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Tax digitalization around Europe

The level of digitalization in taxes reached by countries globally varies significantly. How can companies keep up effectively with the continuous changes in depth of the data reported?
KR Group

How will tax digitalization affect the day-to-day business practice? Check out great and lively conversation between our host Kacper Kosowicz and his guests Andy Spencer (Sovos, United Kingdom) and Laszlo Hosszu (KR Group, Hungary). 

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0:18 – Introduction: Where are we on the path to tax digitalization?
– What substance is hiding behind tax digitalization and digital tax reporting?
– What does digital reporting mean for companies? How will tax digitalization affect the day-to-day business practice?
– What is Continuous Transaction Controls about?
– Five years ago tax authorities didn’t have one-tenth of the tax data they are processing now…
– European tax digitalization map, where are we on the road towards VAT reporting digitalization?
– Closing VAT gap in EU through introducing Continuous Transaction Controls
– How did the introduction of real-time invoicing impact the business process and the environment, in which tax professionals work in Hungary?
18:06 – To what extent the e-invoicing can simplify the compliance process for companies?
 – Is the UK Making Tax Digital program the actual CTCs regime?
– Which CTCs regime could be the best point of reference for other to follow its steps?
– Ensuring compliance to different digital tax reporting requirement as barrier of entry for SMEs on new markets.
– What are the main advantages of introducing e-invoicing for business?
– What is the future role of professional service providers in the advent of tax digitalization?

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, everyone. Welcome to our show. My name is Kacper Kosowicz and I'm the host of the Value Added Mornings podcast by KR Group. Our summer break has been indeed longer than ever, but we are back and ready to talk VAT in I hope, an accessible and practical way. It is hard to distinguish any other trend that would be shaping the present and the future VAT compliance more profoundly than the tax digitalization initiatives do. And today we're gonna talk about that. We have already come a long way from the great achievement of generating the invoice in PDF almost two decades ago to big data reporting and Internet of Things. That's impressive. We are functioning in a data driven society and the tax authorities are somewhat at the forefront of the datafication of business activities now. And looking from the business perspective, companies never reported more data to authorities than today. But the level of digitalization in taxes, reached by countries globally, varies significantly. When you look just at the European case, you see many different schemes, many variants of implementation. On top of this, reforms are being introduced gradually, and as a result, we are all leaving the never ending cycle of adoption of new systems, new approaches to risk valuation coupled with the new reporting obligations. So a justified question is how companies can keep up effectively with the continuous changes in depth of the data reported to revenue authorities. And this is going to be the topic for today. For this episode, I'm pleased to have today with me László Hosszú from KR Group Hungary and Andy Spencer from Sovos. Andy, László, for the benefit of our listeners, could you please give us a little introduction of your background? 

Andy Spencer Of course. So I'm Andy Spencer. I've been working in VAT for just over 33 years now. I started with the UK Tax Authority, worked for a couple of the Big Four firms and I've been working with Sovos for the last few years. Within Sovos, I provide consulting advice to clients, so helping them to understand the implications of their supply chains, help them to manage their obligations and increasingly that's helping them to manage the issues with digitalization. 

KK Great, thank you. László? 

László Hosszú Hi, my name is László. Actually, I see the bright side and the dark side of taxation, meaning that I worked for the Ministry for Taxation for several years and I also have experience on the Big Four side of VAT compliance and tax advisory. So it's up to you to decide which is the dark side, which is the bright side. I saw how the actual legislation, the electronic invoicing and all this data, big data is implemented on the Ministry side, on the government side and I also see how companies are struggling or trying to keep up with the continuous digitalization of this compliance work. 

KK Ok, so at some point of our discussion, I will ask you whether you still keep believing in the sense of the changes, the tax digitalization that you witness at your dark times in, or with, tax authorities. I'm just joking. But yeah, we will come back to this for sure. But to make sure that we all are speaking in the same language, and so we are on the same page with the terminology use, let's see what the regular business person should understand by the term digitalization in taxes, digital tax reporting, what kind of substance is hiding behind this term? 

AS So what has happened as businesses evolved, as IT has evolved, there's a huge amount of digital information available within every business. And what the tax authorities have realized, is actually they can use that information in order to control taxes in a more efficient manner. So historically, businesses would report total figures of the VAT due, the VAT on their purchases. So they would give the tax authorities very, very little information and the only way the tax authorities could work out if that was correct or not, was to go and do an audit. Now that's a hugely inefficient way of making sure that you're maximizing the tax collection and also that taxes are working efficiently. Digitalization is really about making sure that the tax authorities get more of that information, sometimes on a real time basis, in order that they can manage the tax more efficiently. 

