Governments around the world are going digital - eliminating paper-based reporting and instead leveraging technology for a high level of tax compliance automation. Real-time reporting of invoices, receipts, tax payments and accounting data has led to tighter integration between business processes and tax authorities.
With so much data now in the hands of both companies and governments, what serves as the source of truth during an audit depends on the countries in which companies operate – based on their unique requirements for data collection, submission, archiving and payment. Most countries follow one of five models for tax reporting: paper-based, post audit, clearance, assessment or split payments. The ultimate source of truth is different in each approach as control shifts from companies to governments.
For countries that have not gone digital, paper is still king and audits remain unchanged, often taking years to gather documentation and complete the process. This is the case, most notably, in the United States, where there are no standardised electronic invoicing requirements.
The ultimate source of truth: Businesses hold a lot of control, with master data being housed within a company’s own systems. Here, a company’s ERP is the ultimate source of truth, as the centralised location holding all of a company’s transactional records.
Post Audit Model
The post audit approach is a bridge between paper-based invoicing and fully electronic flows of information. Invoices freely flow between trading partners, without the need to submit them to the government. Instead, businesses must submit summary reports and archive “authentic” invoices for up to a decade. Documents must be kept in a defined format and be signed and recorded in accordance with the country's laws. In European Union countries the authentication of invoicing is known as Electronic Identification and Trust Services (eIDAS) Regulation. The onus of proof is on the government to prove inaccuracies, which is difficult against such certified documents.
The ultimate source of truth: During audits in these countries, accounts payable (AP), accounts receivables (AR) and enterprise content management (ECM) systems are considered ultimate sources of truth. AP and AR systems often have the the ability to sign embedded within their functionality, while ECM systems archive all transactions and signatures. To be defensible, the signed, archived invoice document is considered legitimate and indisputable. Ultimately, the invoice itself is the source of truth.
Ten Latin American countries have adopted a clearance model, with more countries across the globe following suit. In Europe, Spain, Hungary and Italy are now using this approach, and in Asia, China, Indonesia and South Korea are exploring similar models. Under a clearance model, each invoice must be reported and authorised electronically by the tax authority before or during the exchange process.
The ultimate source of truth: Clearance models begin to shift the power to governments in audits, facilitating electronic audits. Because tax authorities have records of every single transaction, the governments in these countries are considered the source of truth during audits. Companies must ensure the invoice details sent to the government; proof of truck movement of goods (in some countries); receipts; documentation from buyers and suppliers that are stored in their ERP records; AP, AR and ECM systems all match, or they will have a hard time defending against government data in the event of an audit.
Electronic Assessment Model
Chile was the first country to move to eAssessments with its automated Proposal of Monthly VAT Declaration (Propuesta de IVA), and Spain is considering a similar requirement, expected to begin in 2019. In this approach, tax authorities generate VAT reports based on real-time transactions that taxpayers submit, and issue the reports to taxpayers for revision and remittance. With eAssessments, taxpayers will have to prove if government calculations are wrong based on what they submitted, which is extremely complicated.
The ultimate source of truth:The control moves completely to governments. Now companies are the ones that need to audit what governments report. Therefore the source of truth is the government’s portal, based on data collected from previous models.
Split Payments Model
In an effort to make VAT systems more fraud-proof, countries like Italy, Poland and Romania have implemented a split payment mechanism. This changes how VAT is generally collected by making the payment for the tax base, such as the product price net of VAT, separate from that of the VAT amount. Generally, this is accomplished by a customer paying an invoice to two separate accounts: the net amount going to the suppliers business bank accounts and the VAT amount being paid directly to a dedicated VAT bank account for the supplier.
The ultimate source of truth: Governments strengthen their control. Under the split payment mechanism, banks - as well as businesses and governments - will need visibility into invoices, receipts and payments, in order to understand what the VAT amount is, and what goes into the suppliers' business accounts.
In all of these scenarios, companies that automate tax compliance processes are best prepared to rapidly defend against audits. Learn more about Intelligent Compliance, the only way to make sure you have a bulletproof audit defense in every country in which you operate.