Real-time VAT reporting is coming – Are you ready?

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: 

• “Tax Administration 1.0” a paper-based tax administration, traditional functions; 
• “Tax Administration 2.0” an e-administration, where most of the functions are digitised, although the fundamental processes are the same (but faster and more efficient); and 
• “Tax Administration 3.0” represents a paradigm shift, where the taxpayer and tax administration systems are interconnected, where compliance is automatic and seamless, and where traditional decision functions are done by technology.¹ 

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.,  

• Access to tax data: In many organisations, the tax function often has access only to a limited number of reports; and finds difficulty in accessing the relevant systems or databases that house required tax data. This creates a dependency on the IT and finance departments when additional data is required for tax compliance and analysis.  A trend revealed in the Tax Transformation Trends study shows that having visibility into enterprise-wide tax data has proven difficult for many companies. Integrating tax-related data across the company (36%) is the second most cited challenge for tax departments as they pursue increased efficiency and access to better data². 
• Tax data housed in multiple locations: Real-time reporting requires that data is right the first time, in a tax-ready format and provides the right level of granularity. However, often the data is received from multiple sources in less than useful formats, with inadequate levels of detail for use by the tax function. Data must often be manually enriched and reconciled to be useful for tax purposes. 
• Inaccurate tax data: Tax functions are often required to make corrections to the data extracted from systems before using it for the tax return. This often points to the incorrect tax set-up in the underlying systems leading to incorrect data being provided to the tax function.  
• Inadequate data management tools: Many tax functions do not have access to data analytics tools that can efficiently analyse tax data and pro-actively identify areas of risk. They tend to use spreadsheets that lack the more sophisticated capabilities that new technologies can bring. When tax functions fall short of obtaining and analysing their tax data at the required speed, the risk of fines and penalties due to non-compliance  exposure will increase.  

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?

• A modern VAT return: Data transmissions will be aimed at simulating a vendor’s VAT return in the future. SARS will likely seek to modernise the current VAT return to prepare vendors to disclose detailed VAT data that will be scalable for real-time reporting.  Taking cognisance of the fact that the changes are aimed at garnering meaningful disclosure to SARS, it may – for example – distinguish the types of zero-rated and deemed supplies, VAT rates, apportionment adjustments to input tax. The same applies to tax data from other systems, such as customs and income tax. All of this to identify variances that used to be dealt with via the discontinued IT14SD reconciliations. 
• Electronic invoices: Electronic invoicing (e-invoicing) will allow for electronic submission of VAT data to SARS in the future. SARS will likely seek to prioritise the compliance requirements for vendors implementing e-invoicing, using a graded approach to digitisation, such as clarifying the level of detail required on e-invoices.
• Tax thresholds: National Treasury is looking at adjusting the current tax thresholds for vendors, this because the provisions may be outdated insofar as addressing inflation and revenue trends. 
• Penalties: Legislation to introduce or amend penalties to deter non-compliance as the modernisation initiative progresses.  

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:      

• Start enhancing your tax data now: Given that the tax function relies upon every transaction housed in the data generated by the business, organisations should be looking at their full VAT compliance process. This includes where the data is sourced, which systems are used, and how this information is adjusted as well as consolidated. This will provide a clearer picture. Organisations should also consider leveraging emerging technologies such as artificial intelligence to detect anomalies, monitor and anticipate tax data related issues, opportunities and risks.     
• Monitor regulatory and tax trends: By releasing the discussion paper on VAT modernisation, SARS is offering a strong signal of how the VAT system will evolve over the coming years. The tax function must start to invest in understanding the proposed changes and contribute to the dialogue with SARS as they evolve.  
• Envisioning a target operating model: Tax functions must start thinking about their future operating model, as this will be key to helping define as well as execute initiatives and technology roadmaps. The tax functions should also look outside the traditional tax infrastructure to assess existing capabilities and technologies across the organisation that can be leveraged and then develop a digital road map. The said roadmap should align with the department’s long-term goal and how that can be achieved through practical and achievable steps.
• Generate internal support: Responding to the change will require broad-based support from across the organisation. The tax function must start building the business case for change, not only for generating internal buy-in but to also secure the investment and leadership support that will be required. You could start by looking for other transformation initiatives that are starting or underway (e.g., transition to enterprise resource planning [ERP] cloud or finance transformations) and leverage these to prepare for the proposed VAT real- reporting requirements. 

Conclusion 

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