Tax Automation Considerations for Global Businesses
As the economy evolves into a digital age, businesses are following suit. Gone are the days when a company's customer base was limited by geography, as any business can now easily sell its goods or services online, reaching customers worldwide. As a result, governments are grappling with new challenges in regulating these novel business models, including safeguarding their tax revenues.
Digital service companies are at the front line of this transformation. In recent years, numerous countries have implemented distinct tax regulations to enable the taxation of services rendered to their residents, irrespective of the service provider's location. The objective is to levy indirect tax (VAT, GST, or sales taxes) on foreign service providers offering digital services. Although the fundamental concept is the same, every nation has a distinct approach.
Consequently, companies offering digital services must comply with complicated tax regulations globally from day one, regardless of size. When the work to comply is done manually, having a global presence exponentially increases the burden on the tax department and IT teams, creating a real need for reliable tax automation technologies.
- The digital economy has allowed businesses to scale globally very quickly, which requires tax teams to manage indirect tax calculation and filing in an increasing number of jurisdictions
- Tax departments are often burdened with repetitive manual work that can easily be automated
- Manual processes, which worked when the business was only present in a few countries, quickly becomes untenable when a business expands globally
- Tax automation is the best way to leverage the tax department - it limits repetitive, manual work, allows for greater centralization and monitoring of the indirect tax function, and allows businesses to adapt more quickly to regulatory changes
- Automating the validation of tax IDs, the calculation of indirect tax, and the preparation and submission of indirect tax returns can greatly benefit businesses and provide a meaningful ROI
- Several automation techniques and tools are available today, and businesses need to appreciate the existence of each to make the best use of the available technology
Increase the impact of your tax team
Tax managers often spend significant time on repetitive tasks such as manual data entry, spreadsheet analysis, and manual report generation and modification. This becomes especially complex if your business has just moved into dozens of markets where it needs to calculate indirect tax and file tax returns.
This work does not utilize the tax team to its full potential and expertise. Tax automation allows tax specialists to shift their focus to high-value initiatives, leading to happier, more efficient employees who make fewer errors. Tax automation also enhances accuracy by eliminating human error from tax processes. This ensures audit preparedness, smoother tax reporting and calculation workflows, and better ROI.
Centralize the management of tax processes
By leveraging automation, it is possible to consolidate tax compliance, tax calculation, and even tax returns and invoicing into a single workflow. Tax teams can more easily monitor the organization's progress in the return submission process and identify errors in indirect tax calculation. This allows them to assess the level of risk in real-time and gain insights into areas that require improvement in efficiency and accuracy.
Adapt quickly when legislation changes
Having manual invoicing or tax calculation processes in an ERP or billing system can quickly drain the tax team and IT resources. To take an example, what happens when a jurisdiction, key to your revenues, starts requiring foreign digital service providers to charge indirect tax to local customers - do you have the bandwidth on your roadmap to quickly do the following in the absence of a highly automated solution?
- Change the tax treatment on supplies to those customers (creating new tax codes, developing tax determination logic, etc.)
- Validate tax IDs to charge indirect tax only to end consumers (and not to VAT/GST registered businesses)
- Extract transactional reports from your ERP and billing system in a format that makes it possible to use it for completing tax returns (or do manual adjustments in case the format is not useable as is)
- Keep track of changing rules in these jurisdictions and potentially do these three things each time there are regulatory changes
If you could do the above quickly, with limited manual intervention and few possibilities for errors, wouldn’t that be a better solution? That is possible only through investment in tax technology.
Tax automation makes it possible for tax teams to handle large volumes of data, making it easier for businesses to scale their operations and manage growth without significantly increasing the workload of the in-house tax team.
Additionally, tax automation is more economical than having large teams doing work that is below their pay grade, and it can easily adapt to changing tax laws and growing business needs. Centralized access to up-to-date and accurate tax data helps tax teams oversee the submission process and mitigate risks. Tax teams that are not burdened with low-value tasks can more effectively respond to audits and investigate areas of potential non-compliance.
This can mean fewer tax reassessments and penalties, and a greater ability to catch errors before they become too costly. Adding new technology may have an up-front cost, but continuing to do things manually can be far more expensive in the long run.
What types of tax automation make the most significant impact?
Checking your customer’s tax registration status
Typically, customers fall into one of two categories for tax purposes: businesses or consumers. Generally, foreign digital service companies would only charge indirect tax to non-business end consumers. Therefore, to determine whether tax is charged, you need to verify their business status and keep proof of it. Verifying a customer's business status can differ depending on the country, but generally consists of validating a tax ID number.
When the deadline for filing taxes is near and you have to verify thousands of tax IDs manually or with outdated tools, it can be a scary experience. It can take hours to validate thousands of tax IDs using VIES (the EU-wide VAT ID validation tool). Tax-ID validation tools in other countries can be difficult to find and potentially even slower. If the system is not working properly you may have to start over, which is not ideal if your business has many customers across the world.
