The digital economy is currently the equivalent of 15.5% of global GDP and is growing at an astonishing rate—two and a half times faster than global GDP over the past 15 year, income tax returnings. We can safely say that the rise of the internet economy has been rapid and impactful.
This ultimately means that tax is levied only on the final consumption that occurs in the taxing jurisdiction.
Perhaps unsurprisingly, many countries that first introduced this kind of indirect tax regulation for digital services didn’t have the largest digital economy players as residents.
The debate about how to best tax the digital economy is still active and unresolved on many fronts. But for in-house tax professionals, tackling the challenges of today’s rules is their immediate concern.
When I was head of international tax at Uber, I experienced first-hand how onerous it is to keep up with the fast-changing business and legislative environments. Even with the best will in the world and the dedication of proactive tax teams there’s a hard truth: it’s not easy for companies to stay on top of and achieve full compliance with all the relevant rules and regulations, particularly when they’re operating with limited resources and in a fast-moving world.
Broadly speaking, in-house tax teams are faced with two major challenges. First, they need to understand which tax rules and regulations in which countries apply to their business and then how they should comply with them. As previously mentioned, having enough people with the right expertise to do this internally is hard.
Getting the knowledge externally by subcontracting to advisory firms is a good, but usually expensive, option. This isn’t an “annual update” situation. The speed at which the world continuously evolves means that existing rules change and new ones are introduced all the time. So companies need updated advice from their consultants just as frequently.
After getting a firm grip on the rules, it’s time for the in-house tax team to face their second challenge—finding the right automation system for their business. There’s no way that a high volume of international transactions can be processed manually. Automation is the only way to correctly calculate and collect all the relevant indirect taxes.
Building a homegrown automation solution appeals to an increasing number of in-house tax teams and product managers, mainly because it deals with the lack of flexibility that often comes with existing, off-the-shelf products. It seems like a simple development addition to core product functionality.
However, for most companies, homegrown automation quickly reveals its complexity. It requires the intensive efforts of dedicated teams and continuous maintenance. For many companies, it would become the equivalent of building their own power plant.
Alternatively, companies using traditional external tax automation software and tools have found upsides and downsides.
Another consideration is that these tools usually require a lot of “custom” setup work. Consultants and tax advisers have to be brought in to help navigate the complexity of the tax automation software. Not only does this significantly increase overall costs, but it also means that integration timelines often run into months—with such projects sometimes taking more than a year to complete.
Whether it is worthwhile to build or buy a solution, or maybe a combination of the two, really depends on a company’s specific use case, risk profile, and existing resources. However, income tax returning there are generally a few core things to be aware of early on in your assessment of which direction to take:
A good starting point is to understand what your needs are across your tax processes and where the difficulties arise. Ask yourself questions like:
Take a step back, and then review your current processes and identify where you need workarounds. Make an effort to really understand where steps are taking too long, where manual intervention is required, and where multiple tools are used. This is where you should focus your efforts. Whether you choose to build or buy, the solution you choose should alleviate pain while making tax compliance efficient and scalable.
Let’s consider, for example, the journey of data through the indirect tax compliance process. It begins when your tax teams extract data from one or multiple systems or sources. The root source of all the data, however, does not reconcile with these out-of-system changes. This leads to additional work, either at the time or later, during audits. The audit trail is unclear because it’s hard to track who did what and when.
It pays, however, income tax returning for tax experts to understand, at least at a high level, the options and limitations different technologies bring as they are conceptually responsible for translating current and future tax requirements into automation requirements. Understanding the technological choices that are available helps them achieve their goals and reduces unwelcome surprises.
Perhaps you’ve forecast growth into 10 new markets but in reality your business quickly ends up expanding into 50. All these factors can greatly impact the robustness, scalability and future-proofing of your tax automation decisions. Tax should be an enabler for the business, income tax returning never a blocker.
This advice should be a no-brainer. Your best talent wants to have impactful and challenging work. If they don’t get it then, income tax returning as we’ve often seen, the talent will leave your company to find more significant work elsewhere.
Losing expertise means that your business becomes heavily reliant on a few remaining key employees and their institutionalized knowledge, increasing the risk of a single point of failure.
In order to mitigate this, you need to find out how much repetitive and mundane work your team actually does, then minimize (or eliminate) it as much as possible through automation.
The key takeaway is to not shy away from or postpone automation initiatives but instead to embed automation into your early thinking and add it to the toolbox of solutions you use to tackle any tax and business issues, even the unexpected ones.
The rise of the digital economy has certainly made the life of many in-house tax professionals much more challenging. Tax exposure and obligations, with specific digital services rules in more than 90 countries, are now the reality.
I strongly believe that we’ve yet to see the true potential and full adoption of technology by in-house tax teams. Technology is revolutionizing tax in ways that go beyond mere compliance. Automation allows businesses to respond quickly and agilely to the ever-changing global business environment. Tax teams play a vital role in unlocking this value.