Tax Compliance Process Changes With Electronic Invoicing

Steve Sprague, chief strategy and product officer at Sovos, told PYMNTS in a recent interview that tax compliance is changing — from an intermittent activity to a continuous one.

In the past, corporate back offices were satisfied with legacy accounting systems and may have assumed that those systems will extract a “big enough file” to cover all of the diverse markets and tax reporting requirements across the globe — from the U.S. to Brazil to Germany — depending on the scope of the organization.

But now, he said, these companies must deal with a third party operating “inside” the company — that would be the government.

Among the most notable trends in tax policy, he said, has been the movement of governments toward transactional collection through continuous transaction controls (CTCs), particularly in Latin America and Europe.

That’s a notable change, he said, from what’s traditionally been seen before, especially in the states.

What’s Changing

“Many individuals,” said Sprague, “viewed tax as something that happens on a quarterly basis or an annual basis. But around the world, it’s been moving from not only quarterly, monthly … now it’s in real time.” Governments are collecting enterprises’ invoices in real time, gaining insight into those companies’ billing and accounts payable processes.

When the government is collecting the transaction, that invoice now is only valid if it’s in the government system of record. It doesn’t just matter what the invoice says in a company’s general ledger. It’s what’s in the government system, “what’s been filed, stamped, collected and stored in the government database that matters,” said Sprague.

Tax compliance, he said, thus becomes an operational issue, affecting all parts of the business. In countries such as Brazil and Mexico, companies cannot ship their goods unless the transactions behind those goods have been approved by the government. The negative effects compound: not shipping means they can’t pay their bills, or a supplier could even refuse payment, expecting that the goods are to be returned.

“You’ll have supply chain challenges, billing, AR and accounts payable challenges,” said Sprague.

A proactive, successful tax compliance strategy, said Sprague, begins with connectivity, and includes using digital means to identify trading partners and eliminate fraud. Robust reporting, he said, is a building block of this strong foundation, all of which then enable companies to analyze their operational efficiencies.

Chief information officers, said Sprague, must reconsider how their companies are structured, and what’s needed as they go to market in other countries. They must think beyond building out the proverbial “last mile” of connectivity of getting information to the tax authorities.

Data, of course, remains critical — and it’s the “master data” that feeds the accounting information flows that remains the most critical of all.

“What the government wants is standardized data so that they can make decisions,” said Sprague. The situation is becoming urgent, he said, as the number of countries with continuous transactional controls (CTCs) will be near or above 40 in just a few years, up from about two dozen today.

“You have to fix where the problems lie,” Sprague told PYMNTS, “which is in the centralized systems — where the data is created.”

“So, source data and data reconciliation demand that you have controls. It demands a single platform and source system,” said Sprague. Anything that needs to be corrected used to be corrected at the point of filing, and now it needs to be corrected at the point of the transaction. Knowing whether a supplier is charging the correct tax can mean the difference between an enterprise under-deducting or over-deducting, which in turn determines the outcome of an audit or a possible penalty. Known as determination, it needs to be embedded in the transaction flow.

“It all needs to be defined not just based on what you bill but also what you pay — and it has an impact on cash flow,” he added. Technologies including artificial intelligence (AI) and cloud-based platform compliance models can help pinpoint and examine discrepancies as the government compares a firm’s data to its trading partner information in real time.

Looking ahead, digitization and standardization can and will have “profound effects on the economy,” he said. Granular, transaction-level tax reporting will give enterprises and governments insight into where they need to be investing in all manner of logistics and tax policies.

“All of this information that’s being collected is going to create more opportunities for small businesses and mid-market companies to be more competitive,” Sprague said, adding that “this is going to be a force for positive change.”