What’s clear from the digitalisation of tax authorities across Europe is that Making Tax Digital is not going anywhere. Richard Sergeant investigates.
MTD certainly stirs the passions, and there’s nothing like the swirling debate about whether it is a good or bad thing, and whether it will actually happen or not.
Regardless of where you stand, it is inevitable, and it will probably be more far-reaching than you imagine.
That is if you live in the UK. Because for many places around the world the digitisation of their tax authority is well underway, already mandated, and proving to be an attractive template for others such as HMRC to follow.
Businesses are already feeling it
In Thomson Reuters 2018 European tax technology survey which talked to large businesses right across europe, 53% said that tax regulation had increased with a similar amount saying that the amount of information required to support filings had also increased.
Furthermore, 37% said they were aware of their tax authorities plans to implement digital filing and compliance. An astonishing figure compared to five or so years ago and illustrates both the determination of this trend and the increased burden on businesses to comply.
Interestingly the main tax software selection priority was security, raising real concerns around themes of manual processes and use of spreadsheets, reputational damage and bad PR around tax affairs being exposed, increased complexity around formats and standards, and of course conforming to GDPR.
It would seem that transparency and increased reporting go hand in hand and take security risk way beyond the concerns of using ‘cloud’. In fact this speaks to knowing where all the data is and who has access to it.
But where is this being driven from?
OECD makes the running
The Organisation for Economic Co-operation and Development (OECD) are setting the global agenda. In the area of tax the drive towards greater tax transparency, accountability, and ‘true’ collection of tax owed have seen a raft of initiatives and reporting formats such as Base Erosion and Profit Shifting (BEPS), country-by-country reporting, and critically the Standard Audit File for Tax (SAF-T). None of which would be possible without the technology being available to implement.
SAF-T and the gateway to digital tax
SAF-T is well worth looking at in more detail as it is both intense, and provides the blueprint from which tax authorities are then developing their digital tax regimes.
In effect it is a schema not unlike XBRL that requires the following to be submitted:
- The full general ledger and journals
- Accounts payable, with vendor master data, payment ledgers
- Accounts receivable with client master data, payment ledgers
- Warehouse inventory product master files and inventory movements
- Inbound and outbound flow of goods
- Fixed assets ledgers, depreciation, and amortisation
Recommended to be submitted monthly.
Not only does it have implications for the audit, but in the short term the format brings distinct advantages for tax take.
For all that though, there are differing interpretations of these standards, and different countries are implementing with varying criteria.
At its core though, the OECD is setting the benchmarks for global standards, granular reporting and a digitisation of the relationship with tax payers; and it’s been filtering down to tax authorities for years now.
Digitisation of tax authorities
VAT (indirect taxes) are where the most obvious successes have been: Spain (with SII), Portugal, and Hungary are obvious examples but not unique. In the case of Spain they have a near live reporting regime. Not all are requesting the full SAF-T data and other countries like France, Belgium, Netherlands have or are adapting to suit; however, the direction of travel is clear.
2019 will also see Greece, Italy (SDI live reporting of sales) and even the UK (MTD for VAT) eventually follow suit. So this is neither new or parochial.
And what we are talking about is not just replacing paper with tax authority filing portals, but utilising direct links from software straight into their systems.
Poland leads the way
Poland has recently become the poster child for the OECD ambitions and where many tax authorities are now starting to look closely. After introducing mandatory SAF-T filing alongside VAT declarations for larger organisations in 2016, this was extended to all VAT businesses in January 2018. After only four months the results have been impressive.
Through big data analysis they were able to identify 85,000 “suspicious invoices” (not necessarily fraudulent but just inaccurate) made by 36,000 entities, and collected some PLN 150m. They were also able to send emails and SMS text messages to the owners of these suspicious invoices and ask them for more details or to make aware of errors.
The success has been as such that the Polish finance minister, Teresa Czerwińska, has unveiled plans for Personal Income Tax (PIT) and declared: “We plan to move away from the VAT declarations at the beginning of next year; the uniform VAT Control File [SAF-T] should completely replace it.”
This is a fundamental change to the relationship between taxpayer and authority and creates a clear path for future implementation across all taxes.
Where is this leading?
If we take all this into account the evidence is that for most countries of the world, the relationship taxpayers will have with tax authorities will look something like this:
- Mandatory digital filing
- Demanding access to granular (transaction level) data
- Access to data directly via open banking and government departments
- A requirement for broad acceptance of technology by businesses
- Increased compliance complexity
Which puts MTD into perspective.
Whatever our views on what is being asked by HMRC, and what it is capable of delivering, there is no doubt that this the direction of travel. And depending on the political priorities of the day, it is only a matter of time before nearly all taxes are dealt with in this way.
In part two, we’ll take a different view on the influence of technology and MTD and explore why it’s the tax department that should be braced for the biggest changes, not the accounts team.