When real-time tax controls move from a trend to the norm, what comes next?
Few experts would disagree with the idea that the global trend towards real-time tax controls on business transaction data has evolved from a ‘trend’ to the ‘norm’. The first ‘clearance’ systems have now been in place for over a decade, and pretty much every tax administration that we’ve talked to, who haven’t yet embraced this path yet, have admitted that they plan to eventually.
So, the time has come to think about what will happen next – once the paradigm has shifted, do we go back into an evolutionary mode, or are more revolutionary things coming? Here are my predictions on the incoming trends and fundamental key questions we’ll have to tackle over the next 10-15 years:
1. Analytics as you’ve never seen them before: big data, artificial intelligence, and machine learning
Tax administrations don’t normally publish a comprehensive list of the controls they run on the business transaction data they receive through their real-time platforms. And most countries that have a clearance system in place have so far just focused on just getting the exchange process to work. But once the technological requirements are in place tax administrations will find that they are left with a goldmine of data that they can use analytics to mine, analyze and identify trends that will assist them in further closing their VAT gap.
Expect artificial intelligence to be a major area for investment among tax administrations in this space. Businesses will see their invoice and other transaction data scrutinized, not just as individual documents but increasingly as big data sets that allow tax administrations to utilize machine learning to identify behaviors and sniff out anomalies. Organizations will be held accountable for errors, inconsistencies and mistakes on an entirely new and completely unprecedented level.
2. An increased focus on tax determination
With every invoice not just exposed to tax administrations in real-time, but with a growing number of tax administrations being able to stop your logistics or financial processes in their tracks until they are satisfied that an invoice is 100% correct, there’s one area that needs urgent attention: tax determination. Today, businesses rarely, if ever fully master the complex art of determining jurisdictions and rates, but when an entire supply chain is dependent on getting it right, this will increasingly become a priority area that you will need to get under control.
3. Businesses will be forced to improve master data
As most indirect tax managers know, the quality of your master data is your company’s tax compliance Achilles’ Heel. The complexity of wildly varying real-time control systems will finally free up the internal budget required to drive the required enterprise-wide programs that Tax Managers can only dream of, helping fix this problem once and for all.
4. Tax audits will dwindle
Real-time tax controls will mean that tax administrations will work harder to make deep audits extremely rare events. A new balance will be achieved between advanced analytics and business data quality, creating an opportunity for tax administrations to perform pinpoint surgical audits only when and if required.
5. Reports will change in nature
A lot of the focus in real-time tax control has been on indirect tax collection. Naturally, things won’t end there. Tax administrations will extend the controls that improve their ability to collect direct taxes. While real-time transaction controls will ultimately reduce the need for certain types of returns for indirect taxes, the direct tax angle will come in to complement information collected from transactions with non-transactional data (e.g. assets) on a periodic basis.
6. Meaningful clearance harmonization? Not before the first human colony on Mars…
While we are working hard to do our part to push for standardization and harmonization among real-time controls, we’re not optimistic that practical progress will happen any time before the first colony is planned on Mars (a 2030 goal for NASA). Wild diversity will remain the norm as tax administrations feel increasingly free to introduce and make new tweaks to their models. From a macroeconomic perspective, the current phase we’re in has a land grab quality to it; as long as there’s still room for creative innovation, countries won’t mind beating their economic competitors to the perfect system, and therefore the incentive for subnational cooperation will be at best, modest.
7. B2B standards will embrace public sector-driven elements
Standardization organizations and software developers will in the coming decades find themselves introducing more considerations that originate in public law than ever before. Automated, transparent, real-time communications with tax and other law enforcement authorities will become the norm in software development and this will inevitably influence business functionality. It’s not economically feasible for business solutions to maintain and evolve two parallel types of process and technology, for real-time communications and reporting to tax administrations and for business-to-business optimization purposes, at the same time. As such, there will be strong economic drivers towards standardization, and as regulatory functions aren’t negotiable – they are more likely to come out as the winners
8. Late payments will diminish
We’ve already seen it in Latin America: tax administrations can become positive agents for change in the economic relationships between buyer and supplier. They do this by building ‘hooks’ into their real-time control systems that innovative fintech companies can use to launch finance services that create market-driven solutions to the problem of late payment. These solutions are helping combat one of the greatest dangers to a flourishing economy built on healthy SMEs.
9. The biggest question of all: can tax administrations control the power they are unleashing?
Real-time controls aren’t just a new way of collecting taxes. They’ll have a profound and lasting impact on how businesses and governments are run. Business software will evolve to organically include the standards and processes driven by such legal requirements. However, tax administrations will almost inadvertently attract economic powers that, not only are they not historically equipped to handle but that no government agency has possessed in history. This will, of course, lead to the question of data privacy and data use limitations. Governments will have deep access to unprecedented levels of intelligence from all areas of economic life, from individual business deals to macro-level indicators, at any moment in time – including right now. We’ll soon need a real discussion on how this profound intelligence, about markets and individual companies, can and has to be safeguarded from manipulation for political or even darker purposes.
10. Real-time platforms as business transaction engines – a bridge too far?
Perhaps the biggest area of concern and where the biggest potential risk lies is with tax administrations who will increasingly be tempted to use their enormous cloud execution power to fix what other government departments view as a failure of the market in specific areas. For example, we already see real-time control platforms go beyond their initial mission to siphon off useful data as business transactions happen, and instead interpose themselves as platforms that handle the end-to-end invoice exchange processes. In some cases, this function is optional and focused on accelerating electronic integration between very small companies – an area where B2B automation vendors have not traditionally focused. However, other tax administrations have already taken this idea to its logical extreme, making it mandatory for all invoices to be delivered to buyers via their real-time control platform.
While the basic idea is understandable, it is impossible for tax administrations to focus on the ever-increasing business efficiencies in the way that a specialized B2B automation vendor can. Over time, tax administrations will need to make big decisions to balance the opportunity for perfecting tax collection, with the automation benefits of continuous market-led innovation in the business transaction software space.
Christiaan van der Valk, Vice President Strategy, Sovos TrustWeaver
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