IN discussions among tax leaders and senior finance executives of large multinational corporations (MNCs) and corporates in Malaysia, the conversation is increasingly centered on the topic of technology and automation in taxation.
The million-dollar question is, how can technology and automation be used to transform manual and time intensive taxation processes while complying with local and international tax obligations?
The complexity of the tax landscape has been accelerating, especially in the last few years.
Managing the number of tax obligations effectively in an increasingly digitalised global economy, while maintaining a similar resource level and budget (for example, doing more with less), is becoming a conundrum for businesses that operate globally or even regionally. It is also a challenge for the tax authorities.
To this end, technology and automation are seen as the means to alleviate an increasingly stressed taxfunction.
Digitalisation is the seemingly obvious way to remove mundane data crunching activities while enabling tax functions to focus on more value-added activities such as tax planning.
Unfortunately, most corporates have found that there is no easy fix, and tax technology projects cannot be implemented by merely installing new software.
Automation and technology, including analytics tools can indeed help tax functions to evolve by making manual tax processes more efficient. However, the complexity of the tasks and resources needed to implement them properly, and ensuring they are fit-for-purpose, are frequently underestimated.
Digital tax administration
Before any discussion on tax technology and automation can take place, it is important to understand the thought process and focus areas of tax authorities around the world, including the Malaysian Inland Revenue Board (IRB).
This will enable taxpayers to shape their technology roadmaps correspondingly and anticipate further requirements from the authorities.
In a recent publication, Tax Administration 3.0, the Organisation for Economic Cooperation and Development (OECD) discussed the digital transformation of tax administrations as comprising three core building blocks of enablers to allow seamless integration between the systems of tax authorities and taxpayers.
These building blocks are digital identification of taxpayers, automated connection between tax authorities and taxpayers’ “natural” systems, and electronic invoicing.
Like taxpayers, tax authorities are increasingly leveraging technology to collect and manage tax datThey rely on sophisticated analytic processes to find anomalies and to select targets for tax audits.
Despite the inevitable differences in national approaches, a global review of tax digitalisation practices highlights several similarities:
> Tax authorities are moving compliance “upstream”
Rather than waiting for taxpayers to submit tax returns after the taxing event, tax authorities are looking to consider ways to support tax assessment in real-time or near-real-time by directly connecting with the taxpayers’ systems.
This has the benefit of accelerating the payment of taxes and provides tax authorities with immediate data to examine. As a result, taxpayers will increasingly need to focus on reviewing their data from a tax perspective before this data is sent on a real-time basis to tax authorities.
With similar objectives to capture more data electronically, we have observed that the Asia-Pacific region is accelerating the implementation of e-invoicing or an electronically delivered invoice in a specified standardised format designated by tax authorities.
E-invoicing allows tax authorities to keep real-time information on taxpayers at a transaction level and is central to allowing compliance to be moved upstream. In Malaysia, the IRB is currently working on an e-invoicing initiative together with other regulatory authorities as part of a broader initiative to digitalise the country’s processes in order to gain efficiencies and move up the value chain.
> Tax authorities are increasingly asking for more information and data from you
New reporting and regulatory requirements with a tax angle are emerging such as digital tax filing requirements, environmental, social and governance (ESG) reporting, and the OECD’s Base Erosion and Profit Shifting (BEPS) 2.0 initiatives including the global minimum tax.
These new requirements for MNCs to report their income and calculate the effective tax rate for each country in which they operate and the push for the “tax transparency” agenda in developed tax markets are driving change at an unprecedented scale and pace.
Through various withholding tax, indirect tax and other transactional tax, tax authorities have significant taxpayer data. They are now bringing sophisticated analytics tools and data matching techniques to paint a detailed picture – not only of data-driven transaction flows but also of a group’s risk appetite and overall tax planning efforts.
> We are seeing heavy collaboration among national tax authorities, coordinated by the OECD as a new phase of work
The implementation of the BEPS 2.0 rules has been the result of many consultations between tax authorities in the key developing and developed markets, together with the OECD.Tax administrators have learnt the value of such collaboration from previous projects and are putting that experience to good use by sharing approaches and leading practices.
In Malaysia, greater collaboration and sharing of data among the various tax and regulatory bodies, will enable much richer and deeper sources of data that can be used holistically for various audit and enforcement activities.
In short, the future tax function must be ready to cope with increased demands resulting from the digital transformation of the tax authorities and new ways of doing business in a globalised economy.
Taxpayers must look into their tax data and technology deployment strategies, to ensure that systems are fit-for-purpose, risks can be identified and addressed in a proactive manner and seamless integration can occur with the tax authorities’ systems where required.
Technology adoption is no longer an option but a strategic differentiator for taxpayers.
Julian Wong is the Ernst & Young Asean global compliance and reporting leader and partner at E&Y Tax Consultants Sdn Bhd and Dr Ong See Yew is the EY Asean tax technology and transformation leader. The views expressed here are the writers’ own.