KK László, would you like to add something? 

LH I do agree with that. Tax offices all around the world and in the Eastern European part where there was a lower level of digitalization earlier, they realize that asking and getting this data from companies made their life easier and they can get rid of a certain percentage of the black economy, and therefore they see really high potential in the big data and digitalization. Because today, let's say in some cases or in most cases, the tax office knows more about your business as a lot of managing directors do. 

KK Yeah, I can imagine. And I can also understand the rationale behind the idea of digitalization, meaning closing the VAT gap and diminishing the grounds for tax frauds. But what does that mean for the business itself? Reporting the data, plus of information, set of data to the tax authorities. Practically speaking, what does that mean for the companies now and what could it mean in the future? 

AS I think it very much depends on which country you're in. As you said at the start, the position around the EU varies significantly. And if you extend that around the world, it's even more different there. The reality is that businesses have to take much more care. They have to be much more present in terms of how they organize their business, how their accounts work, how they record information. If you have to provide it to the tax authorities on a near real time basis or on a real time basis, you need to get it right at that time. You can't go back and correct it or make changes to it afterwards. So, I think continuous transaction controls, it really means essentially that the tax authorities are getting the information on a continuous basis rather than just periodically when you're submitting the VAT return, and they're getting that information in a lot more detail than they ever did before. So they know the basis of the transaction, they know who you're supplying. They can match the transaction between the seller and the purchaser to make sure that they're both declaring the same amount to make sure that you remove fraud, but also to make sure that you reduce errors. There's huge numbers of errors that are made by businesses, that digitalization is looking to try and remove by making sure that the information is flowing securely from accounting systems to the tax authority, rather than going through lots of processes where humans are involved, where there can be mistakes. So, it really is changing how businesses need to look at tax from the perspective of where they need to, whatever the mandate imposes, but also in terms of making sure the information, the tax treatment they're applying to their transactions is correct because it's going to be found out if you don't get it right. Whereas in the past, as I mentioned earlier, it was only if you had an audit, the errors being identified in audits were often infrequent. 

KK In other words, we are getting more professional in terms of preparation of the data, so more diligent, more careful and still error-prone. Yeah, I mean, this is the whole process, but less in terms of the final output because the checks are more, let's say continuous, so I think. 

AS Yeah, exactly. Errors are still going to be made because people are going to be involved. There's always doubt in relations to VAT as well. It's not a simple tax, despite what some people may say. There's always an element of interpretation, there could be errors still being made, but the reality is that whatever the invoice says, that's going to be communicated to the tax authority and the business has got much less ability to be able to intervene than they did in the past. 

KK And you use the term of continuous transaction controls, and I can bet that most of the listeners can experience the practical side of that, but if you ask them what it means in practice, they wouldn't say. So, maybe could you please give us an example of CTCs. What is that? 

AS So CTCs, I mean, it's the word that a lot of people use, but it covers a whole different range of mechanisms. So, one example would be the immediate supply of information in Spain. So, within Spain, if you're above the threshold, you need to submit details of your invoices on a near real time basis. So, you need to tell the tax authorities the detail, the tax treatment, lots of information about each individual invoice that you raise and that you receive, so they build up a picture of all of the transactions that you've undertaken in a particular period. They can then match that with the counter party, so they can see what's happening with regards to how two businesses are providing that information to the tax authority, and that allows them to carry out lots of checks to make sure whether the transactions are correct. Transactions will ultimately lead to the VAT return, so in time that will allow them to be able to say, well, is the VAT return itself correct? So it's rather than this periodic reporting of just single figures, it's continuously receiving information at quite a detailed level from businesses, so that they can then carry out real time checks and there's a much better ability for them to be able to control the tax and identify problems at an earlier stage, rather than two or three years later when they actually decide to carry out an audit.

KK László, do you have any thoughts that you would like to share with us regarding this? 

