Tax digitalization around Europe (PART 2, digitalization in practice)

Welcome the second part of our discussion regarding the digitalization in taxes. Today we will analyze more to what extent the tax digitalization utilizes already existing business processes, and to what extent it forces companies to adopt new measures, new processes.
Author:
KR Group

Check out the second part of our great and lively conversation between our host Kacper Kosowicz and his guests Andy Spencer (Sovos, United Kingdom) and Laszlo Hosszu (KR Group, Hungary).


Listen on: Spotify | Apple Podcasts | Google Podcasts


Outline:

8:16 – The imminent and increasing pace of tax digitalization. Is tax digitalization unavoidable?
10:08 – Simplifying tax compliance and data collection with tax digitalization.
12:19 – Future of tax digitalization. Next steps.
14:40 – Reducing fragmentation – creating a uniform and common platform for taxes.


Intro Welcome to the home of VAT. You are listening to KR Group Value Added Mornings, podcasts that answer all of your questions and make your VAT life easier. Nice to have you here. Grab a coffee, stretch your legs and enjoy. 

Kacper Kosowicz Hello again. Welcome to the second part of our discussion regarding the digitalization in taxes. Andy Spencer from Sovos and László Hosszú from KR Group are still with us. I'm Kacper Kosowicz, and I will be your host for today. In this part of the discussion, we will analyze more to what extent the tax digitalization utilizes already existing business processes, and to what extent it forces companies to adopt new measures, new processes. It leads us to the obvious question, natural question about who is benefiting the most from the tax digitalization process? Is that the tax administration, business, or professional advisors? 

Andy Spencer I think we potentially all got the ability to be able to benefit from this. So, the tax authorities, they're going to have better control of the tax, they're generating more revenue for the public purse. There's less fraud, they can close the VAT gap. So if it works in the way it should, the tax authorities will definitely benefit. In terms of businesses, there's potentially reduced costs after you've got the initial outlay. So, things work much more efficiently. So, I mean, it's never good for anybody to lose their job, but if you can reduce cost in terms of headcount, that's going to make the business more profitable, hopefully redeploy those people elsewhere. So better processes, better ways of running their business, more immediate information available to the business to make the right decisions. And from tax advisers, I mean, businesses will need help in implementing, so they need support in implementing, and the key thing I think is that the underlying data needs to be right. So the tax authorities are going to get that information, they can check whether the right VAT treatment has been applied. So businesses are still going to need to map their supply chains, work out if the correct VAT treatment has been applied to them, so they're going to need advisers to help them to do that. As they go into new countries, new territories, new supply chains, they need to get the advice. So I think the tax compliance side is going to change because as tax authorities start to populate VAT returns, the process and the requirements are different. They still need to control it, but the actual requirements change. But from a tax consultancy advisory point of view, I still think there's going to be a need in the future, because tax that is complicated, you need to make sure, especially if you're giving that information to the tax authority, that it's right, to minimize exposure for the business. 

KK Yeah, and we talked about how incohesive the system is or the approach in Europe, or globally is. And given that fact, what would you advise to the companies, multinational companies thinking about the foreign expansion, or SMEs thinking about the foreign expansion from the country with the less advanced CTCs measures in place, to more advanced in tax digitalization, regarding the optimal strategy towards ensuring compliance? Because it's not that easy when you are moving from the country where you have no real time reporting to the one where it's expected or it's an obligation. 

AS Absolutely. And I mean, it's one of those things you need to think about before you're going to go into a new country. I think the key thing is what you said is looking at it strategically, not just looking at it as a disparates problem which needs to be solved. So you need to have a strategic view of how CTCs are going, so that you don't just then have a piecemeal solution for each country. So, ideally you're looking at it in the whole, taking into account what changes are going to happen in the future, the direction that CTCs are going in, not just in the EU, but globally, so that you can have a solution which is going to allow you to develop and minimize the amount of disruption to the business. Because if every time there's a new mandate, you have to then introduce a new solution, you're going to be doing that all the time. It's going to be a long time before they converge, even in the EU I think, so you really need to be looking at it from a strategic point of view and seeing it as an opportunity rather than necessary - but I've just got to do this in order to be compliant. 

KK László? 

