Dealing with indirect tax data is the key to effective indirect tax management. But the variety of indirect tax data required by different jurisdictions and the sheer quantity of relevant data generated by large organizations can present a range of logistical issues.
With the increased reliance on indirect taxes and the “fair tax” debate putting companies’ affairs firmly in the spotlight, we consider some key challenges faced by multinational tax, trade and finance departments.
“Big data”: more and more information to gather, store and report
- In the last few years, the term “big data” has become a hot topic with companies and tax administrations around the world. Big data is the enormous amount of electronic information being produced every minute through a variety of channels. Sources include bank transactions, financial and market reports, orders and invoicing, surveys, customer data, online activities and even weather or traffic reports
- Three important attributes define big data:
1. Volume: It consists of very large data sets
2. Velocity: It is being produced at a tremendous speed by the growing digitization of society
3. Variety: It contains data from many possible sources, including structured and unstructured
- The sheer volume, variety and velocity at which data becomes available present technological challenges in securing, storing and tracking it. But companies that can effectively do so stand to uncover valuable relationships between seemingly unrelated, large and complex data sources
The drive for better indirect tax data
Having accurate global indirect tax data — and examining it critically — has never been more important. What is driving this trend? How can companies use technology to gain more visibility of their indirect tax position? How can they manage indirect taxes and associated costs more effectively? And why is this issue “front of mind” for today’s global companies?
- Governments are increasingly relying on indirect taxes to meet their budgetary needs
- VAT rates have increased worldwide in recent years, and new indirect taxes are being introduced in many countries for sectors such as banking and energy
- The “fair tax” debate has put companies’ tax affairs firmly in the media spotlight – drawing intense scrutiny not only from tax administrations, but also from regulators, investors and even the public
- Tax and customs administrations are focusing more than ever on full compliance and using risk analytical tools to target their resources to tackle tax leakage and tax avoidance. They are collecting more taxpayer data and doing more with it
Tax functions are facing external and internal pressures.
- Businesses around the world are under pressure to improve financial performance. They are increasingly aware of the intense scrutiny they face from a range of internal and external stakeholders
- They are asking more of their tax and finance functions. This includes:
- Challenging them to reduce risks and meet the company’s obligations more effectively, using limited resources. These functions are being asked to go beyond tax compliance
- Asking them to actively contribute to companies’ financial performance by reducing costs, facilitating processes and improving cash flow
- Asking them to play an active role in the strategic decision processes providing financial and non-financial impact analyses
- At the same time, corporate models are changing as multinationals standardize processes across entities and jurisdictions, and also as they rationalize structures and consolidate technology platforms and reporting systems. There is, however, little harmonization in the indirect tax compliance and trade information requested or the format for submission, which can make it difficult for centralized compliance and trade functions to meet these demands
- Gaining visibility over the financial impact of VAT/GST related obligations, risks and opportunities is an important step to establishing an effective indirect tax strategy. It is often a precursor to building a business case for allocating resources, and for making decisions about outsourcing and investments in technology
Advances in technology are creating new possibilities to reduce costs and increase profits. Enterprise intelligence tools are increasing visibility and control.
- As corporations centralize their tax, legal and finance functions to reduce costs and increase efficiency, they are increasingly turning to technology to help them manage and measure tax performance
- In recent years, advanced technologies, such as the Internet and mobile phone applications, have allowed indirect tax obligations to be completed, filed and managed using technology tools. Improvements in managing data can be achieved quickly through simple enterprise intelligence (EI) tools
High performing global traders focus on data
- Trade compliance is critical to companies whose business is dependent on the international flow of materials and goods. The “trade function” within such companies, wherever it sits, is responsible for maintaining key trade master data (tariff classification, country of origin etc.) and for managing any third parties, such as customs brokers, that make customs declarations for the company. It is also responsible for ensuring that all exports and imports are correctly declared to the customs authorities
- Trade data accuracy and improved trade processes further operational agility, improving supply chain speed and reliability, thus enabling accelerated response times
- Trade functions add significant value through improved efficiency and operating cost reduction, actively looking for new ways to use big data to improve international trade processes, uncover cost reduction opportunities and manage relationships
- Through timely collection and meaningful analysis, data can be used to quickly move away from traditional reactive support roles to more proactive and strategic positions
What information is relevant, and how should it be interpreted and used? Enterprise intelligence (EI) can help an organization optimize its performance by identifying relevant information, analyzing it in a way that produces insights, thereby allowing the organization to act.
Analytics – making sense of “big data” to identify gaps and opportunities
Indirect tax analytics is a wide term used to describe the identification and analysis of indirect tax issues through data interrogation. Approaches range from one-off reports for specific issues, to custom-made tools developed for in-house use, to continuous monitoring by third-party providers.
The complexity of indirect tax reporting means that many — and possibly most — multinational companies have significant indirect tax exposures. At the same time, many are becoming aware of the cost of indirect taxes — including high duty rates, unclaimed input VAT/GST, penalties and the costs of financing indirect tax payments.
