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How to Solve the Evolving Challenges and Demands of Tax Authority Automation

Over the last 10 years, more and more tax authorities have begun making automation a requirement.

Gina Weken
Gina Weken

Aug 26, 2021

Until recently, the drive for automation in the tax arena was fueled by conglomerates needing to increase efficiencies and reduce operating costs. However, over the last 10 years, more and more tax authorities have begun making automation a requirement. Interestingly, it is no longer just developing countries leading the charge. The trend is developing around the globe.

Tax administrations, around the world, are increasingly implementing continuous transaction controls (CTCs) as an efficient tool for closing the VAT gap. They’re targeting both fraud and innocent mistakes due to the complexity of the tax regulation. By implementing mandatory rules for electronic invoicing (with or without upfront invoice clearance or introducing real-time reporting obligations for both B2G and for B2B transactions), various tax administrations around the world are trying to get better data on the transactions that are carried out in their respective countries. They’re introducing checks and balances early to avoid the cost and effort of having to carry out audits after the fact, and possibly after the people who made questionable tax decisions are no longer with the company.

Multinational finance teams need to improve their automation game for both compliance and operational efficiency. Typically, an accounting system or ERP collects transaction data in an invoice format before mailing or emailing it to the customer. Looking ahead, your ERP should first be ready to feed data directly to a tax authority, which will then provide the go-ahead to issue the invoice or advise you to correct any mistakes. While this might look like a one-time setup, each country will have their own country-specific process in place.

Conglomerates should also be aware that electronic invoices are only the leading edge when it comes to automated documents. An increasing number of countries are currently looking into how electronic documents can be used in a more efficient way across the board. For example, multiple tax authorities are currently determining if they can demand import, export, and delivery documents in electronic formats despite those functions being predominantly paper-based. In other words, the adoption of e-invoicing is fast becoming the new norm for tax policy globally.

How Companies Can Meet the Demands of Continuous Transaction Controls

The first step towards CTC compliance and operational efficiency involves building the technical connections with the taxauthority. All document approval processes will run quickly and smoothly when tax is calculated correctly. However, more time and costs will be spent on invoicing when something is off. The delays created may also impact cash flow. Only once approved can the correct tax invoice be sent to the customer.

To see this in action, look no further than Italy. Its Revenue Agency’s e-invoicing platform, Sistema di Interscambio (SdI), already shares invoices between Italian entities. The Italian government has announced that cross-border transactions must be reported via SdI as of next year. Part of the benefit for Italian businesses is that one of the VAT required listings will be abolished per the end of this year.  

The good news is that tax authorities are rolling out their CTC programs on a gradual implementation. For example, first they’re making e-invoicing for business to government transactions a requirement. Next, they’re targeting B2B transactions, phasing in large, medium, and small companies. Last, but not least, they’re including business to consumers/private individuals. For example, France has set three different deadlines -- for large, medium, and smaller companies respectively -- as they aim for full implementation of their CTC by 2023.

How CTC is Impacting Intercompany Teams

Experts estimate that over a third of world trade happens inside multi-national corporations. Intercompany transactions are in no way immune from CTC scrutiny. In fact, they often attract more attention from tax authorities and auditors. As tax teams update their customer and supplier invoicing to meet regulatory expectations, intercompany teams are expected to do the same.

To ensure compliance and avoid the risk of unwelcome costs and penalties, multinational companies need to rapidly modernize their intercompany operations. They must treat intercompany transactions just like external transactions. Intercompany teams must also be educated on which countries now have CTC -- and to what extent.

The systems that manage intercompany accounting at multinational companies must be prepared to easily interface with the different systems used by tax authorities. It is a requirement for sending electronic invoices to the appropriate authorities for approval before issuing them to the intercompany legal entity buyer. This holds true even when the seller and buyer entities at a multinational corporation are operating within the same accounting system.

Multinational companies must now overcome a variety of challenges. For example, many intercompany teams are currently:

  1. Struggling to keep up with all the different specs and regulations in various jurisdictions.
  1. Dealing with e-invoicing as part of their customer invoicing through their ERP /accounting system for the goods sold to customers (commercial sales) while the more complicated, specialized intercompany accounting function is kept separate.
  1. Grappling with the fact that invoicing for services is more complex than goods. For example, just setting transfer pricing for services “sold” or IP “licensed” between entities within a multinational corporation does not have comparable or market-determined pricing.
  1. Vying for new IT systems and other resources typically allocated to commercial invoicing and transactions while intercompany efforts are considered lower down the priority list.
  1. Having to keep up with which countries that pay more attention to intercompany transactions than those that don’t. For example, some authorities’ auditing teams include an intercompany specialist who looks at annual accounts between intercompany entities -- investigations that could raise deeper questions about how intercompany accounting is handled.

Solve Your Tax Automation Challenges with FourQ

Built by finance, accounting, and tax experts, FourQ deploys Intercompany Financial Management solutions that streamline the global operations of the world’s largest companies. FourQ helps multinational companies increase operational productivity while saving millions of dollars annually through optimized intercompany billing and payment, tax leakage mitigation, and proactive tax optimization strategies. It does this by automating intercompany processing and seamlessly integrating it with global vendor invoice management.

FourQ is more than technology; it is a solution-as-a-service providing continuous operational support and expertise across tax, intercompany billing, vendor payments, and financial transformation. FourQ keeps up with the evolving regulations globally, and automatically takes care of each tax administration’s requirements.

Schedule a FourQ demo today.

Gina Weken

Gina Weken, FourQ’s Indirect Tax Director, helps multinational businesses with the indirect tax treatment of their activities specifically focusing on intercompany transactions while leveraging business specifics and related processes. Gina has more than two decades of experience working as a VAT specialist, starting her career with PwC as a VAT Manager and later moving in-house at GE and Eastman Chemical. Gina earned a Master of Law degree from Utrecht University.

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