Digital transformation is impacting every industry, and so tax authorities are having to follow suit, making it easier for them to audit tax files submitted by companies with tax administration software. This software improves their ability to control and manage tax forms filed by taxpayers.
The key benefit is that digital auditing makes it easier to ensure that everyone pays a fair amount of tax in accordance with the law of any given territory.
In countries that already implement some sort of digital tax filling (e.g. SAF-T in Portugal or JPK in Poland), tax authorities also gain from being able to streamline their digital auditing processes. In countries that either do not have any system in place or plan to implement a digital tax filing system, Valter Pinho, CEO of Petapilot says his solution can support tax authorities defining the legal and technical scope needed to make everything more efficient.
Simultaneously, with Petapilot, companies are supported by providing them with a system that permits the mitigation of tax and fiscal liabilities. This is achieved by guaranteeing the accurate submission of the tax files (in terms of the file structure, metadata, etc.), and by avoiding expensive and time-consuming tax audits. The ultimate key to making everything more efficient for everyone involved is achieved by fine-tuning processes.
This sounds good, but what has driven digital transformation in the tax authority sector? Well, first of all, the renovation in the sector which occurred mostly in Commonwealth countries, was about professionalising tax auditing learning from debt collections in the private sector. The fruits of this exercise were born 12 years ago….and then the revolution came afterwards, claims Pinho. That ‘revolution’ was sparked by the financial and economic crisis that began in the autumn of 2008.
“At the time, the economies were contracting and with it, the tax revenues were reducing sharply”, explains Pinho. This happened at a point when governments needed their tax revenues the most, to provide social services to many of their citizens. Governments, like Portugal – that after an intervention from the International Monetary Fund (IMF) needed to increase its tax collection but it didn’t have the resources to invest in it.
“This led the Government and the Tax Administration to create or be open to trying new ways of doing things”, says Pinho, adding: “The idea of using a standard audit file is at the heart of this revolution, because it moved Tax Authorities from going into the companies to extract the information and mining it in-house to get the information from the companies already in the proper format. Together with the new Big Data Technology which was also emerging at the time the revolution was ignited.”
He argues that countries with unlimited resources, don’t necessarily need to make this change, “but for those with public accounts that are under pressure, it is a lever too easy to pull, and not likely to be missed.” He, therefore, claims that the whole investment in digital transformation, standardisation, and big data analysis can ensure that the initial investment can be paid in less than a year. This is because it can be recovered by increases in the tax revenues associated with it.
Old fashioned ways
Yet he reveals that there are many counties, including several in western Europe, that work traditionally – despite the push for digital transformation and big data analytics. Pinho thinks this is because they can hire more tax inspectors when more revenue is needed. Success cases like the ones of Poland, Portugal, and Lithuania are sometimes minimized. “From what we can see, one of the problems is that in some Western European Countries tax authorities, are not willing to incorporate know-how from other countries they do not benchmark against and end up preferring to conceive everything in-house”, he explains.
“Petapilot had one example this year, in which one tax authority was introduced to us and was really interested in our product, and somehow it was led to believe that it was a domestic solution. When we let them know that we were working with other tax authorities and that this was a solution originated in Portugal, they told us that it was not politically supported to use a product from a peripherical country.”
It’s a pity that countries are missing out on the opportunity to innovate through collaboration. By sharing ideas and experiences it becomes possible to learn, helping to improve efficiencies and to address challenges that need to be overcome. Conversely, a home-grown solution may help to support software companies and employment, but this could come at a higher cost.
The Portuguese experience
With regards to Portugal, Petapilot worked with the Portuguese Tax Authority using its Col.bi, which it describes as being: “A powerful data analytics tool for digital audit and tax compliance.” The target was to double the number of tax audit cases from 30,000 to 60,000. The solution provides a collaborative audit, involving teams with 3 or more auditors who can share their audits and knowledge transfer.
As part of the project, they are also developing knowledge cells to conduct experiential audit tests with all the auditors. To reduce fraud and inaccurate filings, companies are working with the tax authority to improve the quality of accounting procedures to ensure proper data submission and compliance. So, there is a need to use the solution for cross-checking data with e.invoicing to reduce the current VAT gap that is being felt right across the European Union (EU). At this point, with regards to VAT collection, Petapilot says Portugal is one of the best-performing countries in the Organisation for Economic Co-operation and Development (OECD) despite the financial and economic crisis of 2008.
The Portuguese Tax Authority also aims to use the solution to better manage the auditing of large companies with more than 70GB of Standard Audit Files for Tax (SAF-Ts). Pinho explains: “Having a complete, standardised and accurate data set allows us to perform several digital audit verifications, cross-checks, matchings, aggregations, reports, KPIs, analytical comparisons, graphics, dashboards, etc, that allows the tax auditor to define an efficient audit plan, focusing mostly in outliers and red flags among the universe of information available from the taxpayer.”
Subsequently, tax authorities can be more assertive. With the help of solutions offers by companies such as Petapilot, they gain the ability to ask the most appropriate questions to improve their ability to enforce the payment of tax. They can also set and send out fines to ameliorate regulatory enforcement over the economy. Pinho adds: “The software also works as a collaborative platform for the tax authority to interact and work with the company to clarify each case (e.g. logging replies, uploading documents of proof, etc).”
The software isn’t an Enterprise Resource Planning (ERP) solution though. So, how can it help the processes involved with digital tax auditing and filing? Pinho explains how it works: The ERP of the companies needs to provide the tax authority with the tax file or data set. Petapilot’s software runs over that. In this scenario when the ERPs are generating the tax file or data sets, they are confronted with several technical mistakes which are commonly more the responsibility of the ERP integrator than the ERP itself.”
He, therefore, says ERPs are responsible for the “generation of digital tax auditable files and data sets, in accordance with the standards defined by each country. If the configurations are not correctly made in the ERPs systems, the tax auditor will struggle to perform any kind of analysis, which also may lead to [inappropriate] penalties for taxpayers.”
In other words, for example, the ERP integration may generate different invoices with the same number or end up calculating the wrong VAT amount. “There are thousands of types of mistakes which may happen, sometimes unintentionally”, he claims.
Using AI and ML
Petapilot has integrated artificial intelligence and machine learning into its auditing process. The explosion of data makes it impossible for people to analyse the amount of information that’s out there today. Artificial intelligence (AI) and machine learning are therefore used to make big data analytics increasingly more efficient, effective and possible.
Pinho adds that his company is investing in opening up its platform to third-party systems: “Data extraction, Tax Filling, Safe data interoperability, Information providers, Digital Audit, Business Analytics, …, we want to integrate with partners and independent software vendors. Again, we have a data platform, that was built focused on audit, not only an audit tool.”
He believes that tax authorities would profit from having some sort of exchange of information for dealing with international sales. “For that purpose, a standard audit file such as SAF-T proposed by OECD is a likely candidate. But the interoperability between any pair of countries is not the bottleneck. The non-international part of the universe of transactions and operations is, for most countries, many times bigger the international part, therefore countries tend to focus more on integrating the standard to their practices than their practices to the international standard.”
So, with standardisation, digital transformation, AI and machine learning and the right solution, it’s easier to make digital tax auditing more efficient. This achievement will also reach beyond national tax boundaries. After all, it’s in the interest of all tax authorities to ensure that their citizens pay the right amount of tax and pay it accordingly; and it’s in the interest of every one of them around the world to work together by sharing knowledge and information to combat fraud.