With Fonoa Lookup, you can directly verify tax IDs with governments in the EU and over 100 countries all using a single platform. We can also automatically validate tax IDs in your checkout to ensure you’re applying the correct amount of tax to each purchase. This translates into less manual work for your tax team and more accuracy in your tax calculations.
Charging tax correctly
Many businesses have some degree of indirect tax automation configured in their ERP or billing system. The downside is that minor changes to a company's business model or expansion to a new jurisdiction can require significant modifications to the automation settings. Configuring the initial indirect tax automation and making these modifications is a manual process requiring significant tax and IT resources.
Managing different currencies is also a challenge that many businesses face. Tax must be declared and paid to the tax authorities in local currency, but that may not be the transaction currency. There are often specific rules regarding which sources to use for currency conversion, which vary widely from country to country. Doing this manually for dozens of countries and for each indirect tax return can be highly burdensome for tax professionals.
Implementing a tax engine is a potential solution that allows for a much greater degree of automation. Fonoa offers a powerful tax engine that calculates indirect tax on all types of services in over 140 countries, available via an easy-to-use API. The tax rates and rules are maintained by a dedicated team, which means little to no maintenance for your internal teams. We offer a simple currency conversion feature using the sources required in each individual country’s legislation. And new jurisdictions can be added within days, allowing your business to expand globally without becoming non-compliant.
It is no secret that completing and filing indirect tax returns worldwide can be challenging. Much of the difficulty with tax compliance is often related to the data you use to complete these returns, which usually requires significant manual adjustments after being exported from the ERP or billing system. Doing this for dozens of countries in addition to completing and submitting the returns can be too much for in-house tax teams to manage internally.
Outsourcing tax compliance to a traditional law firm or consulting firm comes at a steep cost. It can become far more expensive when the service provider needs to spend time to adjust the data manually.
Automating the entire tax compliance process can reduce the time spent on manual data entry, reconciliation, and filing, freeing up resources for more strategic tasks. Automation can also reduce the risk of errors in tax filings and payments, which helps to minimize costly penalties, interest, and audits.
Fonoa offers a straightforward and flexible tax compliance solution with global coverage. We work with you to automate any manual adjustment needed to prepare the data coming from your ERP or billing system, to ensure that little or no manual work is needed each month to complete the returns. We can then automatically complete the returns and even file them on your behalf in countries that allow it.
What are some other common methods in tax automation?
The prior sections have looked at the reasons for automation and the areas you can focus on to impact your business significantly. Yet, every company is different, and novel problems demand novel solutions. As the saying goes, “If you only have a hammer, every problem becomes a nail”. To avoid this scenario, it is helpful to acknowledge the existence of other tools and technologies.
Fonoa’s engineers and tax professionals rely on a combination of technologies, and there are several automation methods you should be aware of. These general tools can also be used to improve efficiency, reduce errors, and free up employees to focus on higher-value tasks. Some of these have been deployed by international tax teams for several years already, while others (like AI) are relatively new and only becoming more common with the release of general-purpose technologies (like ChatGPT). Importantly these methods apply to automating VAT/GST and income taxes.
- Robotic Process Automation (RPA): the use of software robots or "bots" to automate repetitive and rule-based tasks that humans typically perform. These bots can be programmed to mimic human actions, such as clicking buttons, entering data, and performing calculations, thereby freeing up employees to focus on higher-value tasks. RPA is commonly used in finance, healthcare, and manufacturing industries to streamline operations and improve efficiency.
- Business Process Automation (BPA): automating entire business processes end-to-end rather than individual tasks. BPA can involve a combination of technologies, including RPA, workflow automation, and artificial intelligence.
- Artificial Intelligence (AI): This refers to machine learning, natural language processing, and other techniques to create intelligent computer systems that can perform tasks that would normally require human intelligence, such as decision-making and problem-solving.
- Machine Learning: a subfield of artificial intelligence (AI) that involves using algorithms and statistical models to enable computer systems to learn from data, without being explicitly programmed. Machine learning algorithms can be trained on large datasets, and can use the patterns and insights found in the data to make predictions or decisions on new, unseen data. Machine learning is used in various applications, such as image and speech recognition, natural language processing, fraud detection, and personalized recommendations.
- Cognitive Automation: This combines AI technologies with RPA to enable systems to understand, reason, and learn from data to automate complex processes that involve cognitive tasks.
- Robotic Desktop Automation (RDA): This involves automating desktop-based tasks such as data entry and report generation using software robots.
How Fonoa can help
Fonoa offers a single platform to manage these challenges that growing businesses face. Our top-notch customer support means we have the fastest implementation time on the market; and our worldwide coverage means you can start using our solutions right away wherever you do business.
Get in touch to automate all things indirect tax.