A Reflection on Enhancing Tax Transparency and Compliance

Yesterday, I traveled to New York to discuss tax transparency at the ITR Women in Tax Forum US. Today's panel discussion is set to cover a wide array of topics: CbCR, Pillar 2, beneficial ownership, and mandatory disclosure rules. Given my background in indirect tax, my focus will be on the transparency efforts associated with countries implementing mandatory e-invoicing. Mandating e-invoicing isn't merely about adopting a different data format (XML instead of PDF). Such mandates often entail real-time reporting of invoice data to tax administrations, granting them a comprehensive overview of all business transactions. The eight-hour flight provided an ideal opportunity to prepare for the session and organize my thoughts regarding potential questions.

Is increased tax transparency beneficial?

Transparency can be daunting; tax administrations gather data from various sources, potentially yielding a clearer picture of a company's operations than the company itself (particularly if it lacks advanced analytics). Another concern with automatic real-time data transmission to tax administrations is the loss of control over communicated information. When submitting a tax return, meticulous review precedes data submission. However, with real-time reporting, data may exit your company before you even notice. Additionally, transparency incurs costs, especially in the short term when adapting systems and processes. Many companies perceive no added value if their existing processes suffice. Yet, new legal requirements can facilitate resource allocation for digital transformation. Tax and invoicing processes are typically viewed as costs, and companies avoid additional expenses unless compelled by law. Finally, enhanced transparency can yield long-term benefits, such as maintaining data quality and immediate error detection, simplifying rectification before audits.

What is the return on investment for implementing e-invoicing software? 

This shouldn't be the primary consideration. While it's crucial to have a clear, quantified understanding of the benefits before undertaking digital transformation, compliance projects should encompass broader considerations beyond ROI alone. Drawing parallels to purchasing a train ticket or adhering to traffic laws while driving, compliance with regulations is vital for ensuring business continuity. Non-compliance poses significant risks, potentially leading to business failure. Italy's enforcement of mandatory e-invoicing in 2019 serves as a poignant example. Those who were unprepared to issue electronic invoices by January 1, 2019, found themselves unable to conduct business in Italy, resulting in a complete halt to business operations.

How can the rollout of transparency be optimized from a business perspective? Are we overwhelming businesses with excessive data reporting requirements?

Businesses grapple with a multitude of reporting and record-keeping obligations. Take, for example, platforms adhering to DAC7 reporting to pinpoint sellers neglecting to report income, while the VAT Directive imposes its own set of record-keeping rules. The divergence in requirements between VAT and income tax stems from the unique focus of each tax, coupled with potential technical constraints impeding data exchange within tax administrations.

Nevertheless, the cornerstone of every reporting mandate remains transactional data. With access to transactional data, revenue can be accurately calculated. In theory, reporting this data once should suffice, allowing tax administrations to utilize it as needed. Reporting could be streamlined with a universal standard, yet the abundance of standards, each varying by country, poses a challenge. Despite the desire for uniformity among businesses, diverse standards may foster the emergence of best practices.