How transformation is shaping global indirect tax (2024)

In brief

• There is an increased drive for efficiency in tax departments and to add value while contending with budgetary constraints.
• The two major challenges facing indirect tax teams are resources and technology.
• E-invoicing is transforming the global indirect tax landscape. Tax teams need a strategy.

“The rise of the Continuous Transaction Control (CTC) model globally is increasing the pressure on taxpayers and the accuracy needed of their indirect tax-related data at the source,” says Pierre Arman, EY Global Tax SaaS Leader. “The complexity of this paradigm shift to a real-time reporting framework, in certain countries, is supercharged by the fact that each country can implement a different version of CTC. Initiatives such as VAT in the Digital Age (VIDA) are trying to harmonize the introduction of e-invoicing and e-reporting across the European Union to stop this dichotomy of real-time reporting regimes across different countries, but it is still years away,” Arman continues. “This means companies, today, have to plan for a near future business landscape where their entire business process, technology and people have to evolve to deal with different data reporting requirements going live at different points in time, with different frequencies and without any cross border interoperability. It is both a very challenging and a very exciting time to be an indirect tax professional,” he concludes.

Indirect tax is on every single transaction, which amplifies the importance of data for accurate reporting. Businesses need to ask themselves: Do you have the correct data in the first place in your system? Do you have enough of it? Do you know where it is? Do you know how to extract it? What do you need to do to transform it to be able to report it? How often do you have to report it?

"The digital transformation of VAT is a great idea, but it isn't just a matter of writing legislation and then asking organizations to implement it," says Ben Woodfield, Indirect Tax Partner, Ernst & Young LLP. "It involves the digital transformation of the tax authorities themselves, including leveraging technology and utilizing new skills. So, it's a new and complex challenge for them too. And tax authorities need to share detailed and clear roadmaps for implementation, which give businesses enough time to invest in the necessary technology and evolve their processes to achieve compliance."

As digital invoicing rises, how data is transmitted, used, manipulated and visualized will be critical. That is going to define how indirect tax functions work in the future.

The rise of e-invoicing

E-invoicing is transforming the global indirect tax landscape. For tax administrations, e-invoicing can assist in closing VAT gaps, prevent unintended errors, enhance risk management capabilities, and early detection of fraud schemes. As was found by some countries during the pandemic, digital invoice data offers a very rich source of economic data. Near real-time availability offers even greater possibilities for quicker and more in-depth analysis of economic developments and forecasts. While there can be high implementation costs, electronic invoicing can, over time, reduce business costs and stimulate the broader digitalization of taxation-related processes.

“Nowhere has the e-invoicing system been more transformative than in India,” notes Uday Pimprikar, Partner and National Indirect Tax Leader, Ernst & Young LLP. He explains that “Through e-invoicing, the government receives granular invoice-related information on a real-time basis. It is transforming the way tax administration and compliance are being conducted. Policymakers have much better insight into the economic activity, nature of supplies, and logistics – enabling sharper decisions. The private sector is using this digital data to transform and automate financial services, such as pre- and post-shipment lending, leading to better financial inclusion.”

“Several internal business functions and processes are getting automated” he adds. "This invoice data is gold standard because it is real-time, validated and reliable. The granularity of the data is significant, from a tax administration perspective and an economic research and policy perspective, one can map the entire supply chain. Now, the ability to identify areas of evasion and non-compliance is extremely high."

“Currently, invoicing compliance in India is estimated to be upward of 80%-85%,” says Pimprikar. "A big change from the past – as taxpayers in India were not the most tax compliant before the introduction of e-invoicing. It has led to the massive formalization of the economy, which has triggered a significant increase in direct tax collections. Since the introduction of e-invoicing two to three years back, total tax collections have increased by more than 50%.”

Find the right resources and technology

"There are two major challenges facing indirect tax teams: resources and technology," says Maria Hevia Alvarez, EY Global Indirect Tax Deputy Leader. “Resources because they are lacking and technology because there is so much out there and it is challenging to decide which is the best approach for a particular business.” Teams are being asked to do more with less in times of cost pressure. This makes it harder to keep up with the increasing compliance obligations and demands.

To address these challenges, companies are looking at their operating model to determine what tasks can be outsourced and what should be kept in-house. This can involve a range of activities, such as compliance, determination, managed services or invoicing. The decision depends on factors, such as complexity, local teams and budget considerations. Some companies are adopting hybrid solutions.

"Once you know what you want to do, find the technology needed to support your operating model. The key is covering every country and obligation," adds Hevia Alvarez. That is why the EYGlobal VAT Reporting Tool (GVRT)tool is expanding to cover VAT/GST reporting in more jurisdictions and to develop a global e-invoicing solution. The goal is to have a broad component connecting invoicing with a reporting solution.

Effective tax management: the importance of collaboration

“The key to effective tax management of transformation is the absence of organizational silos,” says Gwenaëlle Bernier, International Tax Partner, Ernst & Young Société d’Avocats. “Tax and finance functions should work together to create a holistic approach. When these teams work in isolation, there is a risk of duplicating efforts, missing critical deadlines and overlooking essential compliance requirements.”

"In many businesses, no one is fully responsible for indirect tax management. It has been spread across the organization," adds Bernier. “Businesses must create a tax governance structure that defines responsibilities, roles and accountabilities. While it may be tempting to spread the duties of VAT management across the organization, it is essential to have a centralized approach.”

Key actions for indirect tax and trade functions to help drive transformation:

• Future-proof your indirect tax function by putting a data strategy in place.
• Find and retain talent.
• Harness the right technology to support your operating model.
• Create a tax governance structure that defines responsibilities.
• Consider a centralized approach to VAT management.
• Use the implementation of tax policies to address long-standing data issues.