Authored by Siya Mtsha Associate Director: Tax Technology Deloitte Africa Tax & Legal, Nicole Perumal Manager: Indirect Tax (VAT) Deloitte Africa Tax & Legal
For many organisations and their leaders, the introduction of real-time VAT reporting requires a new approach to data management, compliance, and business strategy.
There is a major change coming that will fundamentally change the way value-added tax (VAT) is reported and collected in South Africa.
In October 2023, the South African Revenue Service (SARS) published a discussion paper on “Value- Added Tax Modernisation”, which outlines the proposed framework to modernise the VAT system primarily through digitalisation. This will involve the adoption and implementation of real-time or close to real-time transmission of transaction data from registered vendors to SARS, and the reporting of VAT data using the modern VAT return.
This investment in digitisation by SARS will ramp up its ability to access more business information in real time. More importantly, it has the potential to unlock the value of data for SARS; gaining more insight on the behavioural pattens of taxpayers and working towards making them more compliant.
The shift to real-time reporting will also drive fundamental changes within organisations. Whereas in the past tax teams could analyse and correct tax data before filing the tax return, now SARS will be receiving that data directly and in real time. This means that SARS will have eyes on an organisation’s tax data at the same time as the tax function, as a result Tax data quality and governance will become more important. The changes will compel many organisations to adapt to the new ways of interacting with the tax authority or face significant penalties and increased operational risk.
This article outlines some of the key considerations – for SARS and organisations operating in South Africa - as SARS begins the VAT modernisation journey aimed at moving them closer to being the digital tax authority they aspire to be. We share key learnings from tax authorities that have taken the leap ahead and embraced technology. We also delve into how these revenue authorities are using technology to shift compliance into the digital realm, as well as discuss what organisations operating in South Africa can start doing as they prepare for the new regime.
Key considerations for SARS
Modernising the tax administration is a key component of improving capacity, introducing efficiencies and closing the tax gap, however, focusing only on technology as part of digital transformation will not achieve the desired result.
As more tax authorities adopt digital administration, we see that the digital transformation approaches applied are ever evolving. The experiences of tax authorities along the journey so far reveals that there isn’t a single endpoint but rather a continuous process evolving many individual steps.
The Organization for Economic Co-operation and Development (OECD) Forum on Tax Administration (FTA) conceptualised a tax administration’s digital transformation journey by sketching the starting point, in-between stages, and aspirational endpoint as follows:
Ronnie Nielson, Deloitte Tax Thought Leader (Denmark) explains that even though this provides a conceptual framework that tax authorities can adopt, in reality digital transformation rollouts have adopted a phased approach. Chile is a good example of a country that has managed to systematically whittle away the VAT gap by cleverly using information from electronic invoicing. This was first implemented for the largest businesses - a small number of conglomerates controlling a large part of the economy - and cascaded through their supply chains. They have since built a range of taxpayer-facing services as well as internal use cases (e.g., analytics applications to identify high risk cases).
The experience of Deloitte member firms in regions where tax authorities have adopted digital transformation show that the best starting point for SARS would be to define the end game. This means not just focusing on real-time reporting but also how the transformation aligns with the digital tax administration of the future and government’s broader digital ambitions. The value of data for compliance purposes is but one aspect, albeit a very important one; of the business case.
The “end game” should clearly profile its vision and desired future state,
In addition, it should also outline the overall principles for technology and architecture as well as the business choices arising thereof. There is enough insights and experience from early adopters (such as Latin America) to inform such a vision. Their implementation roadmap should be informed by their vision and should allow them to gradually progress towards the desired end state. This involves both design of the real-time reporting initiative, rollout of the initiative through a phased approach that’s likely to start with government and large businesses, as well as initiatives to take advantage of - and extract value from - the data.
The data quality challenge
The tax functions will face many challenges in preparing and complying with the requirements of real-time reporting. However, data quality will be the most critical factor that they will have to contend with and address. Many tax functions spend the bulk of their time accessing tax data, making corrections, performing reconciliations, and formatting the data for tax compliance. But a process like this will be under increasing pressure as SARS introduces near to real-time reporting and demands more tax data in greater detail.
Many organisations that have yet to invest in digitising their tax data processes will struggle to obtain and transmit the right data to SARS. As the data demands are likely to increase, the data challenges will intensify for many reasons, e.g.,
Organisations will need to have the relevant data capture processes and controls that ensure high quality data is in place. This data will not only be relied upon for real-time submissions but, also for downstream VAT compliance return preparation processes as well as tax authority verifications. Lack of data quality is where many organisations are likely to fall short and face increasing risk of non-compliance .
What could be next?
What organisations should be doing now…
While the implementation of real-time VAT reporting presents several challenges as outlined above, it also creates many opportunities. It can act as a strong lever that the tax function can use to improve processes and data quality issues.
What measures can thus be taken by organisations in South Africa?
To better prepare the tax function for the future, tax and finance leaders should consider implementing these measures:
There is no doubt that digital transformation through the VAT modernisation initiative will contribute to SARS meeting its objectives of enhancing efficiency, speed and transparency, lower compliance costs and collecting more revenue through enhanced compliance.
However, for the revenue authority to achieve these objectives; the digital tax transformation strategy, planning, and implementation thereof should be linked to the larger digital administration agenda as well as a clearly defined vision. Although the path and endpoints in transitioning to the future digital VAT administration may differ between countries, there are common steps and issues in planning, designing and executing the journey that SARS can adopt. These include setting a vision, making decisions on design and phasing and the construction of a digital roadmap that contains all components required to achieve the desired future state.
For taxpayers, the move to real-time reporting should act as a lever to build a business case for investments in improving the quality of data or as a reason to improve upstream finance processes and improve legacy system issues. A holistic approach that considers how the processes, people, data and technology will interact should be adopted. It is time for tax leaders to get the rest of the organisation to stand up and realise that they need to make fundamental changes and build tax requirements into every stage of the process. The pressure from digital tax requirements is only going to increase in the years ahead. Organisations will need to get comfortable providing a level of transparency to SARS which they have not historically had to. Those who take a strategic and proactive approach in response to the expected heightened data demands, will be rewarded with increased efficiency and more accurate VAT reporting.
1 Forum on Tax Administration (OECD, 2020). Tax Administration 3.0: The Digital Transformation of Tax Administration.
2 Deloitte 2023 Tax Transformation Trends