It’s been long-established that the workplace is increasingly technology driven. From internal finance to human resources, hosted collaboration on work files to communication streams, almost all aspects of the workplace are now powered by tech in some way. And much of this resides in the cloud as a software-as-a-service offering; after all, cloud architecture is renowned for the benefits of productivity, dynamic flexibility and scale.
But the conversation has moved beyond private enterprises and their internal technology usage; governments and their financial institutions are also harnessing this power to improve their processes. Focusing on the financial, this broadly falls under three categories: accounts receivable, procure-to-pay, and reporting.
The digital history of the tax office
To understand the current landscape and why the cloud is such a vital part of a modern financial system, it is important to explore what has occurred in the tax landscape in the last twenty years.
In the early 2000s, faced with a growing VAT gap – the difference between VAT owed and that which is collected – it was Latin America that paved the way with digitising their tax processes. Indeed, countries such as Brazil, Chile and Mexico have become synonymous with e-invoicing and digital VAT compliance. This is because their models of e-invoicing were imposed via a “clearance” regime, whereby the tax administration receives (and often pre-approves) digital invoices in real-time.
This made a huge impact on the VAT gaps of the countries implementing them by building compliance into the very fabric of the invoicing process. Other countries began to take note of these systems. In particular, with figures from the European Commission showing an estimated VAT gap of around 137 billion euros ($150 billion)—more than 11 per cent of the total expected VAT revenue—it was unsurprising that countries throughout the EU began looking to LATAM for inspiration.
But in Europe there is a far more delicate situation; after all, the opportunity to use technology to drive friction out of the clumsy paper-based system has been there for decades, and the right approach could have benefited both the taxman and the taxpayer. So why hasn’t the same revolution taken place?
These issues were mainly due to the EU VAT Directive changes in 2001, meaning that no single system could be agreed upon by all Member States. Subsequently, different European countries introduced their own variations of continuous VAT controls, forming a colorful patchwork of periodic, real-time and near real-time reporting systems across the continent—a patchwork that represents a real compliance headache for those organisations with a presence in several different jurisdictions.
Keeping track of the changes
The current situation finds tax authorities worldwide making changes at a constant rate – Latin America hasn’t sat still, South East Asia has regular changes happening at the moment, led by the manufacturing powerhouse of India, and Europe, wading through the red tape, has seen major economies adjusting to a faster, more digital way of working such as Italy, Poland and Finland.
The issues for businesses are two-fold when it comes to keeping compliant and making sure they don’t fall foul of the rules – the rate of change and the decreasing time frames to get everything right.
Looking at the first, the number of major economies that are making inroads to digital invoicing and reporting to their respective tax authorities is constant – look at any tax specialist’s blog and you’ll see that updates are happening frequently. These shifting sands mean that the manual identifying, understanding, and implementing of the new rules is a constant uphill battle for even the most seasoned of finance professionals.
Secondly, the windows for accurate reporting are getting shorter and shorter. Keep in mind that real-time financial reporting – or, in some cases such as the Latin American purveyors, where invoices are governmentally checked and approved in real-time – is where many countries want to arrive as their end destination. This is leading to a phasing-out of time-period VAT reporting for instance, where the government will have all of a businesses’ transaction data which is submitted in real-time or in a far smaller window, meaning that mistakes can have immediate consequences. Immediate reporting also doesn’t allow the luxury of collating and finalising information before the financial year-end, or ahead of a visit from an auditor.
Technology shouldering the burden
These issues highlight why bespoke, cloud-based solutions being implemented are key for modern organisations.
For example, a business based in the UK might have a supply chain that begins with materials and manufacturing in India, then shipping to customers across the EU. This means that it’s not just the UK’s relatively rudimental Making Tax Digital system that needs to be accounted for; it’s also the more advanced reporting and invoicing structures that are found abroad which need to be up to date, formatted and shared in the allotted time frame to ensure no disruption.
For even the largest of finance teams, this is an issue that can take up huge swathes of the working week. It also relies on expert guidance in the form of well-remunerated staff, or expensive consultancy costs. To this end, cloud-based technology is the best direction to take. Once implemented, the software can manage the complex and time-consuming tasks of keeping up to date with legislation, ensuring that all payment information is formatted and shared in the time frame of whichever nation is requesting it, ensuring that business doesn’t grind to a halt due to mistakes, or that penalties aren’t accrued.
This is even more important during the current global Covid-19 pandemic. The bottom-line has never been as vital and fast, accurate invoicing and procurement are of paramount importance to maintaining some sort of stability. A secondary benefit is that automation via the cloud gives finance professionals pace and time to think more analytically and strategically, safe in the knowledge that those in IT are freeing up time via the implemented software.
Connecting the dots
With cloud powering the visibility and adherence to this critical government data, it’s important to look for several different hallmarks of a technology that will truly make a difference.
ERP systems, the bedrock of any business, are set to undergo a fundamental shift with the sunsetting of SAP’s current solution to make way for full adoption of S/4 Hana by 2025. In their current format, many ERP systems and their ancillary functions have been gradually built up over time, meaning that ensuring these all report accurately into governments is difficult to achieve. So SaaS, cloud-based technology should be sought out, with its flexibility ensuring a seamless transition as these ERPs are upgraded upon, without the system breaking down. Dynamic and continuous input is a crucial function for B2G transactions, and cloud ensures this is a given, allowing for navigation of complex regulations.
API functionality should also be explored. As previously mentioned, a standard business may use differing ERP, payroll, expense and archiving functions from different providers. While this works to the current standards of periodic reporting, there is a far more pressing need to un-silo this data with a move to real-time or smaller time-frame reporting and invoicing. Taxation software hosted in the cloud needs to be installed which can connect into these different systems, ensuring that they can communicate, the data can be shared, and accurate archives and reports filed without any inaccuracies. Security must also be of paramount importance with any aspect of finance, with encryption, two-factor authentication and other safeguards a must for any technology being brought onboard.
Finance for now and the future
The cloud brings numerous benefits to finance at this current point in time, but certainly is an important and somewhat daunting undertaking for many organisations. So, if director-level buy-in is proving tough, there must be a consideration for the future too to discuss.
The move to digital, real-time reporting on transactions is not going anywhere anytime soon. The pace of change is only speeding up, and with it, the time periods for remaining compliant with tax offices ever shortening. It may well be that a business can operate in its current setup successfully at this moment in time, but those in IT and finance departments need to be future proofing their organisations too.
Advanced, expert cloud and SaaS technology represents the only logical way to do just this, ensuring businesses can continue to operate globally in the easiest and most cost-effective way possible, as well as preparing themselves for legislation which is continuing to barrel towards an entirely digitised, real-time future.
Oscar Caicedo, VP, Strategy & Operations VAT, Sovos