How to keep up with new complexities in tax
New tax compliance challenges are unavoidable, and the pace of change is only accelerating. Consider what is happening at a macro level that produces massive and unending complexity for tax departments:
- Commerce is increasingly global, with supply chains and business models transcending physical borders.
- Political winds have prevailed in the direction of protectionism, and nobody knows whether they will stay on that course and accelerate, versus whether they will snap back and blow in the opposite direction.
- Technology has evolved to a point where automating many manual or repeating business processes is not just possible — it is now expected.
One noteworthy consequence of all of this is that tax authorities are being pressed from multiple angles. Not only must tax authorities help fund the operations of their jurisdictions and maintain a regulatory and enforcement approach that is fair, consistent, and predictable, they must strive to achieve a sensible balance between these two sometimes-dueling objectives.
In certain cases, it is becoming easier for tax authorities. Some countries have moved or are moving to the real-time reporting of indirect tax, which helps their tax authorities regulate and enforce indirect tax policy fairly and quickly. In the United States, a new legal precedent (South Dakota v. Wayfair) gave new power to tax authorities to enforce tax collection on online sales.
This is an example of a shift that is a positive development for tax authorities, but one that does not do much to simplify how tax departments can achieve compliance, scale operations, and deliver deeper value to their businesses.
In other cases, tax authorities are tasked with generating more revenue by either increasing rates or imposing new taxes. This has a direct and obvious effect on corporate tax departments; those that sufficiently automate tax determination generally won’t feel any pain from this complexity, but those that don’t, will.
In still other cases, political risks are producing what one might call “unknown unknowns” for tax authorities. Protectionist trade measures affect supply chains and commerce patterns in unpredictable ways, and they can create a rationale for more rate changes. No one knows what the business consequences of Brexit, for instance, might be because Parliament has been unable to reach a consensus on terms of the withdrawal from the European Union. This is an example of an uncertainty that massively impacts tax departments by making it challenging for them to plan.
What can get lost in discussions about macro complexity and the tax function is that greater certainty for tax authorities does not necessarily equate to greater certainty for tax departments. In fact, many instances of a tax authority’s job becoming easier can mean a tax department’s job becoming more difficult, if (and only if) the right technology isn’t in place to solve for those new demands via automation and intelligence.
New sources of complexity
Right now, three sources of complexity stand out as being particularly noteworthy: the Wayfair matter, new VAT regimes, and Brexit.
South Dakota v. Wayfair is a US Supreme Court decision that established a new definition for nexus. Prior to Wayfair, a company was required to collect sales tax if, and only if, it had a physical presence in the state where the transaction occurred.
Before Wayfair, the concept of nexus was already complex and open to different kinds of interpretation. Essentially, the Wayfair matter materially expanded the definition of nexus beyond the “physical presence” threshold to include economic nexus. So, while it gave more clarity to states as to when they can require sellers to collect sales tax, it created additional complexity for tax departments in the process. It did not produce a unified and consistent definition of nexus. While Congress has the power to set a unified, national standard, no legislation has yet garnered sufficient support to pass.
Instead, Wayfair opened the door for tax jurisdictions to write new tax laws (or re-interpret existing laws) based on their respective interpretations of the new precedent. Now, every state that has a sales tax has either changed their definition of nexus or has pending legislation to do so.
For tax departments, Brexit creates the need for drastically different tax frameworks from those used in the past.
The Value Added Tax (VAT) in the EU is a general, broad-based consumption tax assessed on goods and services purchased or sold for use or consumption within the EU. VAT is not charged on goods or services exported outside the EU.
However, per the recent guidance issued by UK authorities, effective January 1, 2021 (unless a further extension to the transition period is agreed), all imports of goods into the UK will need to be accompanied by customs declarations. The goods will potentially be liable to tariff payments and import VAT. Therefore, all UK businesses currently would be planning on how they will meet their future customs obligations along with the impact on their cash flow. There will be an added layer of complexity as the same approach will not apply to the flow of trade between Northern Ireland and Ireland or between Northern Ireland and Great Britain (England, Scotland, and Wales).
Value-Added Tax, in EU and Elsewhere
Brexit highlights, among other things, just how important value-added taxes are to today’s global business environment.
Right now, VAT is not a perfect system. EU members lost €151.5 billion, or more than 12% of the total revenue forecast from VAT in 2016 to tax fraud, evasion, and avoidance, according to the European Commission. This “VAT gap” shows how out of sync tax systems are with the ways companies go about scaling and growing in today’s business environment.
Tax regimes, however, are stepping up their game. For the EU, part of the solution might include more harmonization of cross-border trade and more autonomy for member-states to adjust rates. Ideally, this would be achieved without disrupting business processes, but it would be risky to assume closing the VAT gap is not the top priority in tweaking the EU VAT regime.
A trend towards real-time reporting and/or e-invoicing alongside SAF-T is another part of this story, as it allows tax authorities to monitor compliance and combat fraud. And because almost every jurisdiction will have differences in how these fast-paced changes are complied with at a technological level, it produces additional complexity for taxpayers. A key challenge in this transformation lies in the quality and availability of data in source systems. Expectations and assumptions from the tax authorities often miss commercial reality and the scale of change needed within accounting and invoicing systems, as well as core businesses processes. These can be expensive and time-consuming across all sizes of business.
VAT is also no longer an EU-specific tax framework either as members of the Gulf Cooperation Council, an economic union of states of the Persian Gulf, began to implement a VAT framework since 2016. Three now have VAT in force, and the other states are expected to implement VAT regimes in the coming years using systems that are technologically advanced from the very beginning.
How we see it
It is not going to get any easier for tax, finance, and supporting IT departments. Complexity is growing, both in the number of trends that produce it as well as the intensity of the consequences for tax departments that it creates. Tax teams produce significant value to their companies. Nearly everyone wants to automate processes because doing so reduces risk, lowers cost, and makes the work of tax more dynamic and exciting.
Having the tools in place that allow teams to respond quickly and thoughtfully to these landmark changes will be more crucial as this complexity increases. Automation with tax technology ensures that your team has real-time access to accurate content, updated as soon as regulations change, so that your team doesn’t have to spend time constantly updating and reacting to the latest information. And the best tools feed this content directly into your calculations. Instead of scouring sources for how and when rates and rules are changing, you can feel confident that you’re getting tax right the first time, every time.
The pace of change in our connected world will only intensify as time goes on. More than ever, it’s important to have a solution that can take care of the manual tasks and get you the information you need faster, so that your team can focus on more strategic, value-added work.