LH Yeah, I mean, just imagine, like, five years ago, the tax office did not have one tenth of the information they are processing right now, and in my opinion, they also have to grow up to this task because several times they have so many data that they even can't analyze. And we had, for example, several places when the data that was sent to the tax office was incorrect. And the tax office can make, of course, a lot of automatization, but it's still ongoing. So, I would say right now the data tax offices are receiving are more than they can actually check. But this will change in the future. I mean, if you imagine five years ago, we submitted a lot of documents on paper to the tax office, which took them time to process, and probably they came back to you if they realized something like half a year later. Right now, if you submit something to the tax office, some information, it's automatized, it's processed, and the next week they will come back to you that maybe there is something incorrect. Please check it. So, I would say it's a good thing, this real time reporting, or this electronic transmission of data to the tax office. But on the other side, they also have to make a lot of development on their side for this process to work more or less. 

KK Yeah, you're right because both parties or all stakeholders would need to get more professional and more cautious when it comes to the way of, let's say, fulfilling their obligations and these obligations differ between the stakeholders. So sometimes when I see this rollout map for Poland or for the other countries, when it comes to tax digitalization, I'm asking myself whether we are doing that just for doing it, because we have to do it, and do we just, or do they consult that with stakeholders, business stakeholders, is the business really prepared for that. And, in Poland I still have that in my mind when we introduced a SAF-T file, so JPK file in Poland. There was no system prepared for this. And some people waited like three, four years for SAP to be ready, and when it was ready, they changed the scheme, you now? And everyone had to do that again. So, I'm trying to find, right now I know that the race is on and the stake as to who is going to win this little conquest for who is going to get more information, gathering more tax data. And if you could sketch the map of where we are right now, how far from completion of this process are we? Why would that be? 

AS I think there's a long way to go. I mean, picturing in the EU, some countries are a relatively long way down that journey. So, for example, Spain, Hungary, as you've already mentioned, but some are so far away, they've barely even started. I think we need to look elsewhere in the world to where other countries are. So South America is a really good example, because a lot of the practices that were introduced in South America many years ago are the way that we're now moving. So places like Chile, where they've got very advanced systems, Brazil, Mexico, where we're now replicating their systems, but we're still only doing part of it. So, I think there's a long way to go and countries will start to introduce new mandates. So as you've mentioned, there's a number of countries coming up. So we've got France with their mandatory CTC invoicing that was due for 2023. We heard rumors this morning that it was potentially delayed to 2024. So there's maybe a delay in that. We've also got Germany where there's political pressure for CTC invoicing. The reality is that the VAT gap around the EU is so big, I mean, it's 170,000,000,000 at the last count. Businesses aren't getting it right, there's a mixture of fraud, but lots of other things as well. So governments are going to be keen to try and reduce that gap as much as possible. And they'll look at where countries have introduced CTCs to see how effective they are, how efficient they are and whether they will close the gap. And as we said earlier, the reality is that businesses have to pay much more attention if they've got a continuous transaction control regime, than if they're just submitting paper returns. They know that there's going to be a different level of scrutiny from the tax authority, so they have to have a different mindset. So my view is we've got a long way to go yet. The difficult thing I think for businesses, especially that are operating on a Pan-European basis, is that every member state is doing it differently. So you haven't got the same implementation. You haven't got the same way of doing things. So it's very difficult to say, right, we're going to be able to meet everybody's requirements in a simple way. You need a strategy. You need to be able to look at it as a whole rather than just piecemeal and react to each new mandate as they arise. 

KK And it's a great challenge for multinational companies. When we introduced the ERP system, localized system in the five countries, all the rules of the reporting, real time reporting, SAF-T file, et cetera, differ to that extent that we had to decide what we're going to keep outside of the system. So it was the exercise that we partially did carry out and we couldn't, we wouldn't be able taking into account the cost of making that fully localized. So we said, okay, this is your system, this is your ERP, and you have all of the subsystems next to that to ensure that you will be compliant. And that's something that can close the VAT gap, but it will come with a cost, right? 

AS Yeah. Absolutely, absolutely. 

KK And László, you experienced that also practically because Hungary is among top three, top four most advanced European countries when it comes to putting tax digitalization agenda into practice. Could you tell us how the introduction of the real time invoicing impacted the business process and the environment in which companies work in Hungary? 

