TBI Expert View is our in-depth look into the evolving world of global VAT, the VAT landscape, and current trends that companies should be considering and planning for as we head into 2023.
In Episode 3 of Series 3 of TBI Expert View, Andrew Finnegan, Senior Finance Director, International Financial Controller & Vincent Manning, Senior Tax Manager for Zendesk discuss ‘Digital Reporting’.
Hello everyone. Welcome again to Expert View. In this episode we’re going to look at digital reporting requirements in a bit more detail. Today we’re meeting with Vincent Manning and Andrew Finnegan from Zendesk, who are going to take us through the current situation with DRR, and they’re going to talk about what’s coming down the line. They’re going to talk about the impact for Zendesk and wider businesses.
So Vincent & Andrew, welcome to Expert View.
Thanks, Lisa. Appreciate the opportunity.
I’m going to just hand the floor over to you now to go through your presentation.
Thanks very much. So just briefly to introduce ourselves, my name is Vincent Manning and I’m Senior Tax Manager at Zendesk. I’ve been with the company over three years and my areas of responsibility cover everything tax related in the EMEA region.
Hi everyone. I’m Andrew Finnigan. I am the Senior Finance Director for EMEA and I’m with Zendesk just over four years. My areas of responsibility are for accounting EMEA and then for global payroll. Just to give you kind of some background on Zendesk. Zendesk is a SaaS company, so we provide software as a service which allows our customers to interact seamlessly with their customers across a number of channels, whether that be email, chat, voice, social media and the company was founded in 2007 in Denmark and is now based in San Francisco.
And as a group, as you can see on the slide, we have a presence in all regions which is growing year by year. And in parallel, our revenue as a group is growing year on year and looks to continue growing into the future. So, onto the area of digital reporting, as most of you know, when we talk about digital reporting specifically, we mean continuous transaction controls and periodic transaction controls. And I’m sure most of you have come across both of those at this stage and heavily linked to the area of digital reporting is the area of e-invoicing which almost goes hand in hand with CTC’s and again, as you all know, the focus for digital reporting is controlling that VAT gap and minimizing that VAT gap as much as possible. That knowledge fits into the Use Action Plan from 2020, but with those on a single approach to digital reporting, it’s currently a bit of a wild, wild west. The demand is in terms of what different countries are doing on the area of digital reporting, and we’ll see that on the on the next slide.
And then before we move on. Just a quick question. Seeing you mentioned there it’s the wild, wild west and that the approaches are different in different countries are you seeing more countries focus on digital first or are you still seeing some countries being very, very manual and less reliant on digital first?
Again, it’s kind of following the same theme in terms of a very varied approach, in terms of what countries are doing. And I guess, you know, if you look, different countries are taking different approaches to the area of digital passing, how to tackle this. And similarly, tax authorities in terms of tax audits and things like that are taking very different approaches. And some, as we’ve seen ourselves over the past few years, have been quite digitalized in terms of looking from that data directly from your system, almost a data dump that they just take away, comb through, harvest and analyse using their software. And then the other cases we’ve seen, the old school kind of paper-based audits where it’s almost handing them over invoices and all your paper documentation. So yes, it’s really quite a mixed bag in our experience. And that kind of leads onto the next slide where we show the different countries and to have implemented city fees and fees so far and as you can see, even under each heading, there’s different approaches that countries have taken. So, you know, if you’re coming into this fresh to look at it, it’s a little bit overwhelming in terms of where these stairs are or any one way to get on top of all of these different requirements. And it’s actually quite difficult because each country has their own, I guess, specific requirements and then different approaches to digital reporting. So, it’s just one of those. Yeah, it’s quite difficult to get your arms around us.
And in terms of something I’ve noticed and Vincent, especially as it relates to Zendesk and as we’ve moved more into digital first and is our reliance both from a tax perspective and even from an accounting perspective on it and on the systems that we use. So, I mean, what’s your take in terms of what, you know, a tax team is going to look like in the future? Is there going to be a need for more I.T. based skills or will it still be the traditional kind of model in terms of tax specialists?
I think it’s kind of moving towards that hybrid approach. I guess really where people understand the tax technical, the kind of fundamentals of tax, but also have that understanding of systems and IP and being able to marry the two together so that you have a system that can operate in an automated way and meet these various requirements. And even just to simplify it and bring in efficiencies in terms of your tax reporting, but also that it’s fundamentally correct and that every return you file is still accurate. So, it’s something we’re trying to do get a handle on in terms of how we upskill. But also like you said, like getting resources and working with IP and getting their buy in so that it’s very much a collaborative approach in terms of digital reporting. On the IT side, the system is doing what it should, but also on the tax side that it’s accurate, it’s compliant with all tax laws or we need to report our taxes.
