The way in which businesses file and remit tax returns will soon undergo big changes. Governments have always wanted faster payments, increased compliance, and reduced fraud. The confluence of these needs with technology’s emerging ability to give it to them are queueing up significant changes to tax compliance around the world.
Traditionally, merchants have collected and held taxes during a filing period, and then some time after the period ends the merchant has filed a summary return and remitted the taxes. This system evolved hundreds of years ago, before the existence of computers or even copying machines. In the days of quill pens, it would have been unrealistic for a government to ask tax filers to send a detailed list of all transactions or immediate payment. So, summary returns were adopted as a reasonable filing requirement.
However, with the advent of online point-of-sale and bookkeeping systems, merchants have a digital record of every transaction as it occurs in real time. And thanks to rapid advancements in technology, it would not be difficult to provide that transaction detail to a government electronically. Further, we’ve all come to expect immediate payments. The government has no reason to wait days or weeks after the period ends to get their money.
Governments around the globe are starting to leverage technology to reduce fraud and collect tax payments faster. Businesses and financial service professionals need to stay up-to-date on recent global trends in tax compliance in order to prepare for increased reporting and compliance responsibilities, both in the United States and internationally. Here’s how to do that.
Standards evolve at home and abroad
Let’s look at ways governments around the globe are changing filing practices to use technology to reduce fraud and accelerate payments.
In Brazil, new policies for sales reporting require online documentation called a Nota Fiscal. Transactions are reported to the government in real time. For most transactions in Brazil, the sale may not be completed until the government has received the electronic invoice and issued a confirmation number. Brazilian businesses must also report to a public, digital bookkeeping system, called SPED, that requires these companies to upload general ledgers, trial balances, customer and transaction lists, suppliers, transaction details, and inventory ledgers. Financials must be signed by both the company and their accountant. The government reconciles transactions between buyers and sellers, and any mismatches automatically trigger a government audit. These new filing methods are credited with increasing Brazil’s tax revenue by U.S.$58 billion via improved efficiency and reduced fraud.
In India, the government now requires all businesses to use the Goods and Services Tax Network, or GSTN, for all sales and financial reporting. While not a real-time system, the government does reconcile transactions between buyers and sellers. In fact, with the GSTN the government has such a good idea of a business’ sales on its books that it fills out a tax return automatically. The GSTN system requires that monthly returns, and tax payments and credits, cannot be claimed for transactions unless they have been matched between counterparties.
The GSTN system requires full invoice-level details for all business-to-consumer transactions that cross state lines and are greater than 250,000 Rupees (approximately U.S.$3,900). Businesses must also provide extensive payment details and identify the HSN code for all products. India’s government made these changes to drastically cut down on fraud and increase tax revenue.
The European Union now requires that businesses comply with a Standard Audit File for Tax , or SAF-T. This new standard specifies that accounting data (down to line-item data) must be available in an electronic format (.xml) for monthly tax collection and on-demand audits. Value-added tax is withheld until confirmed via SAF-T.
SAF-T substantially increases the amount of transaction data shared with tax authorities, supplying tax authorities with a full range of information, including transactional data, full general ledger and journals, accounts payable, vendor master data, payment ledgers, and soft-copy vendor invoices. Other information includes accounts receivable with client master data, accounts receivable payment ledgers, copies of customer invoices, warehouse inventory product master files and inventory movements, inbound and outbound flow of goods, fixed assets ledgers, depreciation and amortizations.
SAF-T not only requires local businesses to supply this transactional data, but also demands that European Union companies that file VAT returns in a SAF-T country provide SAF-T data.
Filing requirements are starting to change in the U.S. as well. Merchants that participate in the Streamlined Sales Tax initiative are already required to provide ledger-level detail in filing. Further, legislation has been introduced in Massachusetts that would require credit card and other payment processors to remit the tax portion of sales to governments in real time.
In an even more stunning development, Colorado enacted a law that required out-of-state sellers to provide the state with a list of all customers and their purchases for sales in Colorado, if the remote sellers did not comply with certain requirements. The Supreme Court recently declined to review this law. Other states are following suit, meaning retailers may soon find themselves having to provide full customer lists and purchase histories to state governments.
States are also looking to capture more taxation from online software sales and services, and require reporting to assess tax obligation as well. To determine tax obligation, state tax authorities would require businesses to share contract and customer details, as well as delivery mode and usage information.
The future of tax compliance
Both businesses and tax professionals should prepare for the future by looking at real-time accounting practices and preparing for detailed data sharing. Governments will likely continue to pursue more enhanced tax compliance requirements as a means to reduce fraud and increase tax revenues, including the accelerated collection of tax revenue throughout the year.
Merchants should start to examine whether their systems are ready for real-time reporting. Business may find this involves not just technological change but also policies and practices. In the past for many small businesses it may have been acceptable to look past minor things that don’t balance. In the future, such imbalances could trigger government audits or charges of impropriety. Being ready for electronic reporting involves not only technology, but likely improvements in processes as well.
Because tax compliance requires increased amounts of data, businesses and tax professionals should begin ensuring that data for transactions, invoice details, ledgers and account balances is digitized and available to access when needed. Businesses should also prepare for the potential data security risks that result from new data-sharing requirements. Companies doing business in regions that require real-time validation will likely need a financial service partner or advanced software to deploy, automate and update all the required systems to comply with the new mandates.
Given governments’ desire for reduced fraud and faster payment, it seems inevitable that these taxing authorities will embrace what technology has now made possible: far more detailed transaction reporting and real-time remittance of funds. Businesses should watch these developments and take steps to be prepared.
Could it be that if tax collection efficiency improves, governments will reduce the overall burden of taxation? One hopes!