LH Yeah. Getting back to Andy's example of Southern America, like, what level of digitalization they are. I can share with you a secret story, which is back then when I was at the Ministry of Taxation. We were looking for the best practices regarding the electronic cash machines where the cash machines actually supplied data to the tax office directly. We got examples from South America and therefore, the Hungarian government, based on our studies, introduced this years back then, and it's a full success. I mean, on the level of the companies, it was really a headache to introduce that. But right now it's a win. So I would say Hungary is also taking examples from all over the world, like, best practices. We are among, I guess I can say that we are among the most digitalized countries in Europe because the tax office really wants to know everything about you. At one point it's good, but at one point it's bad for the companies because of the compliance costs. So it's like an entry barrier for a lot of companies that want to sell in Hungary or do business in Hungary that it's a huge cost. It's a huge compliance cost. But on the other hand, the tax office tries to see or tries to develop such solutions, for example the connection through simple APIs where they can support you in the implementation cost and make it as simple as possible. So I would say, from the company side, how they welcome these kinds of digitalization moves from the Hungarian government, it's really like two sided. A lot of companies were supporting it because then the competition, where you find the competition is not paying taxes, they disappeared. They will go away because they cannot work in such kind of an environment where everything needs to be reported to the tax office.  On the other hand, big companies or like foreign companies who want to enter the Hungarian market, they are sometimes frightened with this high level of digitalization and the compliance costs. And we have seen companies that did not enter the Hungarian market because of this. But it's coming, it's coming to all European countries, so I guess companies have to be prepared for such kind of compliance costs. 

KK But they need to be prepared in a different way to each country, as Andy said. 

LH That's true. 

KK We in Poland are going to introduce the e-Invoicing in 2022, hopefully, and that will be voluntary at the beginning and then by 2024 it should be mandatory. But we rely on the example or the use case of Italy, but it's not the pure Italian case put into the Polish realities. So that would be only a fraction of that, a good one, but still a fraction. So when you have a fraction of the fraction of the fraction, you need to explain the company, like we have multinational clients and working on 5, 7, 10, 15 markets in Europe. They have one compliance center and their headquarter, and they cannot follow the changes. So then, that's the moment when we can show up on the stage and do our job right. But looking or getting back to the Hungarian example László, do you believe that e-invoicing can be the remedy, can simplify the process for the business? If so, to what extent? 

LH If you bare this compliance cost, it's going to be easier for your company because the tax office will in one year, within one year prepare your VAT return, your corporate income tax return, and you just have to review it. So they will have all the information that is required to prepare such documents. And in that sense, your compliance costs in the long run should decrease. It's going to be like an entry cost. A market entry cost is going to be higher because of these rules and regulations. But in the long run, you're going to be profiting from that. 

KK And Andy, do you have anything like, any country, any example, or any model of CTCs that is close to your heart currently? Would that be the one from Italy that I mentioned? Maybe the one from Spain, which you mentioned, or the one from Great Britain, so Making Tax Digital program? By the way, I think the UK is quite far from introducing the e-Invoicing system. I'm curious, why is that? 

AS It's interesting because making tax digital is often referred to as a CTC, but in reality there's not a huge change in terms of the amount of information, so the VAT return, it looks the same. The amount of information the UK tax authority gets is exactly the same as it was before. It's just they now get it via an API. So the aim at the moment of making taxes to really is to reduce errors. So firstly, that was in the completion of the VAT return, and the second stage was in compatible accounting software, having to have digital links.  So the idea is that they're trying to reduce the errors of cut and paste in spreadsheets where businesses just make transposition errors. So really, it's not got any more functionality for the tax authority than it had before, or be that that is the long term aim. So it's got the ability in the future to be able to provide more information to the tax authority, but at the moment they don't get anything else. So it's not really the proper CTC at the moment. I mean, for me, I think it's really it's about trying to balance the needs of the tax authority, which I totally get, the VAT gap needs to be closed. And I'm a citizen, I want the government to be able to collect the right amount out of money so that it can use it to benefit society. But it's about balancing the needs of the tax society with the demands on business. And I think that isn't always met. As László just said, cost of entry into Hungary is very high. Lots of our clients have decided in the past they're not going to do it because it just doesn't make sense. But particularly I like Spain. I think Spain's got a pragmatic solution. They've got a threshold currently, so you only have to submit a few above that threshold, and they haven't mandated e-invoicing, so you can continue to apply whatever practices you want, you don't have to subscribe to e-invoicing. But the tax authority still gets that additional information. It gets it on a near real time basis, and it enables it to be able to do what it wants to do. But clearly not every member state is looking at things in the same way. I mean, e-invoicing, you need to get the derogation from the EU from the directive, so that's what it leaves on. Other countries are deciding to go down that same route, but it's not the same everywhere. I think there is a real need because there is a massive issue undoubtedly for multinational corporations. So if you've got businesses in every member state, you need to be able to comply. But you've got the ability potentially because you've got the resources, you've got the tax departments, you've got the IT departments, you've got the budget. The real issue for me is often with the SMEs. So if they're in a country, this is just an additional cost to them, so they don't necessarily see from their own business or benefit. There might be a benefit for the larger society, but for them individually, sometimes it's difficult to see what the benefits will be. So it's really trying to get that balance right between what the state needs in terms of additional information and what a functioning business needs. And I think that's some of the reason why the UK hasn't mandated the invoicing. The governments of the past have always been very keen to try and reduce the burden on business. I mean, at the moment, UK businesses have gone through a massive change because of Brexit, so they don't need anything else. They've had COVID as well. So I don't think it's necessarily going to be top of the UK government's agenda. It's sadly something we are behind the curve on and I'm not sure that it's going to change anytime soon. 

