Introduction

Global tax compliance is undergoing a significant shift. Where businesses used to report tax information periodically, the government is pushing for real-time, transactional-level reporting. 

While the trend started in Latin America, many countries with VAT-like tax systems are implementing real-time reporting or plan to do so. Adopting this approach gives governments visibility into business transactions, allowing them to accomplish several tasks, including pre-filling tax returns and monitoring live transactions for many compliance requirements.

While this transformation of the tax reporting system benefits governments, it can create many problems for businesses. In extreme circumstances, companies that lack the appropriate infrastructure and data risk losing control over their data and tax-related reporting processes. So, why has real-time reporting become the norm, and how should businesses respond?

The Changing Tax Landscape

Real-time reporting allows for improved tax enforcement as it reduces the ability of businesses to underreport or evade taxes. According to Christiaan Van Der Valk, Vice President of Strategy and Regulatory with Sovos, this puts the government in a strong position. “The government says I have all your data. I will tell you what your liability is. Please come back to us if you disagree, but you better come back with good data because I pre-filled this report based on your authenticated data that I looked at in real time.”

Consequently, real-time reporting provides governments with transaction-level detail, helping them improve tax collection, understand the economy, and make better-informed policy decisions in many other fields. 

“Tax compliance is no longer a risk-based decision,” says Van Der Valk. “We’re witnessing a rapid transition from tax as an interpretation-based and declarative activity to a binary yes/no situation where you either fully execute the required data integration or the legality of your business operations will be questioned. Meeting the technical and data specifications to the last comma becomes a basic condition for your business’s existence. You cannot run a legitimate business without proper company registration in a country. A defense that you acted in good faith, which may have worked in the past, will increasingly fall on deaf ears.”

How Should Finance Leaders Respond?

From a multinational perspective, real-time reporting comes with challenges. For example, individual tax regimes often have different technical specifications and timelines. These facts alone can create operational challenges. However, more profound problems can arise from the growing information asymmetry between businesses and governments. Businesses typically operate different, non-integrated applications that will communicate data at different intervals to the tax administration. This makes it hard to anticipate how the tax administration will view all this data after combining it and applying advanced analytics across ever-larger data sets. 

Many businesses will increasingly find themselves in a concrete situation when the fiscal authorities start using your real-time, authenticated data to complete your tax return instead of relying on the business to provide its view of what that report should contain. This disrupts age-old business routines and reverses the burden of proof, putting firms in a position where they must prove the tax administration wrong. 

Tax and finance leaders should focus on copying how the government views data to control their data and tax position. This is a new design objective for business systems and processes, which requires taking a holistic perspective where, until recently, business leaders have allowed tactical point solutions to be used in response to individual countries’ fiscal requirements. 

Therefore, the first step involves comprehensively assessing the business systems, processes, and data flows. This includes assessing the current state of compliance and, critically, the data quality across the business. 

Next, finance leaders should develop a strategic, enterprise-wide approach that prioritizes automation, avoids point solutions, and integrates consistent compliance capabilities into core business systems rather than bolting on separate tax software as an afterthought. This will help ensure a centralized data view despite the inevitable diversity of underlying business applications. Data quality and visibility are critical, and finance leaders should strive for the same data quality and insight that tax authorities have developed from their data.

Collaboration Matters

As governments continue to invest in advanced technologies, those solutions will play an essential role in tax enforcement and compliance. Electronic invoicing and standardized data formats enable seamless data exchange, making it possible to apply real-time data analytics to monitor transaction data and quickly identify issues or discrepancies. 

Collaborating with technology partners is critical for businesses. This includes working closely with software vendors to ensure compliance capabilities integrate seamlessly. Critically, larger companies should design their go-forward process and application landscapes based on a thorough understanding of the enterprise software ecosystem. This includes the principle that continuous innovation in business efficiency cannot be ensured by the same software vendor that provides continuous global tax compliance. Instead, business leaders should demand the best of both worlds by requiring enterprise application vendors to embed advanced tax compliance functionality from vendors who manage constant regulatory change. Partnering with advisory firms is also recommended, as they can help navigate the evolving compliance landscape and prepare your internal processes and data for the rigors of continuous transaction controls. 

Above all, businesses must stay agile and adaptable, maintain a good level of cross-functional understanding of trends in tax compliance, and be prepared to quickly adapt systems, data structures, and processes as the regulatory environment demands. The key is for tax and finance leaders to take a proactive, strategic approach to managing the transformation to real-time reporting rather than reacting to individual compliance requirements.

According to Van Der Valk, the stakes for tax and finance leaders have never been higher. "If you don't deal with real-time reporting and its requirements, the legality of your business will quickly be questioned altogether, and you cannot be a bona fide operator in a country." Businesses can no longer view compliance as an optional, risk-based decision but a prerequisite for legal operations in most countries worldwide.