in the US, 29% in mainland Europe, and 20% in Canada. The same pattern holds for indirect tax determination engines: the adoption rate is 31% in the UK, 29% in the US, 20% in mainland Europe and 13% in Canada. And there’s a huge split between Europe and North America in the use in digital tax reporting software — around 48% adoption in Europe and less than 7% in the US and Canada.
Technology tools to prepare for digitized tax filing and real-time remittance requirements
- Corporate tax departments expect governments to enact more digitized tax filing and real-time remittance requirements that will require greater use of indirect tax technology.
- Most companies have not deployed the tax automation software they will need to safeguard their indirect tax teams.
- Those tax departments that are using indirect tax technology give it high marks for having a positive impact on their tax compliance operations.
“This year’s report reveals that tax departments are at various stages in the transition to becoming more technology-enabled,” the report concludes. “The most sophisticated departments, which remain the minority, are reaping the benefits of investments in streamlining and automating processes. Leaders there feel in better shape to achieve their departments’ strategic goals and address the challenges they face.”
Less tech-savvy tax departments, however, “are feeling strained and are more likely to be in the unfortunate position of having to take on new technology projects at the same time as they strive to simply get through the day-to-day,” the report says. “In any case, gathering the data to prove the business case for investing in technology projects is the first step to starting the process of change.”
Download the full 2021 State of the Corporate Tax Department report for more indirect tax findings. For information on how to transform and modernize your indirect tax department to become more technologically sophisticated, take a look at our free resources: