Tax technology refers to the use of software, tools, and digital platforms to manage and streamline tax-related processes within an organization. This field combines tax expertise with technological solutions to automate, enhance, and simplify various tax functions, from compliance and reporting to planning and analytics.

Tax technology initiatives can be relevant for all parts of a tax function including transfer price and corporate tax. However it is particularly important for managing indirect taxes due to the complexity, the volume of data and transactions, and frequent changes in regulations that characterize these types of taxes.

However it is not an end in itself. It is a means to ensure that a business is fully compliant in the places where they operate, in the most streamlined and error-proof way possible.

As each business is different, the pain points that prevent a business from reaching this goal can vary widely. The tax function of each business must create its own tax technology strategy that takes into account the challenges that it faces.

Key takeaways

• Tax technology brings together tax expertise and technological solutions to automate and simplify tax functions, including compliance, reporting, and analytics. This integration is crucial in enhancing efficiency and reducing errors in tax processes within organizations.
• As each business faces unique challenges, tax technology strategies must be tailored to address specific pain points and objectives. This involves an in-depth assessment of current processes, technology gaps, and setting clear objectives to guide the selection of tools and solutions that align with business goals.
• The future of tax technology is marked by advancements like anomaly detection, automated e-invoicing and real-time reporting, and global tax calculation. These innovations promise more sophisticated, efficient, and integrated solutions to meet the evolving tax compliance and tax management needs of businesses.

What can indirect tax technology do?

Put simply, indirect tax technology automates indirect tax management, ensuring compliance, reducing errors, supporting strategic decision-making and empowering tax teams, especially for businesses with complex tax obligations or high transaction volumes.

Some of the most common use cases of indirect tax technology are the following:

• Automate global tax calculation: Applies correct tax rates in real-time, with automatic updates for rate changes. Advanced systems can manage complex tax obligations across various regions and may have features like automated currency conversion.
• Streamline tax compliance: Automates tax filing, ensures ongoing tax compliance, and maintains detailed audit trails.
• E-invoicing: Reporting invoices and transactional information to the tax authorities is often unmanageable when done manually, and impossible when real time communication is required.
• Validate customer and supplier IDs: VAT / GST numbers, TIN numbers, etc. to assist with onboarding and ensure that tax is charged correctly.
• Facilitate E-Commerce: Calculates and applies correct taxes for online sales, integrating with e-commerce platforms.
• Prepare for Audits: Assists tax professionals by maintaining tax information in a single source of truth that is easily accessible.

How should tax departments create an indirect tax technology strategy?

The goal of indirect tax technology is to solve problems for tax departments. However because all businesses are different, each tax department may have very different pain points.

For example, perhaps your business has grown through mergers and acquisitions and each acquired entity has a different ERP system, making data fragmentation and data management a huge concern. This may cause huge issues with managing VAT returns and other reporting requirements or finding useful information for audit defense.

Or, take for example a business involved in ecommerce with thousands of transactions per day. It is functionally impossible to have someone behind each transaction manually picking a tax code that produces a certain tax result. For businesses with very few but high value transactions, it may be possible to muddle through using a more manual approach (although it is rarely advisable).

Understanding the Current Landscape

Before any tax transformation, it's crucial to assess your organization's current indirect tax landscape and tax operations. Your indirect tax technology strategy is crucial and will affect many stakeholders, from tax analysts to the c-suite of the business.

This assessment involves a thorough evaluation of existing processes, technology, and pain points.

• Evaluate Existing Processes: Begin by analyzing your current tax processes, including data collection, tax determination, and compliance reporting. Identify inefficiencies, manual tasks, and areas prone to errors.
• Inventory Technology Assets: Catalog the technology tools already in use, such as ERP systems, tax determination engines, and compliance software. Assess their effectiveness, integration capabilities, and areas where they fall short.
• Identify Gaps: Pinpoint the gaps between your current setup and the requirements for accurate and efficient tax management. This step will highlight areas where technology can play a crucial role in closing these gaps.

Setting Clear Objectives

Defining clear objectives is key to guiding your strategy and ensuring it aligns with your business goals. Consider the following objectives:

• Compliance and Risk Management: Ensure that your technology solutions support compliance with varying tax regulations and minimize the risk of errors and penalties.
• Efficiency and Automation: Focus on automating repetitive tasks, reducing manual intervention, and streamlining workflows to enhance overall efficiency.
• Scalability and Flexibility: Select technology that can scale with your business as it grows and adapts to new tax jurisdictions or regulatory changes.
• Data Integration and Accuracy: Tax is becoming more data-driven. Ensure that tax-related data flows seamlessly across systems, providing accurate and real-time information for decision-making.

