Real-time indirect tax controls and online reporting – less similar than you think…
The ISO Invoice Tax Report and SAF-T specifications for online tax administration invoice controls exemplify fundamentally different directions in the rapidly evolving electronic invoice compliance space; these models affect businesses in very different ways.
If you want to know if trading parties respect indirect tax requirements in their dealings, there are essentially two ways to do that: (1) tell them to keep track of key aspects of their transactions and ask them to disclose recorded data upon request (pull, i.e. audit) and/or through periodic reporting (push, i.e. tax declarations); or (2) obtain data from transactions ‘on the fly’ by chronologically recording and ‘clearing’ specific subsequent steps towards completion of the transaction.
Both methods allow tax administrations to leverage the internet and associated modern technologies to obtain data much more quickly than before. And since the costs of exchange data over the internet has decreased so much, both methods nowadays often require taxable persons to send the tax administration one set of invoice data at a time. It’s understandable, therefore, that the non-initiated observer views these methods as all more of less the same time.
One essential difference between the two however becomes evident when looking at the data that is transferred from the taxable person to the tax administration:
- The invoice + additional audit data from the taxpayer’s system in one file: in the case of online audit or reporting (method 1), which is an up-and-coming method in Europe, one often finds requirements that are fully or partially based on the SAF-T specification issued by the OECD. A SAF-T file contains invoice data as well as various other data about the underlying supply from the ERP system and/or other systems used by the reporting taxable person.
- Just the invoice (or other discrete trading document): in the case of ‘clearance’ (method 2), the taxable persons are required to send only the invoice and/or other business data that relates to the transaction step which the tax administration wishes to receive, record and approve. An example from the standards world – although not broadly adopted yet – that has been designed to support this process for invoices is the ISO20022 Invoice Tax Report message.
Both methods share a number of features that are obvious and widely reported: notably stringent machine-processable format constraints. More relevant than these common features is the different impact of the two models in existing business processes. Understanding this difference isn’t just for geeks. The confusion between these two control measures increasingly has significant real-life consequences. Let´s briefly look at a few of them.
How easily available is the required data?
While invoices are readily available as part of any B2B (and B2G) transaction process, businesses need to delve a lot deeper into their internal IT systems to be able to gather the data that is needed to create a full SAF-T report. Many businesses struggle with this task – sometimes because it’s problematic to rearrange IT systems and processes because companies increasingly face severe restrictions in available IT resources in this era of cloud and outsourcing; but more often – especially for smaller companies – because such data is simply not available.
Relevance of taxpayers´ compliance with ancillary record keeping obligations
Under method (1), a tax administration needs to trust the trading partners to keep a transaction data ledger in a reliable manner. Under method (2), the tax administration is in a position to gradually build up such a transaction ledger itself from authenticated supplier and buyer connection points in a highly automated fashion. It would therefore seem that method (2) reduces tax administrations’ dependency on the honesty of taxpayers.
Who is better suited to execute these obligations?
Most importantly, an argument that requires some understanding of current dynamics in the ‘enterprise software’ market: the supply side of this market has over the past decade or two evolved towards distinct vendor categories for business-internal processes, such as ERP systems, and transaction management processes, such as procure-to-pay or order-to-cash systems. Since these are at present separate vendor categories, it makes a big difference if tax requirements for online communication of invoice- and other tax-relevant transaction data- use method 1 or 2.
Invoice data permanently travels back and forth these different systems within and between companies, from source data in sales, logistics etc. systems to records in the ERP and discrete trading documents/data in transaction management systems. Therefore, when the law requires invoices to be communicated to the tax administration in real-time or near-time through an online method, companies may be unsure when such communication should take place: should the communication take place while invoice data is being prepared or recorded in the ERP or upstream internal systems? Should it rather be seen as a new step as part of the business-to-business data exchange process? If so, at what moment of such process should the requirement be met?
It’s quite natural that companies are unsure about this, because tax administrations often do not produce clear guidance on this matter and laws use generic terminology – for instance referring to ‘the invoice’ without specifying whether that means ‘invoice data’ in the ERP or ‘original invoice’ in the exchange system. The result of this will be familiar to many readers: companies put pressure on vendors across these different functional categories, which can lead both to dangerous compliance process duplication and non-compliance because the vendor in question simply isn’t in the right position in the end-to-end data processing chain to get to the right data or perform the required interaction with the tax administration. This may sound academic, but in real life we’re seeing transaction management service providers withdraw support from some countries because they cannot be certain if they have to meet SAF-T-based reporting requirements – which among other things means that suppliers in such countries may no longer be able to invoice their customers abroad.
We’re clearly lightyears away from any standardisation of these different online control methods. It is obvious, however, that tax administrations view the (electronic) invoice as the key leverage point for improving tax collection. To prevent subtle but important differences such as those briefly described above from spawning greater diversity among online tax control approaches, we need to make sure that these issues are more clearly defined and taken more seriously by policy makers.
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Christiaan van der Valk, Company President, TrustWeaver