One wonders, and perhaps even speculates, that some countries applying real-time reporting may well transition to government regulated invoicing in the near future. The main reason for calling out this very recent trend in government-regulated invoicing systems is the exponential increase in compliance costs which would be caused if all countries did this, and if they did so in their own way.
That is, if each country chose to adopt their own regulated invoicing system, each taking a slightly different form, and with unique software or hardware requirements. This is the risk that creates most concern. If this trend continued, it would effectively mean that multinational companies seeking to centralise their global compliance efforts, would need to maintain and operate literally over different country-specific hardware or software systems and interface-type solutions.
In short, the benefits of centralisation would be lost. The answer to this problem is not to naively suggest that there could be a single global regulated invoicing system. Rather, it is to suggest that a body like the OECD could and should seek to define common standards in a way that seeks to reduce compliance costs for businesses and governments alike through that commonality.
For example, by defining the optimal core functionality of the software or hardware being developed; by prescribing how that software or hardware should interface with common ERP systems; as well as minimally acceptable IT security standards. In fact, it could be similar to the guidance published by the OECD on the standard audit file for tax SAF-T , which is now increasingly being introduced by countries mainly in Europe.
An interesting by-product of the advent of government-regulated invoicing systems is the increased importance of tax invoices in VAT systems. For example, longstanding practice in Australia was that while the law required the issuance of tax invoices to consumers within 28 days of a request and law prescribed the minimally acceptable content of such tax invoices, in the event of an audit tax, invoices serve merely as one form of evidence as to when, who and how much was involved in a given transaction.
It is never determinative of the transaction itself. In common parlance of form versus substance, the tax invoice may describe the form, but the substance is the whole circumstances of the transaction itself. By contrast, China, with its highly regulated invoicing system known as the Golden Tax System , put a high level of importance on tax invoices, which were treated as being the best evidence of a transaction.
This is not to say that the form of the tax invoice will always supplant the substance of a transaction, but exceptions are relatively limited in practice for example, fraud. Examples abound of taxpayers being denied input tax credits which they would otherwise have been entitled to, merely by reason of the wrong type of tax invoice, the content of the tax invoice, the failure to retain the tax invoice, or the failure to verify the tax invoice.
We predict that along with the rise of government-regulated invoicing systems and the increased importance of data and analytics by tax authorities in auditing or verifying VAT compliance, practically the data inputted into tax invoices will assume elevated importance — in the fullness of time it will be virtually determinative evidence as to how, when and for how much a transaction takes place.
This is not to suggest that the law will explicitly state this, rather it will be the practical reality of a system which relies on those same data fields used in tax invoices to feed the ERP systems and in turn the analytics used in the detection of errors or anomalies.
Already, we are seeing developments in optical character recognition technology, together with artificial intelligence, that are enabling human-less invoicing — system logic is driving the invoice issuance process by a supplier through to the receipt, validation and processing of invoice payments by the recipient.
In short, we are beginning an era in which there is limited, or even no, human interaction in the tax invoice issuance process.
As such, if 'the system' does not flag it as anomalous, erroneous or extraordinary, the content of the tax invoice becomes the reality. It almost seems contradictory to argue that large businesses will outsource their VAT compliance and related technology needs, given the impending death of the VAT return discussed in Future of VAT: Continued evolution and increasing significance.
However, let's consider what remains when VAT returns die. As noted above, the longer-term perspective is that VAT compliance will effectively be managed through the data which is fed from business' own ERP systems directly to the tax authorities, or via government-regulated invoicing systems. As we all know, the single biggest operational challenge facing in-house tax departments right now is in managing data. Data management problems stem from a number of factors, such as:.
In fact, among the most common complaints made by in-house tax departments is that they are unable to fully comply with tax laws because of system limitations. This usually necessitates practical workarounds or manual processes to manage compliance. Moore's law, adapted to a data context, would suggest that data will double every two years, with businesses accruing more systems rather than fewer.
Given this, logic would suggest that data management challenges will increase exponentially. And herein lies the role of the VAT compliance professional. Their role will be to design processes including through robotic process automation and deploy technology tools in many cases using artificial intelligence to manage the data which, in turn, manages VAT compliance.