Developing a Technology Roadmap

A well-defined technology roadmap is the backbone of your tax department’s indirect tax strategy. It outlines the path from your current state to your desired future state.

• Select Technology Solutions: Based on your objectives and current gaps, identify the appropriate tax technology solutions. These may include advanced tax determination engines, compliance software, and reporting tools that integrate with your existing systems.
• Phased Implementation: Implement the technology in phases, starting with high-impact areas such as tax determination and compliance management. This approach minimizes disruption and allows for gradual adaptation.
• Future-Proofing: Choose solutions that can evolve with your business, accommodating new regulations, jurisdictions, and increasing transaction volumes.

Training and management

Purchasing the right tax technology solution is necessary but not sufficient. It is crucial that your teams are trained and that you monitor this technology to ensure that it continues to address your pain points.

• Employee Training: Conduct training sessions for tax and finance teams to familiarize them with new tax software or upgrades.
• Change Management: Develop a change management plan to manage the transition smoothly, addressing any resistance and ensuring user adoption.
• Performance Monitoring: Establish KPIs to monitor the performance of your tax technology. Metrics could include compliance accuracy, processing time, and error rates.
• Feedback Loop: Create a feedback loop with users to gather insights and continuously refine your technology strategy.
• Stay Updated: Keep abreast of technological advancements and regulatory changes to ensure your strategy remains effective and relevant.

What about AI?

Artificial intelligence is a term that is thrown around a lot these days. Just like tax technology in general, it is not an end in and of itself. A tax technology solution with AI won’t solve all pain points simply because it has AI; it's vital to examine what the AI’s function in the tax technology process is and whether it is actually addressing a gap that existed previously.

This is new territory in indirect tax technology, but we have seen some powerful applications of AI:

• Anomaly Detection: AI can identify unusual patterns or discrepancies in tax data that might indicate errors, fraud, or compliance risks, helping businesses address issues before they become problematic.
• Automated Report Generation: AI can compile and generate tax reports by pulling data from multiple sources, ensuring accurate and timely filings
• Data Validation: AI can scan tax data for inconsistencies or errors, such as incorrect tax rates or missing information, and flag them for correction before filings are submitted.
• Data analytics: AI can analyze historical tax data to identify trends, such as seasonal variations in tax liabilities or patterns in sales tax collection, helping businesses anticipate future tax obligations.

Where is tax technology moving in the future?

Tax technology is undergoing a significant transformation, driven by rapid advancements in digital tools and data analytics. As businesses face increasingly complex tax regulations and compliance requirements, the future of tax technology promises to bring more sophisticated, efficient, and integrated solutions. Here’s a glimpse into where tax technology is heading:

E-invoicing and digital reporting

Tax technology is rapidly evolving to address the increasing demands for real-time reporting and e-invoicing requirements, driven by regulatory changes and the need for greater transparency and efficiency in tax administration.

E-invoicing solutions are improving with respect to scalability and useability. As more countries create these requirements, tax technology solutions need to keep pace. Easily integrating many countries in a short period of time, standardizing dashboards and error messages, and reducing friction in the invoicing and reporting process is becoming a must have.

Tax technology providers are also moving in the direction of including features for real-time validation of invoice data against regulatory requirements. This ensures that invoices meet the necessary standards before they are submitted to tax authorities.

Personalized solutions

Legacy tax technology providers tend to offer an out of the box solution that may not work well for all businesses. The future of tax technology will offer more personalized and customizable solutions tailored to specific industry needs and business requirements, enhancing their relevance and effectiveness.

Data Analytics and Visualization

Data analytics tools enable more sophisticated reporting and visualization of tax data, helping organizations to better understand their tax position and make informed decisions.

This can be translated to interactive dashboards, which provide real-time insights into tax liabilities, compliance status, and key performance indicators, enhancing visibility and strategic planning. This information can be powerful, and can support tax leaders being viewed as business partners, not just as a compliance function.

Global tax calculation

Businesses have become more global in the past few decades, and this trend is only accelerating. One of the biggest drivers of this is ecommerce, which has revolutionized global trade.

Tax authorities have caught up and have created new obligations on non-resident businesses. This means businesses operating globally need to be able to calculate tax in many or all places where they operate.

Tax calculation isn’t limited to finding the right rate however. Customer tax IDs must often be validated, and the tax collected needs to end up on a tax return. How you choose to manage this can make the difference between a streamlined and accurate process or a manual, time consuming, and error-prone process.

Leverage Tax Tech with Fonoa

Fonoa is the first global tax automation platform that allows you to validate tax IDs, calculate taxes, generate invoices and e-invoices, report transactions and file your tax returns through a single solution.

Talk to us and learn how Fonoa can help your business automate global tax compliance.