And sort of notice things around the area of planning and resources that because we’re reliant on I.T. and I.T. resources are finite that we must be more structured in terms of what we want to do and when we want to do it and get it on the roadmap. So, you almost need to be thinking 12 – 18 months in advance and getting your resources booked in, in order to implement something that that you need. There’s less resources there to be reactive to changes that come down the line.
No, absolutely. And we see that across all areas. I find you need to have a clear picture of what the requirements are and what you need and that you can really sell that to the I.T team or bring it to them as a project, that’s very clear and very laid out in terms of requirements. And like you said, then getting this on the roadmap for maybe some point next year or 12 – 18 months down the road. But it’s all very clearly laid out in terms of what you’re going to need. And what are the quarter requirements and what’s the resource that you need from I.T. I suppose that leads us into our example of our first kind of interaction with digital reporting. This was the UK’s Making Tax Digital for VAT, which came in, in 2019 and ran up well. It’s continuing, but the soft-landing period ended in 2021. So, I’m sure most of you will have come across this in some form already. But I guess for us it was the first time where we needed to step back and look at one of these digital reporting requirements and see, well, how are we going to approach it, what are our system currently capable of, where the gaps were, the quick wins and you know, really kind of formulate a plan and get the buy in from the different stakeholders that we needed. So, in this case for us, it was working kind of cross-functionally. I know we just mentioned about working with our I.T team, but it was also engaging our procurement team, our accounting team as well as I.T in terms of understanding the full end to end process and seeing, okay, well how are things working currently? What’s the process? And then what are our systems doing at the minute, where there are areas that we could easily with a few tweaks without making any changes that are too fundamental, but just kind of make little improvements and then seeing how that flows through to the end process. So, there was a lot of discussions and various ideas tried in terms of, how we could approach this. But for us we settled on enhancing the use of tax codes in our app system and in our ERP system at the point of entry, that invoices are almost categorized at that point and assigned the tax code. And then that will just flow to our system when it comes to our reporting, then we have the categorizations and then to collate that into a final, the VAT return is quite straightforward and it’s something that was automatable.
And then since many people listening to this will have a similar structure to ourselves that they do use a shared services center and a lot of the high velocity transactions are entered in the shared services center; what approach did you take to ensure that the accuracy of the entries going into our ERP system was high? Because I’m always conscious of, garbage in, garbage out. If we’re not doing things right up front, then the VAT return that we get at the back end will be nonsense. And will create more problems. So how did you go about ensuring that there was a high level of confidence that the returns were going to be accurate?
Yeah, and that was something we kind of had to really think through because, you know, like you said, we have a shared services center and a lot of people there are VAT experts. So, you can push very technical responsibility onto them in terms of determining the correct VAT treatment of invoice. This was at the same time they were first point of contact and are the people putting in the data. So, it’s finding that balance between giving them the right tools to apply the correct tax codes, but also not putting too much pressure on them. That might be too much in terms of their kind of technical capabilities. For us, it was a case of predefining the tax codes that would apply to each invoice. But on top of that, giving a high level of training to all of the app specialists and giving them documentation and resources for them to be able to say, okay, well, broadly, I understand the concept and the process, and I’m well enough equipped to be able to see if a tax code looks funny and if it’s something that maybe needs to be investigated. But otherwise, a lot of that pressure is actually off the person, that they know the code is predefined and it’s more a verification from their side, which we found this was a much better approach. And then, we had different controls in place as well in terms of the levels of review and audits, in terms of making sure that those codes that were being applied were the correct ones, just to make sure that the accuracy was one 100% plus. For us, it’s something we’ve had in place for a few years now and we’ve found it’s been a massive success. And even just in terms of numbers, we’re finding, it’s taking, I think, 60% less time to prepare the VAT return, which over a few returns over a year is a big time saving. And we’ve learned a lot from this. We’ve kind of tweaked it as we’ve gone along. And it’s something we’re looking at rolling out to our other subsidiary entities, even though the same requirements might not be there. But it’s about improving the data that we have. And to your point about garbage in, garbage out, just really getting robust VAT data into our system and being able to leverage that. So down the road as we make more of these requirements, we’re in a much better position to be able to adapt to them and implement the necessary changes to comply with the requirements. But going forward, then in terms of how we plan around digital reporting in Zendesk, obviously it’s very difficult to look too far ahead for us both internally and externally. There’s bound to be big changes internally in terms of the different countries that we’re in where we have different entities set up. And maybe the activities of some of those entities change over time, which changes the VAT lock of those entities. And externally tax law is continuing to evolve and change, and more countries are introducing legislation around digital reporting. Even in Ireland, where our VAT return hasn’t changed in a long time, it’s likely something that eventually will change and become more digitalized especially as revenue you have digitalized things like real time reporting. It’s inevitable that eventually VAT will go down the same route. But again, that’s looking at maybe one country and looking at each country in isolation. But without that global framework or global approach to digital reporting, it makes it much more difficult. And to really leverage any efficiencies across countries. In terms of the approach that you take to digital reporting, it’s kind of ad hoc, one by one facing each one. I guess the hope would be that there would be a harmonized approach in that there’s one way to approach digital reporting. And then for us, you know, we can, like we’ve talked about as having a road map for I.T, of having maybe one global project that will allow us to meet all of these various requirements for us. In the meantime, that kind of wraps up this case study that we found very useful and hopefully sets us up well for the future. But now I’ll pass it over to Andrew to talk more about the wider tax landscape and how we how we approach this.