In short, VAT compliance will be nearly entirely a technology proposition. The second part of our proposition, which is that most large businesses will outsource this work, is not stated as a matter of self-interest, but instead comes down to simple economics. The reliance on technology solutions to manage VAT compliance often requires significant up-front investment cost, if built by the organisation for their own needs.
Yet that same cost may be split among hundreds or even thousands of taxpayers if developed by third-party providers such as the Big 4 accounting firms or specialist software providers. The economic equation is entirely comparable with that of cloud computing, which is effective because large up-front investment costs can be shared among a large group and obtained more affordably on a subscription basis.
Added to this is the fact that the maintenance and updating of VAT compliance technology can also be costly. Two other factors also bear consideration. The first is that with the rise of government-regulated invoicing systems, the cost of technology investment increases too.
The second is that as businesses digitalise their models, they increasingly need to comply on a global basis. These two factors combined will lead to an exponential increase in VAT compliance costs unless outsourcing occurs.
For these reasons, the more that VAT compliance becomes a technology play, the greater the likelihood that it will be outsourced. In 10 years' time, we will look back quaintly on the era in which businesses were able to claim input tax credits in many jurisdictions for business costs such as motor vehicle usage fuel for employees on work-related trips; mobile phones for employees for business use; meals for employees on business trips; and even entertainment to the extent that is still available.
Put simply, many of these types of costs are susceptible to exaggeration and error. In an era of digitalisation, where many types of processes are highly systematised and where verification of the correctness of these credit claims would consume a disproportionately large amount of resources, it would not be a surprise for these types of claims to either be denied credits outright, or be subject to a simplification which provides an automatically determined credit amount or percentage.
Potentially, this type of simplification may even be extended to other types of costs incurred on business trips, such as accommodation and domestic air travel. An interesting question remains as to whether simplifications will also be applied to areas such as in the financial services sector, which are currently subject to partial exemption methods as in the EU.
Singapore is a country with simplifications in this area, as it effectively mandates the percentage entitlement to input tax credits depending on the classification of the financial services institution.
Many Asian jurisdictions also only provide limited flexibility in partial exemption methods, through the use of only 'revenue based' apportionment methods. While in Future of VAT: Continued evolution and increasing significance we argued that financial services would be subject to VAT as the default method, there will likely still be certain areas for which exemption remains, thereby giving rise to the need for an apportionment of credits.
Similarly, other sectors that commonly make a mix of both taxable and exempt supplies, such as the real estate sector, could also be subject to simplifications to ease compliance in calculating input tax credits. In short, in an era of binary coding, where everything is reduced to either a '0' or a '1', it is not a stretch to envisage the end of approaches or methodologies for calculating input tax credits which are subjective, or highly prone to over-exaggeration, error, or require disproportionate tax authority resources to verify and audit.
Among the propositions made, this is perhaps the most controversial and also the gloomiest from the perspective of a tax advisor.
It is the idea that we, as tax professionals, whether working in-house or as external advisors, will likely be disintermediated by tax authorities. Let's consider the case for this. First, it is already happening to an extent. Consider the fact that the tax authorities now deal electronically with business; in most countries they publish extensive information to help businesses comply, whether in the form of legislation, rulings, interpretations, guidance material, etc.
Many tax authorities have developed chatbots and similar, such that now most routine queries are handled without the need for a tax professional. In short, understanding a businesses' obligations has already been made considerably more efficient and require less labour or input from tax professionals than they did in the pre-internet era of 20 years ago. Second, as noted above, tax authorities are now building their own government-regulated invoicing systems to obtain transaction level data automatically, or they are requesting it on more of a real-time basis than ever before.
With this data, they can carry out data and analytics testing to then determine whether the business is complying and, if not, by how much. They do not need tax advisors for this, certainly not as much as before. Third, and this is the major point, in the technology race, the tax authorities will always win. They will win because the tax authorities can build technology tools which they can mandate to serve an entire population, whereas any third-party technology is always subject to competitive pressures, and the need for pricing and sales.
Tax authorities are also not subject to normal returns of investment. Our recent project experience, while unrelated to VAT, may nonetheless be very relevant in demonstrating the potential to be disintermediated. In , the Chinese government authorities introduced new rules for the withholding of tax on employee salaries and wages.
