Global Indirect Tax Compliance - An Overview
At Fonoa, we get a lot of questions about how companies can best set up indirect tax compliance processes on a global scale. This post will explain some of the essential concepts and the various options in-house tax teams can consider.
What is indirect tax compliance?
Indirect tax compliance is the umbrella term that represents the process of fulfilling VAT, GST and Sales tax obligations worldwide. It involves the timely and accurate calculation of taxes, reporting of sales and purchases, and sharing other relevant data with tax authorities. Ultimately, the key measurement for this is if a company's periodic reporting, tax return filing and payment obligations around the globe are met timely and accurately.
Many countries are moving compliance obligations from periodic reporting to on-the-spot reporting obligations. Some countries have introduced rules and measures on digital reporting (sometimes referred to as real-time reporting) and mandatory electronic invoicing (e-invoicing). Real-time reporting requires companies to electronically share sales (AR) and/or incoming (AP) transactions with the tax authorities in (near) real-time in a specific format and through a specific system.
E-invoicing is the obligation to electronically share transactional and invoice data in a pre-defined format, sometimes via tax authority platforms. The rise of digital reporting and e-invoicing has profoundly impacted indirect taxes. Here, we will focus on the traditional meaning of indirect tax compliance.
👉 More detailed information on what is E-invoicing.
What makes global tax compliance hard?
Managing tax compliance for multinationals is complicated for a variety of reasons. On the global tax regulatory front, countries frequently add new legislation affecting multinationals and digital-first businesses. Staying compliant means in-house tax teams must be aware of each country's rules and regulations.
Moreover, they need to monitor and act on their business's tax return filing and reporting requirements in each jurisdiction.
Many changes do not only impact tax and accounting (which can be resolved by tax experts) but also the technology companies use, and that requires the skills of dedicated developers and input from a broader list of impacted stakeholders.
Extra complexity exists in countries with digital reporting (real-time reporting) and e-invoicing rules. Since there is no one standard for reporting, global businesses are faced with multiple different models to comply with simultaneously across countries. These systems are all separate and unique, and it is up to the finance and in-house tax teams to find ways to become familiar with and comply with each system's particularities.
Regardless of the complexity, streamlining and fulfilling your global tax compliance obligations should be a key part of any multinational’s risk management strategy.
What role does automation play in indirect tax compliance?
In today’s increasingly electronic and borderless world, businesses must rely on automation as part of their compliance process. The scale and speed of business operations make this essential - it is not practically possible to rely on manual processes to calculate taxes on (or report) millions of transactions.
Automation benefits global organizations in three ways - all of which ultimately reduce the cost of indirect tax compliance:
- Improvements in accuracy (e.g. by reducing occasions of human error)
- Increase in the speed of compliance (e.g. by making laborious tasks faster)
- Increasing job satisfaction (e.g. by removing mundane, repetitive tasks from employees whose time is better allocated elsewhere)
Next to that, sometimes businesses lack local tax expertise, which drives the need for help from outsourcing partners (tax advisory and compliance service providers) to outsource parts of their indirect tax compliance.
Should I build tax technology in-house or use third parties?
When deploying tax technology in global tax compliance and reporting, businesses ask, do we build or buy the necessary tools and knowledge?
Each strategy has advantages and disadvantages, and often a combination of both leads to the best solution for an efficient global compliance and reporting function.
Many companies try to use an in-house solution that they build directly or try using parts of their ERP system with enhancements to create a custom solution tailored to their business needs.
Limitations can arise during planning, building, or soon after implementation. This could be because of limited experience with building tax technology that results in missing the long-term requirements and awareness of the limitations of ERPs on this front.
Often, it means not appreciating the technical and content-specific work required to maintain and support an automation solution. Companies building for the first time tend to overlook that building technology is only the beginning. The real friction points are the maintenance and resources required to uphold the tax technology.
Investments in internal tools are often more expensive than alternatives. This sounds counterintuitive, but it is because the development of custom solutions requires specific IT/engineering and Tax resources. These dedicated points of contact then have to do the project management and work together for prolonged periods during the technology's planning, building, testing, and rollout stages.
