Episode 6 – The VAT Industry & the Changing Role of Digital Technologies

Seeing the Changes in Global VAT

The pandemic brought digitalisation into clear focus for every business regardless of industry. A recent McKinsey report stated that 9/10 companies saw digitalisation as intrinsic to their survival. The VAT industry is no exception.

While this is not a new thing, it is probably newer to indirect tax. Tax offices are traditionally slow to change, however, they have a VAT gap they need to close. Digitalisation can assist in this regard.

Pioneering Countries & Struggling Companies

Some pioneering EU states were early adopters of the OECD SAF-T transaction reporting standard. Currently, live invoice reporting and tax authorities’ approval are already in place in Spain, Hungary, and Italy. It will also soon come to Greece and Portugal. Similarly, the UK’s Making Tax Digital plans for digital VAT records and filings went live in April 2019.

As Joe pointed out, this places a lot of burden on organisations that are not ready for digital transformation. This initial foray is showing that a lot of companies just aren’t set up to tackle these changes. Interpretation of the legislation causes a lot of strain for businesses.

Such businesses are left with 3 options:

• Develop technology.
• Adopt 3rd party software.
• Outsource the compliance process.

Largely, Taxback International has seen a mix of all 3 and in some cases a hybrid approach. But the most common factors between these choices are the amount of time, energy, and budget being assigned to it by businesses. Not to mention the enormous stress.

Finding the right partners to assist in the adoption of digitalisation and setting themselves up for success is key.

IOSS/OSS – Is it working?

Long term, digital shifts will be good for both businesses and tax offices. But at the moment, they lack streamlining. As Lisa Dowling pointed out in a previous episode of TBI Expert View, there is simply not enough standardisation. The new real-time reporting requirements, for example, make the processes even more complex for companies.

There are also a lot of changes for e-commerce clients following the introduction of the Import One Stop Shop (IOSS) that came into effect in July. This change has created an urgency to implement.

There has been a huge scramble to register for Import One Stop Shop (IOSS), especially amongst UK-based E-Commerce businesses as they scrambled to register for IOSS. However, the IOSS and OSS are not the simplifying measures they were assumed to be at the start.

As the threshold for sales of €150 is very low, many e-commerce clients will still have to register for VAT outside of IOSS. A close eye should be kept on this space for any future changes.

As our clients adjust, they are restructuring their organisations from a VAT perspective and an item that presents a lot of issues is getting foreign tax offices paid.

Cross Border Payments

Businesses have traditionally utilised their banks to pay foreign tax offices. Often, this creates a consequence on cash flow as payments must be executed very early to decrease the risk of late payments.

With digitalisation, transparency is increasing, and optimising cross-border payments is necessary. The consolidation of requirements also means that the internal VAT teams and their treasury counterparts can synchronise processes and data to optimise payments and cash flow while always paying the Tax Office on time, regardless of location.

What consolidation means?

Ultimately what consolidation means for businesses is that they can execute the whole process in one space. Nothing needs to be done extremely early as it can all be done on time, closer to the due date.

Internal teams can take more of an overview of the process and VAT teams, treasury team, et al can follow the one flow. While the VAT function might have previously been overlooked it’s now visible end-to-end.

How do we support organisations and companies that are struggling?

Pre-pandemic, businesses already faced a myriad of changes in the world of ever-changing indirect tax. But the digital revolution presents new challenges for our customers. The companies who are embracing this change and proactively identifying solutions and partners are setting themselves up for future success.

At Taxback International, Joe notes he has seen clients struggle to recruit and retain VAT compliance staff, track legislative changes, or become intimidated by the speed of technology adoption by the Tax offices.

However, he notes that all of these challenges also present a unique opportunity to future-proof their organisations by adopting the right technology platforms which can be customized around their specific needs. The digital era is upon us and the genie cannot be put back in the bottle, the right technology platform will future proof all company’s indirect tax processes.

Already jurisdictions such as Australia, Brazil, and Norway are focusing on digitizing their VAT processes. In the long term, companies will be able to create more efficient processes and increase transparency while reducing risk.

Are authorities listening to all the stakeholders? They must listen to the industry and the industry, in turn, needs to elevate itself to the right level. This dialogue between authorities and businesses and other stakeholders is critical to making this a success.