The digitalization of tax: preparing for a new era

The digitalization of taxation, along with the major overhaul of international tax policy, presents imminent structural challenges to international businesses and enterprises. Alongside the Inclusive Framework on Base Erosion and Profit Sharing rules, which was developed in order to address the changing nature of revenue with digital transactions, the process of income reporting and assessment is itself being digitalized, which will completely change the way taxes are filed and levied.

 

2019 has seen governments across the world pivot to digital taxation, which alters tax assessment from an annual basis to real time detailed reporting and brings more focus to direct taxation from income and profits than indirect taxes like VAT and GST. Any data collected is likely to be shared across jurisdictions and companies will increasingly face requirements to work with government issued tax forms and systems.

 

Real time digital platforms were initially adopted by developing countries like Brazil and Mexico, with relatively fewer sophisticated tax systems to replace. Worldwide adoption is already well underway, however, with initiatives such as the UK’s Making Tax Digital (MTD) set to implement a fully digital tax system, establishing software compatibility standards and requiring ‘digital record keeping’ for businesses with a turnover exceeding £85,000 as of April 2019. The MTD initiative will eventually cover all UK taxpayers.

 

Governments worldwide are similarly expected to start requiring electronic invoicing, reporting and assessments. Beyond digitalizing paper forms, these formats change the process from filing statements at regular intervals to continuous detailed records of each transaction and ledger. Such real time filing, and assessments necessitates quick resolution in case of any liability, including claims made in error.

 

Governments will receive and share detailed reports on business operations via the OECD’s Common Reporting Standard (CRS) and Common Transmission System, (CTS) giving authorities a clear perspective of multinational activities, including transfer pricing between entities that share common ownership. The OECD has also developed a global digital standard for accounting data, known as SAF-T (Standard Audit File for Tax) which has been adopted by seven European countries so far. This expanded inter-availability of data is expected to result in rigorous auditing of supply chains and intellectual property, with greater necessity to justify some types of cross border structuring.

 

Preparing for new standards of transparency, assessments and analytics requires evaluating the challenges, expenses and potential exposures, both short and long term. Practical considerations in the immediate future involve cataloging all operations and capital alongside jurisdictional requirements and make changes to invoicing procedures. Long term strategic adaptation will involve staying current with developments in Base Erosion and Profit Sharing (BEPS) rules and anticipating the use by authorities of data analytics to expand the scope of taxable assets and transactions. Generally speaking, digitalization leads to more detailed disclosure and exposure.

 

Companies should coordinate their accounting, finance and compliance with their I.T departments in order to avoid any internal irregularity. Any procedure that has not been proactively assessed internally could scale up once analytics are applied. Data analysis of cost and revenue information is another proactive strategy to prevent excessive exposure and even reduce tax burdens overall. Quick turnaround is essential because assessments and levies are expected to be applied in real time, rather than adjusted against provisional payments the following year.

 

Invoicing procedures should be fully digitalized under a single system for the entire operation. Attempting to work under different systems for individual countries is not only ineffective but carries compliance risks in the event of any potential inconsistencies.

 

Liaising with governments regarding continued compliance is another proactive strategy to ensure a smooth transition to digitalized tax regimes as they are implemented worldwide over the next 2 years. Effective tax administration is in the mutual interest of both governments and enterprises, and wherever possible, consultation in advance is one of the most prudent steps a company can take.

 

The scale of the challenge is immense, and depending on the size of business operations, outsourcing to external providers or expanding IT and compliance staff may be necessary. Every aspect of a company’s operations will have to coordinate in order to meet challenges as they arise.

 

Working with an expert service provider ensures an optimal setup from the outset. Dispute resolution in real time can save companies significant expense, avoiding the need for arbitration or recovering funds lost to incorrect taxation. The likelihood of such auditing mistakes is greater due to the vast amounts of raw data inputs from transactions that are immediately reported prior to any kind of tax preparation. Auditing can happen more frequently through increasingly automated processes. When faced with such challenges, it is important not only to have tax experts representing a company’s interests but also to have a team that works closely with its clients, available to address issues as and when they arise.

 

Our services can help ensure that your strategy is efficient, streamlined and adaptive to the specific circumstances you face. We can deliver a reporting structure and schedule that anticipates and meets whatever obligations you may face, and we are always ready to defend our clients from audits on short notice. Our holistic business advisory services can set up your operations with minimal exposure, while our tax services can prepare you for the kind of tests that local tax authorities are likely to run on your data. We are committed to meeting the challenges of a changing world with our clients, and our personalized approach to services helps develop the most proactive solutions. If you have any questions or concerns about the tax administration for your Asia offices, please contact us today to schedule a consultation.

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