4 min read.Updated: 21 Jan 2019, 11:29 PM ISTBipin Sapra and Arati Amonkar
The capability of the government to digitize tax compliance has reached a new high after GST came in to effect
Tax as a subject has undoubtedly gained priority in C-suite and boardroom discussions. Recent global and local tax and regulatory changes have changed the perception that the tax function is merely compliance driven. The tax function of today is an integral part of discussions on corporate strategies and business plans.
This is primarily on account of the pace at which tax administrations are creating precedents and embracing technology to widen the tax net, monitor compliance, and conduct targeted audits. The capability of the government to digitize tax compliance, monitoring and audits has reached a new high after the implementation of the goods and services tax (GST). The compliance and reporting requirements under GST were designed to capture transaction-level details. The analytics on data captured by various tax and regulatory authorities has empowered the tax administration in India to focus its efforts towards potentially non-compliant taxpayers. Even at a global level, with the base erosion and profit shifting (BEPS) and specifically the three-tiered transfer pricing documentation requirements, a multinational company’s intercompany data will be available with several tax administrations where such organizations have a presence, and would increase the need for transfer pricing documentation to be consistent and speak the same language. Automatic exchange of information has enabled tax administrations to conduct joint audits, and organizations are anticipating focused lines of inquiry from tax jurisdictions, in view of the use of analytics for a risk-based selection of taxpayers for audits, and the need for better quality data to respond to such inquiries. This has resulted in a move towards centralization and automation of many internal transfer pricing processes around transfer pricing documentation to the implementation and monitoring of global transfer pricing policies around intra-group services, profit splits, and cash pooling.
With governments gearing up with technology and analytics-driven tools to transform the manner in which tax is administered, taxpayers now have the additional burden of collation and submission of vast information to tax authorities, re-engineering and monitoring internal processes and workflows to align with new reporting requirements, and managing tax controversies. While traditionally taking a head count was an answer to increased tax compliance, now companies in India are compelled to harness the power of technology to effectively face these challenges.
There are many examples of companies deploying technology for easing the compliance burden and reducing the risk of a tax controversy. A few examples are: (a) automation for extraction, validation, and submission of data to tax offices; (b) running analytics on data before submission to tax offices to identify potential risks; (c) automatic allocation and charges to associated enterprises; (d) automatic generation of periodic dashboards to evaluate the tax health of the organization; (e) advanced data analytics for year-on-year comparisons to identify trends with what-if analysis to detect potential red flags.
However, organizations can no longer stop at just getting their compliance right and a more proactive approach is needed to prepare for what will come next. Keeping this in mind, tax heads and chief financial officers are taking stock centrally and rethinking the way indirect tax and transfer pricing was dealt with over the last 15 years. To bring in efficiency, accuracy and consistency, organizations are adopting different operating models for tax compliance and reporting. From complete outsourcing of the tax function to third parties to the setting up of in-house tax centres of excellence or leveraging existing centres to the adoption of a hybrid model, various approaches are being evaluated and implemented based on the ethos of the organization, with increased reliance on technology tools to manage the pace of disruption, achieve economies of scale and manage risks.
Organizations are not shy about embarking upon the journey of mapping and re-engineering internal processes for effective implementation of indirect tax and transfer pricing policies, analysing the current and future state of readiness to respond to tax authorities, embracing customised technology solutions to ease the burden of compliance, and being an effective partner to business teams. For example, many corporations in the midst of finance transformation projects are making the tax function an equal partner in their journey, where previously tax was only a secondary consideration. Given the fact-driven nature of indirect tax and transfer pricing, companies are having to address the need for better quality data as the transactions take place, rather than at the time of an audit, and are enabling their enterprise resource planners (ERPs) to deliver on these requirements.
As in every field, evolution and innovation will be constant and organizations would need to continuously look for opportunities for improvements and technology upgrades to stay ahead of the curve. Administrations such as China are already experimenting with blockchain invoicing and tax collection and, as they evolve, new applications may emerge for other disruptive technologies such as Artificial Intelligence and machine learning in tax administration. In-house tax professionals and tax practitioners alike, who are updating their skills and learning new ways to operate, will clearly have the advantage.