Unusually, these new rules required tax to be withheld by employers on the basis of net income concepts, not gross income. Several large professional service and payroll firms invested considerably in developing technology to facilitate employers aiming to obtain the necessary data from their employees efficiently, which would in turn allow them to determine the net income amounts from which to calculate the tax withholding in respect of each employee.
Just prior to its commencement, the government decided to launch its own technology tool, which would allow employees to upload the data and transmit it to employers each month, in a type of pre-filling exercise.
In the blink of an eye, the government had effectively assumed responsibility for a business opportunity which would, historically at least, have been carried out by the private sector. In all likelihood, we will end up with a mix of government-owned technology to manage the compliance or risk processes, with government-approved technology: tools developed by the private sector which meet certain government specifications. Australia's single touch payroll system used for employment tax reporting is an example of this latter approach.
Make no mistake though, tax authorities stand the very real prospect of disintermediating a significant proportion of the tax profession! The edition of China — Looking Ahead, included an article entitled Lighting a pathway to , which argued that VAT will more closely resemble a sales tax.
The response to the article was highly divisive, with some practitioners considering the proposition to be ludicrous, while others agreed. To be fair, at face value, the proposition is ludicrous when one considers that VAT has now been expanded to more than countries around the world; a sevenfold increase in the past 40 or so years.
However, the validity of the proposition is simply illustrated by considering how VAT works through a typical supply chain of a manufacturer supplying a pair of sneakers to a wholesaler, and through to a retailer before being sold to an end consumer.
It is only when one recognises that the supply of the sneakers involves three separate output tax obligations and two separate input tax credit entitlements, which effectively cancel out the corresponding output tax amounts on those transactions, all so that when the retailer sells to the end consumer, the output tax will be accounted for.
In short, five separate recordings on a VAT return which must be accurate, where only one of which actually matters. One of the key policy rationales for imposing this multiplicity of obligations, at least historically, was to ensure that VAT would be accounted for, in part, even if there was fraud in some other part of the supply chain.
However, the reality is that by imposing so many obligations, albeit on different parties, the potential for fraud remains and some argue it is exacerbated. Leaving that issue aside, surely even an eight year old child can recognise the potential for a technology solution to radically overcome the inefficiency inherent in this system. Now if we wind forward two years since that article was published, the same prediction could be ventured now, but perhaps with even stronger force.
In particular, four main developments have, in our view, opened the doors to VAT more closely resembling a retail sales tax. First, the use of blockchain or distributed ledger technology DLT seems to have progressed from a largely theoretical concept except in the case of crytocurrencies , to becoming more widely used. In particular, there have been increasing request for proposals RFPs from large multinationals seeking assistance in deploying blockchain technology to manage their invoicing processes.
It is increasingly clear that blockchain can be deployed as a means to solve VAT fraud; for example in the EU, where VAT fraud with missing traders happens in certain jurisdictions on an unacceptable scale. Given that VAT is collected by businesses in multiple stages of a supply chain, where money flows directly between suppliers and recipients and invoices are being used to collect the VAT from customers and by intermediaries to claim input tax credits, with no or limited control and visibility on the VAT collection by government, further measures are clearly required.
Declarations are made within 15 days after the month VAT was collected. With this system, the information on the receipt must be genuine to be accepted. This is a kind of automatic audit from the tax administration, means claiming a false invoice can never be accepted, instead, it would indicate the fraudulent attempt and therefore help the revenue enforcement and investigation to map the tax law breakers.
Deputy Commissioner for small and medium taxpayers stated also that the system helps processing and quickening VAT refund to taxpayers as it helps doing a desk audit contrary to auditing processes which took time and cause delays in refunding VAT. Donation Nsengiyumva, a 6-year experienced tax advisor expressed his satisfaction of his career as they contribute to the revenue collection by helping taxpayers to comply with tax obligations.
He also indicated that VAT input validation controls system help them avoid mistakes as it leads them in their declaration. On top of making VAT declaration efficient and effective, Nsengiyumva also appreciated that the system provides a quick audit and help them claim quickly VAT refund and differentiate professional tax advisors and impostors.
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