This approach consumes scarce resources that may otherwise be working on strategic business goals. In tax teams, this could be tax planning and providing invaluable advice to the business units. In engineering and IT teams, it means working on business technology that helps drive revenue and growth.
To add to the technology challenge, when a company grows through acquisitions, it is hard to add separate legal entities and business units to internal custom tools or to update the tax technology to include the newly acquired businesses and different systems in its operating model. It then again requires much work to get the tool functioning properly for all transactions.
Another big challenge for homegrown tax technology solutions is regulatory changes. For example, real-time reporting and e-invoicing have evolved over the years. Many businesses that created internal tools found that they needed to regularly update the tool to changes in the (xml) schema reporting requirements. Tax authorities will likely change the real-time reporting rules as the tax landscape evolves, requiring dedicated resources to keep internal tax technology up to date.
The conclusion? Building tax technology is quite specific, takes lots more resources than expected, and can often only properly be done and kept up to date if the technology is needed and used at scale. Many times, building your own solutions is the equivalent of building your own power plant, which is not very efficient.
If you don’t build an internal tool, what options exist in the market?
Should I rely on tax technology from tax advisory service providers?
Many companies outsource part of their compliance work to large tax advisory and accounting firms. For multinationals with tax reporting obligations in many countries, this may come with the tax advisory firm’s own technology and tools to enhance the process. This has helped in-house finance and tax teams to work with global tax advisory firms that provide them with tax compliance services.
However, the technology is often secondary to the primary (manual) tax services. And the software is typically more focused on being a workflow or dedicated project management tool than a true tax technology automating large parts of the process.
Aside from technology playing a secondary role, a big downside to this approach is that large multinationals tend to change or rotate advisors over time (for financial audit reasons, for example). And with that then comes the need to switch technology too.
Another downside is that these advisory firms often cannot provide technology for real-time reporting or e-invoicing across countries. And when they can provide such services, many manual steps are involved, and it is a specific country solution vs one single global solution.
The bottom line is that large tax advisory and accounting firms are professional service providers, not technology companies. Their tax technology, logically, reflects that.
Should I rely on tax technology from tax technology companies?
What if you enlist the help of a dedicated third-party tech provider? Can that be more effective?
It can, but there is a caveat. The issue with tax technology providers is that hardly any offer a true end-to-end solution. For instance, many will focus on one aspect of the technology - either choosing the tax engine, e-invoicing, digital reporting, or a tax compliance workflow tool. Moreover, many are also limited to a region or just a handful of countries.
You will need to contract with multiple parties to automate your processes. Specifically, each step of the transaction chain and potentially each country will need a dedicated provider. This is a nightmare for engineering teams to cope with different integrations, different points of contact, different service line agreements, and different APIs. For an analogy, imagine an electrical socket with too many plugs attached. Hardly a safe, streamlined, reliable process benefiting from economies of scale by using a single vendor.
And even when you do find a “global” technology provider, it generally means that the provider has multiple technology solutions/products for different countries and regions. It is the same as using different technology providers but then under one name.
What does Fonoa offer?
At Fonoa, our team members have been confronted with and gone through these problems in real-life a lot in their careers. And that is why we take a different approach, focusing on solving the problems that in-house tax and finance teams face today.
Fonoa has developed a platform that allows companies to meet their tax compliance obligations globally in a rather plug-and-play manner. Our platform contains several solutions:
- Tax ID validation: Fonoa’s leading tax ID validation solution lets you check tax IDs directly with government databases in over 100 countries.
- Tax engine: Fonoa’s tax engine is built for flexibility, with the scale and performance requirements of modern-day companies as the baseline.
- Invoicing: Fonoa generates fully tax-compliant invoices in 100+ countries in over 50 different languages.
- E-invoicing and digital reporting: Fonoa gives you access to all e-invoicing and digital reporting jurisdictions through a single solution (API).
- VAT returns: Our team has developed a VAT/GST returns tool focused on collaboration, streamlining your process globally, and automating the actual tax compliance work and process.
The best part is that you can pick and choose which solution you need, in the countries you need them, for the transactions you want to cover.
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