Tax and customs administrations are also becoming more active and more sophisticated in their methods of auditing large companies’ indirect tax affairs. But, until recently, most companies have not been able to identify the major indirect tax risks they carry, nor have they been in a position to optimize their working capital and cash flow on a global basis.
Many are now turning to technology to diagnose underlying issues and weaknesses in indirect tax reporting and to identify opportunities to improve performance. The service delivery models may be broadly categorized as follows:
- Analytics as an outsourced one-off service — the company provides data to a third-party service provider to analyze and report back findings for a one-off project or specific purpose
- Analytics as an ongoing outsourced service — the company provides data on a regular basis to a third party and gets the results back online
- Analytics as in-house software — the company buys or commissions software to use in-house, often supported by a third-party service provider for the implementation or design
Differentiate your company through enterprise intelligence
- EI is how companies manage and exploit big data. Using information helps businesses sharpen their performance, differentiate their offerings, identify new revenue and innovation opportunities, minimize their exposure to risk, improve organizational efficiency, and facilitate the uncertainty of a volatile global economy
- Properly utilizing the information they store and matching it from different sources is fast becoming a competitive differentiator for forward-leaning companies
Tax reporting begins and ends with data
- Data is the starting point and the end deliverable of every tax task. If companies do not seize the challenge to manage their tax data effectively, tax and customs administrations will. Tax administrations are becoming smarter, faster and more efficient at using data analytic tools to obtain, analyze and assess underpaid tax and duty amounts. In-depth reviews that once took from three months to two years to complete can now be done on a data-driven basis in a matter of weeks
- As companies begin to outsource tax compliance and run their own data warehousing and dash-boarding solutions, their analysis of tax and trade data is becoming much more proactive. And as companies use data analysis tools more effectively, and their understanding improves, processes become more streamlined, response times fall, opportunities increase and the number of unpleasant tax surprises drops considerably
Diagnostic tools and data analytics
Data analysis can help companies look into the future as well as into the past. By bringing together information from a range of corporate functions and external sources, companies can simulate “what if” scenarios and identify where risks or opportunities could arise and where future resources should be focused.
The increased focus on indirect tax from both internal and external stakeholders makes it more important than ever to manage these taxes proactively, within the parameters of an indirect tax management framework. This framework rests on the recognition that there are three aspects of indirect taxes to manage: operational, compliance and strategic.
It is common for each of these aspects to be isolated and considered in a vacuum. But the effective collection, processing and analysis of indirect tax data can bring them all together:
- Through effective harvesting and analysis of indirect tax data, management can bridge the gap between operations, compliance and strategy by gaining visibility, control and insight
- Managing indirect tax data is – and will continue to be – the key to aligning indirect taxes to the strategic goals of the business
How we can help
We can help you uncover opportunities for improving your management of indirect taxes in line with your business drivers – whether you want to gain visibility and control, boost the bottom line, defend your position or support strategic growth. We can:
- Analyze data from single or multiple sources to identify and remediate errors and weaknesses in historic flings and declarations and in your on-going reporting
- Assess the effectiveness of your indirect tax processes and controls
- Identify cost savings and improvements to working capital
- Map the possible impact of future changes on your indirect tax position, cash flow and costs
- Develop EI tools suited to your individual business needs
Our network of dedicated indirect tax professionals combines technical knowledge with industry experience and regional and cultural understanding. With access to technologically advanced tools and methodologies, we identify risk areas and sustainable planning opportunities for indirect taxes throughout the tax life cycle, helping you to meet your compliance obligations and business goals around the world.
We provide you with effective processes to help improve day-to-day reporting, reduce errors and costs, and ensure indirect taxes are handled correctly in transactions. Our globally integrated teams give you the perspective and support you need to manage indirect taxes effectively.
It’s how we make a difference.
VAT/GST compliance and reporting is clearly one of the areas where technology can help to improve indirect tax management. How are tax administrations responding to the digital challenge? Where do VAT/GST payers have more obligations, and where do they have more opportunities?
In the digital age, VAT/GST payers’ obligations are increasing as tax administrations look to collect more taxpayer data electronically. But advances in technology can also ease the burden and allow taxpayers to meet those obligations more easily and at lower cost.
In tandem with our report “Managing indirect tax data: gaining insight and control in the digital age,” we conducted a global survey of EY Indirect Tax professionals in 86 countries.* We asked them about the information collected from VAT/GST payers by their local tax administrations, how the information is collected, how long it must be retained, how it may be stored and whether tax administrations extract data from VAT/GST payers’ systems for tax audits.
We confirmed that VAT/GST payers face a wide range of reporting obligations around the world. The frequency of reports and type of VAT/GST data collected varies greatly from country to country. The lack of harmonization and mounting demands for accurate transactional information can challenge even the most effective accounting systems, making it difficult to centralize and standardize processes.
At the same time, businesses are increasingly able to adopt electronic strategies that allow them to issue their tax invoices and to store large amounts of data efficiently, cost-effectively and securely.
Tap into the data of our survey to discover more about the trends, challenges and opportunities that exist far and wide.