Before we move on to the kind of the volatile world that is international tax. I would just like to make an observation in terms of that there is no one solution that fits all and that the approach that we’ve taken in Zendesk is very much of a hybrid model where we educate ourselves internally, but we also leverage our third-party partners such as Taxback International, because we don’t have all the expertise or the knowledge. So, we use our partners, and we use our internal knowledge and that’s how we feel comfortable that we can stay as on top of the tax landscape as we can.
Moving on to the next topic, which is, living in a virtual world and to give you some context, the terminology VUCA came from the Army War College in the U.S. and it was during the 1980s. They were moving from, a world where it was a Cold War and they knew who their obituaries were to a world where there was a lot of unknowns. And that’s very much where the international tax kind of arena sits. Vincent mentioned it earlier about the wild west, and that’s a very true statement. What I found is, and I think observations that probably everyone has made is that, they did the accounting landscape changes gradually and you get probably two years notice of an upcoming change. You can all do your due diligence, understand how it affects you, plan & prepare, but, the tax landscape is very much more volatile and as leaders within our organizations, we need to be prepared for those unknowns and to put in place structures and whether that be system related or whether that would be team and personnel related, that allows us to plan for the future and be able to respond in a timely manner when there’s a sudden, unannounced fact change in a particular country, which we’ve all seen examples of that in recent months and years where rules and regulations and change almost feels like overnight. In terms of, giving you a more tangible example of how we in Zendesk approach it, we have a slide here which talks no tax controversy. We’ve put this in place in order to help us and prepare for future audits, because what we found is that we’re targeted across a number of different tax headings by taxes authorities in different countries and rather than waste and engage with one of the big four to help us respond to an audit query that we use our philosophy around tax controversy to help us prepare. This is so that we have first, second and third-line defences in place before the audit even comes and before we even receive the notification about an audit comment. To give you an example, we use our own product, the Zendesk product which we sell to our customers, and we use that to and for our MDF structure. We raise a ticket if we have a tax change, we raise a ticket in our system, we give access to that ticket to multiple stakeholders. We gather feedback from multiple stakeholders so that even if the decision we make is not agreed with by a relevant taxes authority, they will agree with the approach that we took to make that decision, that we have it all well documented. We have the advice we received from our third-party partners. We have documented the decision-making process that we use to come up with the decision that we made. This is an example of how in this physical world that we live in, that we have to be as prepared as possible and have to anticipate, what is likely to happen down the road. I suppose the points that we want to make in this physical world that we live in is be prepared and have your defence mechanisms in place and understand the why. Educate the business. And, you know, a point that I’m very passionate about is get the balance right between systems and people. As we move digital first, there is this tendency to become slaves to the system. We press the button, we get a VAT return. Great. But we lose the knowledge sometimes in terms of how that operates and why that operates. I think something that, as I said, I’m very passionate about is that you need to not only rely on the system but understand how the system operates and be able to spot when the system isn’t operating in the way that you anticipate.
And just to jump in there, Andrew, and ask a question, I suppose, on the area of digital reporting and I know we’ve all seen different countries can be strict in different areas and I suppose it’s another element to consider in terms of tax compliance. There’s an expectation that a tax return that you file is correct and the positions you’ve taken are correct. But this is, another element in terms of actually filing the report digitally. And some countries may be equally as important as actually filing a correct tax return in terms of filing it digitally in a specified format. With your VUCA, how do you view factoring data and then another complication to add into the tax mix?
Yes, this is a very good question. There is no one right answer. The tax landscape is absolutely changing. We are moving to Digital First and we need to invest in our systems to make sure that we’re compliant and that we’re meeting the expectations of the tax authorities that we’re working with. And I’m at the same time getting the balance right to ensure that. And we understand why we’re doing what we’re doing and we’re not just doing it for the sake of doing it. That would be my response to your question.
Yes, totally. And I fully agree. I think that brings us to the end of our session on digital reporting. We hope you found this insightful and informative.
Vincent & Andrew, thanks so much for your wonderful presentation and thanks for joining us again at The Expert View.
Take a look at Episode 2 of Series 3 of Expert View where Manuela Blochwitz, VAT Manager for Envista and Lisa Dowling, Senior Global Director, Head of Indirect Tax, Advisory and Compliance at Taxback International discuss ‘VAT Controls when moving to a Shared Service Center’.