Managing Compliance Disputes as Indirect Tax Goes Digital

Introduction

Across the globe, tax compliance and collection are changing dramatically as tax authorities embrace digital tax data and real-time reporting. From Brazil to Poland to South Africa, tax authorities are expanding the use of electronic invoices (e-invoices) that make transaction data consistent and machine-readable, allowing for automated collection of value-added tax (VAT) and other indirect taxes. Tax collection, which for centuries has been at the heart of government bureaucracy and paperwork, is finally moving into the digital era.

This is a trend with momentum. For governments and tax agencies, the digitalisation of indirect tax gives them better tools to reduce fraud and close the tax gap (the difference between the revenue a policy or rate is expected to generate and the actual amounts the government captures). Initially, businesses might worry about meeting new requirements, but they will eventually find that this transition leads to greater efficiency, increased compliance certainty, and other benefits.

As a result, the landscape of tax compliance risks and disputes is shifting in significant ways. When tax authorities have data at their fingertips, audit and any related litigation timelines are truncated. Tax authorities start with an information trove in their possession (from the taxpayer, its suppliers and clients as well), long before they make the first enquiry or a more targeted data request. By the time of the initial outreach to the taxpayer, tax authorities may already have identified a specific tax view they intend to challenge, or a discrete fact set to dispute.

That’s just the start. Digital tax is changing the dynamic between tax authorities and taxpayers in numerous ways. No organisation can afford to stand still in the face of these shifts. Legal and tax leadership need new ways of assessing the associated risks and new processes for managing them.

This article provides a discussion of how tax disputes are changing and how companies need to respond. It also sets out some points which organisations might consider when developing a strategy for dispute management in the emerging digital environment.

The digital tax landscape

For governments and tax authorities, there is the potential for significant benefits from the digitalisation of indirect tax. E-invoicing and real-time reporting are not just tools to modernise tax collection; they can also form a defence against tax evasion and noncompliance.

Many jurisdictions have seen that implementing new requirements for e-invoicing and for real-time reporting of transaction data can help to reduce the tax gap. Italy, Brazil, Chile, and Mexico are among the countries that have significantly narrowed the gap in their VAT collections after the implementation of digital reporting requirements.

The Organisation for Economic Cooperation and Development (OECD) has advocated for the expansion of digital tax requirements and has provided guidance. The European Union is moving in the direction of greater digitalisation, most recently with approval of its VAT in the Digital Age framework, which moves towards a mandate for near-real-time data reporting for business-to-business transactions. Where one country in a region has shown success with e-invoicing, others have tended to follow. For example, e-invoicing has been broadly embraced across Latin America, and Europe is set to follow suit.

The benefits extend beyond tax collectors. Companies will see operational efficiencies through increased digitalisation in their supply chain and payment functions. Ending manual reconciliation tasks is a positive result. Beyond that, organisations may find value in the data uniformity that arises from working with new digital compliance requirements. Improved data consistency may yield new automation opportunities, improved analytics, and better co-ordination across the supply chain, finance, tax, and legal functions.

Implications for compliance disputes

In this new digital tax landscape, organisations may discover that the tax authorities are now at least one step ahead of them. Their systems may be more advanced than those of the companies from which they collect tax. This makes it easier for them to compile and analyse tax data and, thereby, see patterns and highlight inconsistencies in product categorisation for VAT purposes—to give just one example.

Tax authorities in jurisdictions with the most sophisticated e-invoicing and reporting systems also now have unprecedented industry-level data. They may tap the e-invoice data they collect for a deep dive into specific sectors. They may be able to see how a range of companies treat the same types of transactions, allowing them to highlight differences in, for example, the use of financial services exemptions. The granular data they can now access for a specific product or industry makes it easier to challenge what’s taxable and what’s exempt as well as see how views taken by different taxpayers align with their determination.

Ultimately, tax authorities will likely find broader uses for the indirect tax data they now have available. Over time, they may begin to address income tax issues using transaction data as a source of truth. When tax agencies begin to reconcile data from invoices, credit cards, and banking records, aiming to cross-reference and match amounts, it will bring a new level of complexity to compliance efforts.

However these developments unfold, tax agencies are gaining a bigger and more comprehensive view of tax compliance as they expand their requirements for digital records and transaction reporting.

