Tax Master Data: A critical component of any tax departments future success
Tax Master Data Management is a hot topic. And rightfully so, as tax data is a cornerstone for any tax department's future success.
Effective management of Tax Master Data is critical for ensuring accurate tax calculations, compliance with local and international tax laws, and efficient handling of tax audits and inquiries. It often involves the use of specialized software and systems to manage, update, and analyze this data accurately and efficiently.
Here are some examples of what it is and a more detailed explanation of the reasons why it is so important.
What is Tax Master Data?
Tax Master Data refers to the critical information and common data sets used by organizations to manage their tax-related activities. This data includes various elements essential for accurate tax computation, reporting, and compliance. Master data is relatively static, and does not include transactional data. Some examples of Tax Master Data are:
1. Entity Information: Details about the legal entities within the organization, such as company names, registration numbers, and addresses.
2. Tax Registration Information: Data related to tax registrations, including VAT numbers, tax identification numbers, and other relevant registration details.
3. Customer and Supplier Data: Information about customers and suppliers, including their tax status, which is necessary for transactions and reporting.
4. Tax Rates and Rules: Information about applicable tax rates, rules, and regulations for different jurisdictions in which the organization operates. This may include standard rates, reduced rates, and exemptions for different types of goods and services.
5. Financial Account Information: Details of financial accounts used for tax reporting and payments, including bank account numbers and payment terms.
6. Product and Service Classifications: Classification of products and services according to tax categories, which is crucial for applying the correct VAT/GST (and other tax) rates.
7. Document Management Information: Details about tax-related documents, such as invoices, receipts, and tax returns, including their format, storage, and retrieval methods.
Why Tax Master Data matters
Because the tax function processes enormous quantities of data, it is important that your master data is accurate, complete, timely, and consistent. Understanding and planning data needs, organizing and facilitating data capture and making this master data accessible for the relevant users and processes is what Tax Master Data Management is all about. Here are some examples of why Tax Master Data matters:
1. Tax authorities are advancing
Tax authorities (3.0) are getting more technologically advanced and are using big datasets to search for anomalies or errors. Controversy risk increases a lot by having inconsistent or incomplete tax data. Data unlocks new insights, and more detailed and complex tax audit queries arise and need to be explained. This will only accelerate in the near term future with the fast adoption of new technologies that power rapid and extensive data analysis, including AI.
2. Real-time digital reporting
Countries are following each other in rapid succession with the introduction of E-invoicing and digital reporting rules.
These mandates require near real-time transactional reporting, and the quality of data is critical in any company’s success to comply. Every detail matters, from the transactional data to the calculation of tax (after the comma), it should all be pinpoint accurate (don’t mention “rounding”). Invoices which don’t meet the validation requirements are rejected, resulting in delayed customer billing or supplier payment and human intervention, both of which are costly to an organization.
3. Accurate tax determination
Especially for companies supplying digital goods and services. Without an understanding of who you are doing business with and their tax profile, your business cannot determine applicable taxes correctly - especially for cross-border digital goods and services. If you are working in one of the fast-growing digital companies, your rapidly expanding global customer base is creating potential liabilities in countries around the world. In order to analyze the liability, you first need to know: is your customer a VAT-registered business or not?
4. Marketplace models
Marketplace businesses (digital intermediation for goods or services) often face extra data complexity. As a marketplace you are required to determine taxes upon checkout for transactions undertaken by your platform sellers and users. This can be on behalf of the seller on the platform, or as the deemed supplier of the service. Having cleaned and complete data is essential for the entire marketplace experience on both the seller and user (buyer) side. On top of that, data sharing regulations like DAC7 are being introduced across the globe, mandating marketplace platforms to collect, validate and submit data on their marketplace sellers. Needless to say, that data needs to be accurate.
What are the challenges with tax master data?
The challenge with master data is that many teams within your organization are using it for different purposes. Even within tax, you might have transfer pricing, direct and indirect tax users, all consuming similar data but viewing it through an entirely different lens.
But not all data is typically captured or planned for, leading to situations where the data is inconsistent, inaccurate, outdated, or simply not there. This then leads to problems down the road when the data is needed for tax purposes.
This is why many companies are currently investing in finance transformations and put an increased focus on (tax) master data management.
Another common problem is that the consumers of the data are rarely qualified or tasked with monitoring and maintaining the technology that is used to house the information. Similarly, the technical and engineering resources that are capable of designing and building the systems are not tax experts. Much is often lost in translation between these two very technical teams leading to poor implementation and frustration down the line.
An example: tax identification number validation
From my recent experience, the work we have done at Fonoa on Tax ID verification is a good example.
A key piece of tax master data in respect of your business partners, is understanding their tax registration status and capturing the correct tax identification number (TIN). This is critical for digital reporting and e-invoicing, tax determination and many more fundamental tax processes (especially for marketplaces and digital platforms). The problem is that validating this information is hard, and it is easy to go wrong.
Most companies test on tax number format. But this leads to users (customers, partners, and end-consumers) filling in dummy data or random numbers. Some companies perform data integrity checks like checksum which helps identify the obvious errors, but this still leaves plenty of room for error. That is why the best practices adopted by most leading companies is to perform tax number validations against government databases where possible because this gives the most comprehensive insight on whether a number is real, active and belongs to the party (supplier/customer) providing it.
The challenge is that this is often resource intensive as it is hard to automate, and volumes of numbers to check tend to add up quickly.
Outsourcing it to service providers is a common solution, but has its limitations too.
There are a number of solutions on the market, but none are able to meet the coverage and validation capabilities in the way that Fonoa global tax ID validation solution can.
Fonoa’s solution allows you to instantly validate tax master data in well over 100 countries around the world. For data cleanup, you can use a batch upload solution, which can check up to 50,000 tax IDs in one upload.
For filling gaps, Fonoa just launched a search-by-name solution whereby providing customer information to the portal will allow you to search for potential VAT ID matches so you can quickly determine which of your customers might be business customers.
For maintenance, you can either use an API, a batch process or both. Many companies deploy a periodic batch process which validates existing master data while using a direct connection to the master data creation within the ERP, eCommerce or marketplace onboarding allowing immediate confirmation of the tax status of your partner.
In conclusion, the management of Tax Master Data is not just a functional necessity but a strategic imperative today. The significance of Tax Master Data extends beyond mere compliance; it is pivotal for operational efficiency, risk mitigation, and informed decision-making for tax departments.
The challenges of managing this data are multifaceted, ranging from the need for accurate data capture and validation to the complexities of integrating diverse internal perspectives and technological solutions.
The example of tax identification number validation underscores the criticality of accurate data and the potential pitfalls in its absence.
As the demand for real-time reporting and digital tax compliance grows, the management of Tax Master Data will increasingly become a cornerstone for success in the digital age, necessitating a proactive, comprehensive approach from businesses worldwide. This ongoing shift underscores the need for continuous innovation and adaptability in tax data management strategies, ensuring businesses remain compliant, efficient, and ahead in a rapidly changing tax environment.
How Can Fonoa Help?
We understand the role of data in your day to day work and appreciate the challenges in-house tax teams face. This is why we developed solutions like Fonoa's global tax ID validation (Lookup).
If you are interested to learn more about our capabilities just reach out to our teams who can provide you with more information.
You can also subscribe to our newsletter, Fonoa Digest, where we share tax intelligence updates, notable product enhancements, exciting upcoming webinars, events, and tax compliance news.