László Hosszú I mean, it's coming. You cannot run away from tax digitalization and if this really affects your decision, whether you want to establish your branch or company in a digitalized country, then it's a problem. I don't think that this should be like an entry barrier for companies that really want to establish their business in different countries. I've got a funny story from the tax office. You know Hungary is in the first months regarding digitalization of the big data and getting information from the companies, but the tax office, inside, uses the DOS base program. It's coming, it's coming in every country, the question is how fast. Whether the less digitalized countries will get there where we are right now in five years or in one year, or in two years. But it's coming. So the compliance cost you have to calculate, it's part of your entry costs, but you cannot run away from this. You should find, like, a local supplier who can give you several options, because different options are good for multinational companies and for SMEs. And if you find a partner in those countries who can help you establish such connections to the tax office, it shouldn't mean you have an entry barrier to start business in different countries than yours. 

KK Yeah, but you did hold many meetings with clients that were thinking about their expansion, and they were even rolling out the expansion projects, and then they got stuck for a couple of months in localizing their ERP system, their approach. They have money, they have resources, but sometimes they were lacking of flexibility, or the sense of being agile I would say, to find this local supplier to change the business process a bit and to adjust to the different circumstances. And that was my observation. But I don't know whether you share it. 

LH That's true. I mean, still a lot of companies see this digitalization as a problem, and as you mentioned, it shouldn't be a problem. They should see it as an opportunity, as an opportunity to reduce their cost in the long term and pay the compliance costs when entering the market. But if a company really wants to enter a market, they should see it as an opportunity and to be compliant with everything with the help of a professional supplier. And in the future, every country will establish this kind of electronic communication with a tax office. And if somebody enters Hungary, they will have experience how to do it in other countries because like a lot of tax authorities we use the API connection, so your ERP system should be prepared for supplying, like basic data, because there's this data that the tax office requires. These are not complicated data, these are just the basic information from your invoices, and it's a simple API connection. We have partners who can establish such connection within one - two weeks to your ERP system. And therefore, it should mean if you are using a good ERP system, which is present in several countries, it can be programmed into it. So I would say you should see it as an opportunity to develop your systems and your way of supplying data and way of collecting data and not as an entry barrier. 

KK Andy, you wanted to say something. 

AS Yeah, I think that's absolutely right. I think that if you've got a choice about where you're going to carry on business, if you're going to set up a new business, this is one to think about at the moment, so you might say, okay, what's the cost of entry into setting up an operation in Hungary, Romania, Czech Republic. You carry out a number of different analyses. That's not the only one, obviously, CTCs, there's lots of other things. It's just something that you bear in mind when you're looking at where you make the decision to locate. But as László said, over time, this is not going to stop. Countries are seeing that it's going to benefit them. The only thing they can do is benefit if they get more information because they've got more control. So it's going to move, the pace of change will, I think, increase over time. We're starting to see that now. If you think back to, I mean, Spain was sort of an early adopter, but we're getting more and more countries introducing, or saying they're going to introduce mandates, all the time. So it's not something you can close your eyes to. It's definitely a way to, it's something you need to be able to engage with. And I think it's absolutely right, you need to make sure that you've got the right partner for this, that you think about it in a strategic way, and you look for the opportunities that it gives you, not seeing it as something which, okay, this is just going to cause me cost. It will cause cost but there's finding a way to benefit from it as well. 

LH But you know there's a lot of other factors that you need to take into consideration. For example, the local taxes, corporate income tax, how the tax office really actually looks at your company, do you have monthly, or quarterly, half year tax office inspections, because that's also not comfortable for a company. So, I mean, we have a high cost of entry, but we have the lowest corporate income tax in the EU. So, somehow you have to balance the pros and cons of entering, let's say, not just Hungary, but any other country. Is that what taxes, what administrative burdens there are, because I know that in Germany, operating a company, it takes more administrative stuff and more cost than, for example, in Hungary. And these are also factors that you have to take into consideration. But yeah, you're right. That's truly like an important factor about the decision how the entry cost will look like. 

KK Yeah, but this is also changing the function of VAT compliance or tax compliance itself. The teams, the role of the teams in the companies, they will spend at least at this moment during the implementation of each new measure, each new tool, or the way of reporting, they spend more and more time on thinking about the taxes, collection of the data, and along the way, they can realize that the process is not balanced. So, the proportion of the data that is expected is not in line with the final goal or the benefit that is projected by the authorities. And this is something that I observed during the conversation that people are more affected by the time they need to spend to think about compliance. So they think more and more every day or every quarter, and they don't like it because it's supposed to be simple. And sometimes it's simple on the paper that you need to do e-invoicing or e-reporting, but then you need to transform the whole function of your taxes and engage more people to collect more data. 

