INSIGHT: Are Taxing Jurisdictions Pushing Us Toward the Point of No Returns?

Across the globe, governments are implementing laws that decrease the elapsed time between a transaction and when they receive the tax owed on the purchase. Mexico started the revolution in 2008 and Brazil has implemented e-invoicing that requires businesses to have invoices approved by the government before issuing to buyers. This approach has spread across the rest of South America, and into the Asia-Pacific region, with China a leader in state pre-approved invoices. In Europe, Italy’s new government sales invoice approval gateway cut tax fraud by almost 15% overnight, and other countries are beginning to follow suit.

Closer to home, a recent proposal for daily tax remittance in Massachusetts is just another example of how legislative discussions are inching us closer to the “point of no return,” where the need for traditional tax returns may no longer exist.

While the reality of no returns is still years away for most of us, there are several factors at play in our journey toward the “point of no return,” some of which are actively happening around the world, including:

Fraud Prevention

For over 10 years, EU member states have been moving toward the submission of transaction-level data subject to value added tax (VAT)—including sales, purchases, fixed assets, stock movements, and bank transactions. This shift has been driven primarily by growing revenue gaps and increasing tax fraud across parts of the EU, now estimated at $150 billion per annum.

As such, new regulations across Europe have been rolled out to combat VAT fraud, including tightening up rules on cross-border business-to-business selling and the move to digital transaction submission in Spain, Italy, and Hungary, with France, Poland, and Greece launching their own sales invoice live filing regimes in the next few years. As a result of these efforts to reduce fraud, businesses of all sizes are facing huge pressures to upgrade their accounting systems and tighten their tax determination processes since taxing authorities will now have live access to taxable transactions.

Cross-Border Commerce

The Internet has made it possible for consumers to make purchases from anywhere in the globe. In fact, by 2022, cross-border electronic commerce (e-commerce) could account for more than 15% of the world’s online retail market. The increase in international e-commerce comes with an increase in the number of goods and services being produced and accelerates every aspect of the purchasing process from checkout to delivery. As it stands, the lack of harmonization rules in Europe and Asia have slowed the growth in online trade and has contributed to billions in VAT fraud.

Countries across the world are looking toward e-invoicing, live reporting, and other real-time processes for VAT, Goods and Services Tax (GST), and other transaction taxes. Tax authorities are also attempting to shift the sales tax obligations onto marketplaces, including the EU making online marketplaces liable for the VAT reporting and collections of their U.S. or Chinese sellers beginning in 2021.

On the business side, those engaging in cross-border e-commerce are, in many cases, facing a new world of complexity in the form of customs duties and tariffs. The expanded customer base combined with additional tax compliance hurdles is forcing businesses to incorporate automation to process transactions and stay compliant. As customers become more accustomed to purchasing goods and services internationally, governments will need to implement more real-time tax reporting processes and businesses will be forced to adopt technology to keep pace.

Technology Improvements

Nearly every aspect of financial technology has been disrupted in the last few decades and tax compliance technology is no exception. Businesses of all sizes now have the ability to automate nearly every portion of their tax compliance obligations from collection to returns. On the other hand, tax authorities have taken note of these technological improvements and are starting to catch up with their own implementations.

Moving forward, the reality of real-time tax compliance hinges on the ability of governments and businesses to use integrated technology that will facilitate the collection, reporting, remittance, auditing, and verification of tax payments at, or near, the time of transaction. As the technology evolves to facilitate a freer flow of tax information from party to party, it’s inevitable that traditional returns will no longer be sufficient.

While real-time compliance is still years away for us in the U.S., it is quickly becoming reality around the world. As the digital economy pushes our society to become even more accustomed to, and reliant on, international e-commerce, governments and businesses will need to adopt the technology necessary to reduce the friction of tax compliance across transactions. The trek toward the “point of no return” will be a slow, gradual approach, but businesses will need to stay on top of the manner through which taxing authorities plan to implement real-time tax reporting so that they can be prepared.

We’re already seeing the different approaches that taxing authorities can take when implementing e-invoicing and live reporting requirements. Across the EU, states are phasing in new reporting measures in a variety of ways, including enforcing regulations by industry, company size, business model, non-resident companies, and more. In the U.S., businesses should expect a similar implementation by states and will need to be cognizant of how new real-time requirements are put into effect on a state-by-state basis.

As governments and businesses prepare for the tax regimes of the future one thing is certain—technology and global e-commerce will one day make the traditional returns process as we know it obsolete. As such, it’s up to taxing authorities to adopt the technology that will support the economy of the future and, likewise, businesses should be preparing their accounting systems to keep pace with the changing requirements.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Liz Armbruester is Senior Vice President of global compliance operations, and Richard Asquith is vice president of global indirect tax at Avalara.