LH Do you know, guys, why Hungary is leading in this VAT digitalization world? It's because we have the 27% VAT in the EU and the state budget income, 80% of the state budget's income are from VAT. So, corporate income tax and local business tax and other related taxes, they are not that significant in the state budget, but the 27% VAT is a huge amount. And therefore our government makes everything that all the surrounding, neighboring and even like South American countries are doing, as the best practice of how they force collecting the VAT. 

KK Of course, there are pros and cons, and if you could see some advantages or single out some advantages of introducing e-invoicing for the business, what would that be? 

AS I think that it will add efficiency in terms of the cost. Once you've had the initial outlay, it's going to be more efficient in terms of the cost of raising invoices, the cost of processing invoices, speed of processing means that you're going to get much more information more quickly if it's processed electronically as well. Obviously, there's a reduced reliance on paper which current situation I'm all for that. The idea that we're still sending paper between businesses or be it that we've obviously got lots of other types of invoicing, it doesn't make sense to me. There's also, potentially, security in terms of transmitting invoices, easier dispute handling. But obviously the downsides, as we've said, is the cost, it's the cost and the disruption to business. So you need to change your whole way of doing business in terms of invoicing in order to meet a mandate. So I think there are benefits and that's what really businesses need to try and see. I mean, it is the future. Obviously it's the future. It's just about for me, it's about businesses not necessarily being able to do things in their own time, but for having to do things to a predetermined date. And I think that example about the idea of a single market is that it should be as easy to trade at the other side of the EU as it is in your own country. Obviously, I'm speaking from someone outside, sadly, outside the EU at the moment. But some of these mandates mean that that's not necessarily the case anymore. If you want to trade in Hungary, it's going to be more expensive than if you were trading in your own country. Or be it that you will have a similar cost as a Hungarian company. So I think there's still challenges to this whole concept when it's not being done on a Pan-European basis in a similar format. 

KK László? 

LH If you look at the big picture, for example, in Hungary, a company issues an invoice as a seller, that data is available to the accounting company, to the tax office and to the buyer as well. So from one system, everybody has access to the tax office system through their dedicated codes and everybody can download that invoice, the tax office sees it, the accounting company can process it. Any other system can be connected to this tax office system, so the data can be spread just with a push of a button, like when you issue an invoice. So basically, if you see the whole picture, you don't have to send invoices to your accountants, they don't have to process it, the buyer doesn't have to print out the invoice, send it to their accountant and process it. So if you see it as a whole process with just a push of a button, the data is available for everybody. Of course, if you are talking about the introductory cost, if you have a good ERP system, with an API connection, everything can be solved. Of course it takes time and money, but it shouldn't be rocket science, because I guess tax offices all over Europe try to make it as simple as possible, but it cannot be done with no costs. 

KK So what would be the role of the professional experts, tax experts in the future when revenue authorities would tell, okay, we're going to do the tax calculation for your entity. So then the role will translate into? 

LH It's going to change, it's going to turn into more like a controller position. So the accounting and tax compliance services will turn more into controlling to see whether the data in the return or in the tax office database is the same as in our ERP system. So basically it will change. I mean, the data processors will disappear because there's not going to be any data on a paper form that should be processed. Everything will be automatically in the system and you just need to check it. 

KK László, Andy, I'm afraid we must pause ourselves here. Definitely, we are going to be witness of the fundamental changes in the treatment of taxes. And as you said Andy, it will be an exciting time for all of us. Thank you for being with us today. 

AS Thank you. 

LH Thank you. 

KK Thank you for listening. Stay tuned. And if you'd like to have more information look at our website: www.krgroup.eu 

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

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