Rethinking compliance strategies

The trend towards greater digitalisation of indirect tax requires corporate leaders to shape a rigorous strategy to assess and manage compliance risk. Tax and legal leadership need to recognise how e-invoicing and related requirements change the approach that tax authorities take in their enforcement and enquiry activities.

These five guideposts can help a company navigate this new compliance environment.

1. Build a cross-functional team
   
   Every multinational company should be asking how it is preparing for and responding to the changes that digital indirect tax brings. This is a discussion that cuts across functions. In an organisation that provides invoice and transaction data to the government in real time, effective management of the relationship with the tax authorities requires co-ordination above all.
   
   Tax and legal teams must work together in new ways, but a successful strategy also requires the involvement of operational and information technology (IT) teams. How confident is the tax department in the accuracy and reliability of the data and information that flows from the IT systems used by procurement managers? This information is now directly accessible to tax agencies, and when there’s an audit or litigation, it will be too late to address any concerns regarding data quality.
   
   To get ahead of the curve, tax teams need to lead the organisation in the creation of a proactive, preemptive, global strategy for managing controversies and disputes in light of data sharing obligations.
2. Stress-test your compliance
   
   The increasing flow of real-time or near-real-time indirect tax data and information to the authorities demands new levels of preparation. A proactive approach can prevent inaccurate or irrelevant data from being shared. It also allows for forethought about compliance risks and areas where disputes might arise.
   
   Partly, this is about stress-testing the IT systems and business processes that will produce the required invoices and other data. When a new mandate is coming—as in certain European countries in the next few years, or when significant changes are being implemented, as in Brazil in 2026—a dry run in terms of data sharing can identify potential problems. What is the process for producing the data and what will the data look like? More importantly, will it be aligned with tax team objectives designed to prevent compliance disputes?
3. Add new layers of legal review
   
   As an organisation adapts to e-invoicing and other digital reporting requirements, there may be a disconnect between the tax and legal teams. Tax people may be best positioned to know the contents of invoice and data files, as they control the flow of this data to the tax authorities. The legal team, though, may better understand what the provided information really says from a compliance or transactional perspective and where there may be potential for challenges and disputes by the tax authorities. The two functions need to be working together effectively.
   
   An additional layer of legal review allows for examination of the potential for challenges and disputes that tax authorities may pursue. It also allows for an organisation to be more proactive in managing tax controversy matters. The legal team is likely to have a better grasp of how a company can defend specific issues in a potential audit or in litigation, especially in view of documentation shared. As discussed above, traditional tax audit dynamics are changed by the digitalisation of indirect and more information has already been shared before any dispute arises. A review process that can anticipate the issues that might occur becomes more important.
4. Improve your data
   
   The need for accurate e-invoice data should be obvious. Because this data is flowing to tax authorities automatically, it will be difficult to correct. Erroneous data, such as the incorrect categorisation of information on invoices, may commit an organisation to a specific compliance view. Inconsistencies may make the business an easy target for an audit or dispute.
   
   But, the demands on the IT systems go beyond the simple management of accurate invoice data. When systems are robust and well-designed, and when data is easy to access and analyse, the entire organisation has an advantage. It becomes easier to identify inconsistent or risky VAT categorisations, for example, or to prepare documentation in the event of a dispute. Also, good systems make it possible to align internal systems and master data more fully.
5. Look across borders
   
   As indirect tax moves towards a more digital future, compliance requirements may vary dramatically from one jurisdiction to the next. But, the response by a large multinational company needs to take into account all the jurisdictions where it operates and must plan for places where it may expand in the future.
   
   The best strategy is to prepare now for the most advanced e-invoicing and real-time reporting requirements, knowing that tax compliance in other jurisdictions is likely moving in that direction and adoption is likely to be quick. Even where requirements may be some years away, the business benefits may begin to accrue sooner.

Digitalisation and its benefits

Digitalisation of indirect tax is becoming a reality almost everywhere multinationals operate. The final holdouts for paperwork and manual processes are giving way to automation and e-invoicing—modern systems to take governments and taxpayers into the future.

The good news lies in the opportunity this creates. With the right strategy, an organisation can be ready for the requirements of digital indirect tax while also creating a more robust compliance framework. Tax & legal leaders can be confident that, at the same time, they are promoting greater consistency internally, boosting efficiency, and developing business intelligence in ways that might have seemed impossible just a few years ago.