AS I think that's right. I think it's changing in terms of you lose the processes so, people not processing invoices, but there will be other functions which will make more data heavy. I think the key thing is making sure that you've got the right provider that you're working with, not trying to reinvent the wheel yourself, looking to work with the right provider who's done all the work, who's made it as simple as possible so you can adopt and comply. And ultimately, what businesses want to do is if they want to get on with running their business, they don't want to be worrying about tax all the time. So it's trying to minimize the amount of time that you have to spend on it, whilst making sure that you're compliant because equally, businesses don't want to have liabilities because they're not doing things properly. 

KK Yeah, when you run the business, whatever the business it is, especially when it's not tax business, you don't want to think about taxes. You want to focus on your core business. It's just normal. And when you are CEO, CFO or COO or whatever, then when you are bothered by taxes to the extent that you cannot think about your normal operations, it's going to be problematic then. So, it is something that when I look at the road map of the future implementation of the tax digitalization in Europe, I see SAF-T file in Romania in Q1'22, Hungary SAF-T file as well in second quarter of 2022; e-invoicing in Poland, January 2022, voluntary at the beginning, then mandatory in two years time; e-VAT return in Norway, in Portugal they introduced this year e-invoicing; France is thinking about their own system of B2B transactions, as you also stressed today, maybe it will be postponed until 2024. So a lot of things are underway and will shape the way we think about taxes and we do the taxes, I believe. Would you like to add something? Your final thoughts and the key takeaways. 

AS I think for me the journey has just begun. I think it's got a long way to go, both in terms of countries deciding to introduce some form of CTC and then also the scope, because I think at the moment governments are getting a certain amount of information. But once they get access to transactional systems, they can request more and more information. So not just invoices but other tax relevant documents. So information in relation to transport, logistics, procurement, point of supply, supplies, payroll, financing. There's all sorts of information they can ask for, which is going to help them to build up a picture of what the business is doing. So I think that once countries have started to introduce that, the way it's going to go is to the government to ask for more and more information because they'll be producing, as they already do in some countries, producing the VAT return you just need to sign it off to say that it's correct based on the information that you conveyed. So the world is changing in tax like it never has done before. And businesses, as we've said a couple of times, they've got no choice. You need to keep up. If you want to do business, you need to comply, you need to know what the requirements are and be able to meet them. It's very exciting. As I said at the start, I've worked in VAT for a long time. It's never stood still. But I think the pace of change, certainly in terms of digitalization at the moment is faster than it's ever been before, and it's going to continue at that pace for some time. 

KK László, it's inevitable and unstoppable, I think, the process. Would you like to add your final comments? 

LH It is, that was a good summary Andy. I do think that the systems right now in Europe are really fragmented. I mean, there's like really high differences in digitalization of different countries, but I do hope that they will go into some kind of unified direction, either through some European legislation, because right now the system, the way the data are sent to the tax offices or collected, they are country by country different. And I would support, like a common approach from the European Union that would enable countries to use the same platform where also ERP system providers and ERP systems of companies can make a more cost effective solution for providing those data. Because in the background of not supplying data, sometimes is the lack of knowledge or the lack of the system behind this process that companies want to provide data, but they cannot with their current system. And therefore, I would support a unified platform to this. But I know that it's not doable right now because it's a race and every country wants to do their best and copy the best practices from Europe and from all over the world. And let's see, we are seeing this as an opportunity and not as a threat or like a barrier. I would say we support that, we like that, and we are profiting also from this. So the effectiveness of the communication and the data transition between our clients, between the tax office, the communication between the tax office in case of tax inspections, they don't have those questions that they used to have before, because they know everything about you, what they want to know. 

KK So professional experts are happy with the changes, that would be a summary. And I wish I could have the representative of the business sector with me today, so they would also tell us a bit more about their perspective. But let's put the jokes aside. Andy, László, thank you for sharing your expertise with us, that has been a real pleasure having you here today. And thank you all for joining us for today's episode. Stay tuned. László, Andy, thank you. 

AS Thank you. 

LH Thank you. 

Outro KR Group Value Added Mornings, podcasts that answer all of your questions and make your VAT life easier. 

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