Why the Creation of a “United Nations of Digital Tax” Is a Game-Changer for Digital Business Transformation
November 20, 2018
The event largely went unnoticed in the general press, and even the business and IT press hardly paid attention. Yet the proceedings that unfolded in October 2018, when more than 80 of the world’s tax administrations came together at a Tax Summit in Lisbon, would be major financial headline material if more people understood their impact.
There is no doubt in any expert’s mind that the platform that was created at this Tax Summit organized by IOTA and CIAT – respectively the leading Europe-and-beyond and the Latin America-and-beyond organizations of tax administrations – creates a de facto “United Nations of Digital Tax,” which has the power to redirect the digital transformation of business as we know it.
How businesses got a digital head start
The basic ingredients of today’s digital revolution in business and civil society started in the 1990s when telecom monopolies were broken down in the US and Europe. Injecting competition into that market quickly set off a wave of innovation that yielded the internet as we know it today. In parallel, the United Nations Commission on International Trade Law (UNCITRAL) from 1996 onwards issued a succession of consensus model laws and treaties that set a relatively cohesive framework rendering the use of e-commerce, e-signatures and e-contracting commercially viable around the world.
By contrast, governments have always jealously protected their right to tax transactions within their jurisdiction using methods and tools of their design. Whenever new laws to facilitate the use of modern IT by businesses and consumers were discussed in any government body, someone would stand up and make sure a footnote was inserted clarifying that such measures would not apply to tax, which until further notice by each competent tax administration would have to remain paper-based.
As a result, businesses had several decades during which they could push ahead with the adoption of digital tools for driving friction out of supply chains and conquer new markets without too much digital red tape from tax, customs and similar law enforcement functions. This meant that certain documents or data of specific value to these areas of public administration still had to be issued and stored on paper – but all in all that didn’t stop businesses from starting journeys of profound change based on available technologies.
The revenge of a footnote
The Lisbon Tax Summit has shown that those days of carving out tax from the digital revolution are officially over. Tax administrations now have a place to work together as they roll out programs towards the establishment of what might be viewed as giant business transaction eavesdropping machines. A key feature of this approach towards ‘continuous transaction controls’ is that businesses and their software vendors are mandated by law to build connections for pushing data that they previously only exchanged with each other to these cloud-based auditing platforms in real time. Governments will leverage their newly created “UN of digital tax” for the exchange of information and best practices; however, they will continue to pursue the actual design and implementation of these cloud systems as diverse national programs.
This revolution in digital tax is spearheaded by emerging economies rather than the countries that have previously driven international law and policy. At the Lisbon Tax Summit, presentations by the Mexican delegation about a seven-step program to introduce more powerful analytics to mine transaction data and progress shown by Russia on leveraging the Internet of Things concept for point-of-sale tax enforcement made interventions by the world’s economic superpowers look oddly anachronistic.
Latin America and other geographies with early experience in continuous transaction controls are showing unprecedented improvements in tax collection. These successes are now freeing up virtually unlimited budgets for digital tax programs around the world. Many larger countries can count their gap in indirect (VAT, GST, sales or use) tax collection in the tens of billions of Euros. Spending a couple of billion a year on reengineering the way business transactions are audited until the gap is of an acceptable size is a no brainer – and probably unavoidable for countries whose sovereign debt has taken on unacceptable proportions.
Reacting to these trends risks putting your digital transformation in reverse
To exemplify what this means to the reality of international businesses, take an enterprise with a 5 million Euro budget for digital modernization for 2019 – and let’s say this company does business in six countries that during that year will either launch an entirely new continuous control mandate or substantially change an existing one.
Since every country will impact existing and planned digital tools used by this business in different ways, it is fair to assume that at least half of its 2019 budget needs to be redirected to staying compliant in these six countries. Because in practice mandate deadlines are always too short, this company will most likely default into a pattern that by now is very familiar to multinational companies – preparations will start late and ultimately a panic fix will be agreed based on a local vendor in each country.
And this is where the real challenge starts: as digital transactions with suppliers and buyers will henceforth be managed locally in each market rather than based on corporate solutions, each mandate chips away at the company’s ability to leverage the mind-blowing power of modern IT. The combination of a quick succession of diverse country mandates and the overarching need for multinational companies to comply with law in all markets has the potential to actively reverse digital transformations.
Digital tax can be a win-win for governments and businesses alike
Companies that fully understand the trend toward digital tax mandates can also use it to their advantage. Even if tax administrations do not adopt higher levels of standardization across countries – something we at Sovos are actively working to encourage by leading on innovative ways for business and government stakeholders to collaborate towards more common views on these matters – these programs come with features that can be used to reinforce rather than weaken digital business transformation.
One strong such feature is that digital tax and in particular continuous transaction control mandates will push all your trading partners to fully dematerialize their communications with you. This will make it easier for you to onboard that recalcitrant long tail of suppliers that insist on sending you paper invoices. In addition, these mandates almost always come with a tight definition of what the tax administration considers to be a digital document e.g. an invoice, and in many circumstances these nation-wide standards can be utilized as a basis for crossing the last frontier of B2B transaction automation: touchless end-to-end transactions and accounting.
It’s time to adopt a global strategy
To reap these opportunities, businesses must take a step back and analyze their status and objectives against the backdrop of the rapidly evolving tax landscape. In so doing, they can gain significant competitive advantage and make great strides towards 100 percent digital processes. Sovos is making its expert resources available to help companies work through these issues, and we are working hard to make it easy for companies to get the best of both worlds – digital business transformation and compliance with tax law – through our unique S1 platform for globally compliant e-invoicing, e-receipts, e-reporting, e-accounting, e-archiving and tax determination.