Trials in the quest for indirect tax compliance

The rise of new digital infrastructure, or ‘digitalisation’ has enabled opportunities for organisations to innovate and create new revenue streams to grow their business. Digitalisation has disrupted the rules of business, and has driven the creation of new sales channels, routes to market and even the types of products and services being sold.  

Traditional businesses long established in the sale of physical goods have seized opportunities to offer digital services in addition to their existing portfolio. Others have used digitalisation to adopt direct to consumer models (D2C) or create vertical marketplaces.

Digitalisation and the increasing complexity of indirect tax compliance

The new flow of commerce has also prompted a change in the way tax and finance teams operate, in response to being exposed to more taxing jurisdictions while tax authorities at the same time are revising their policies and legislation surrounding tax liability in response to this new global economy. This includes digitalising their tax reporting and audit methods.  

This paradigm shift in the indirect tax landscape is increasing the demands on tax teams today, with tax reporting and compliance taking centre stage for many businesses.  

The new pressures on indirect tax teams

Tax teams roles and responsibilities are expanding, with many now trying to balance the demands of both reactive and proactive tax compliance responsibilities. Reactive tasks include monitoring for local and global regulatory changes, advising the business on these changes, and ensuring that both internal reporting and tax returns are produced on time, complete, and accurate. On the other hand, they are also managing proactive tasks such as creating the process for correct record keeping, as many authorities require information to be stored and accessible for many years. Additionally, they must put stringent processes in place to monitor and improve quality of the data used for tax reporting purposes.  

Tax data quality poses a significant challenge, as tax-relevant information is often generated and managed by business functions that operate outside the tax department. This decentralised approach can lead to inconsistencies and gaps in the data collected, which becomes increasingly problematic with the rise of e-invoicing and real-time reporting tax mandates that require precise data accuracy from the outset.  

While data may be deemed correct for general business operations, it does not necessarily meet the stringent standards required for tax reporting. Consequently, ensuring the accuracy and completeness of tax data is crucial, as errors can result in compliance issues, penalties and reputational risks for organisations navigating the complex landscape of tax regulations.  

Tax teams deliver all this while also operating as trusted advisers to the business when it comes to strategy and growth. Recent research by Vertex found that the indirect tax landscape is highly complex, with 42% of organisations stating that the growing number of tax rules and regulations are making indirect tax compliance more difficult.

Compliance can become even more complex for some businesses, such as those operating in markets with complex tax laws (e.g. Korea), going through a business, finance or IT transformation process, or going through a merger or acquisition. There are many levels of complexity that a tax professional today needs to navigate on their quest for compliance.  

Tackling inaccurate data and human error

Data is the lifeblood of any business. Our recent Vertex survey found that enterprise-level organisations’ data is growing by more than 40% a year. Businesses are generating and leveraging vast amounts of data to inform business decisions and facilitate growth – whether that be engaging with customers more effectively, improving productivity or diversifying into new territories and/or revenue streams.  

Most of this data is entered and maintained in a business ERP and financial system by humans. However, many of these people are not tax literate which could potentially impact the tax compliance position of a business.

The question to answer is – is human error the root of non-compliance? The reality is that human error can cause inaccuracies that lead to non-compliance for tax. A simple mistake can lead to large data quality issues when not captured within the business control framework. As a result, there may be a gap between a business’ approach to managing and monitoring this increased amount of data versus the needs for tax compliance.  

This risk can also intensify the personal one that tax professionals reported in our study, with 38% of respondents feeling very exposed by the current level of indirect tax compliance within their organisation.  

It is for this reason that businesses are seeking to automate the compliance process to reduce the risk of human error. Nevertheless, there are always limitations to technology in terms of achieving 100% compliance as many human-led decisions can impact its efficacy. Not having the right processes or people in place, a shortage of necessary training in tax or systems, lack of central records and poor record keeping are all human-led activities that can impact data quality.  

There is a lot to consider when it comes to data quality, but from our study it appeared that people, connections and communication are key to any successful data integrity strategy.

Fortunately, by centralising, standardising and automating reporting, organisations can reduce this risk. Centralised controls are one way tax functions are telling us they are reducing the level of risk in their data collection, filing and reporting, all of which goes towards remaining compliant.

Pushing for the right technology

Despite technology being leveraged to address issues impacting indirect tax compliance, we discovered it can also create barriers to compliance for tax teams. In fact, 39% of our survey respondents believe that technology is acting as a barrier to their compliance abilities rather than an enabler.  

How is this happening you may ask? It may be less about the technology implemented and more to do with the impact of implementing said technology and the changes this causes or requires. The introduction of new technology can lead to disruption while the organisation adapts to including it as part of their compliance processes. It may often feel overcomplicated and requires specialist training to become proficient in its use.  

Equally, the technology may not be the best fit for the company, and this does not necessarily simplify compliance. For example, ERP systems with basic indirect tax capabilities that need customisation to fit more complex VAT scenarios, or development team intervention to help update tax codes as they change. Not to mention disparate systems that do not speak to each other and require manual interventions to merge data sets.  

Some businesses have major gaps in their end-to-end indirect tax technology, with 35% of survey respondents citing a gap in having the correct technology in place to aid them in their compliance efforts.  

Overcoming the skills and knowledge barrier

Interestingly, 78% of our survey respondents believe that having the right skills and talent is the most important factor in remaining compliant in indirect tax. However, it appeared that there are some major skills gaps across tax teams which are negatively impacting their business’ ability to remain compliant.  

Gaps in knowledge and understanding of tax compliance are quite common. 47% of survey respondents said their teams needed to improve here. Indirect tax is a multi-faceted and complex niche and requires specialist knowledge. The lack of harmonisation between countries of rules and regulations causes severe challenges for indirect tax compliance.  

As a result, organisations need to have individuals with specialist knowledge of the country or region. The capacity for this knowledge to be shared across the organisation is also needed to avoid siloed knowledge and to upskill wider teams.

Besides tax technical knowledge, tax professionals must have the knowledge and capability to effectively use the technology provided to achieve indirect tax compliance. These skills are not widespread, making the hiring and training process for organisations time-consuming and costly. It is becoming increasingly important for tax teams to enlist the help of ‘tax technologists’ to understand the impact of effectively managing tax technology, and to ultimately achieve end-to-end tax compliance.

Continuous compliance journey

Achieving indirect tax compliance clearly involves a lot of challenges. It should not be seen as a static goal but a continuous journey of adaptation and improvement. The landscape is constantly changing, and new compliance risks can arise with little notice.  

For businesses, risks of being non-compliant will inevitably increase if their tax teams have not acquired the necessary level of knowledge and skill they need, or if they have not adopted suitable technology to address their pain-points. While many tax professionals believe that achieving 100% compliance is nearly impossible, tax teams must remain adaptable, continually seeking innovative ways to meet their objectives and minimise risk while striving for the highest possible standards.