In recent years, tax authorities around the world have been embracing digital methods of tax administration. Through new legislation, regulations and other initiatives focusing on digitalization, tax authorities are able to collect more and more tax-relevant data in digital format, gain more visibility over taxpayer compliance, streamline their tax audits, increase tax collections, and improve the taxpayer filing experience.
Digital tax administration is not new to the Philippines. For over 15 years now, certain taxpayer groups have been using the electronic filing and payment system (EFPS) and, more recently, the eBIRForms return preparation software and online filing facility. Covered taxpayers are also required to submit their Summary Lists of Sales, Purchases and Importations, as well as periodic alphabetical lists (or “alphalists”) of payees subjected to withholding taxes — periodic, summary-type data that is being analyzed by the BIR through the Reconciliation of Listings for Enforcement (or RELIEF) Validation System.
However, the upcoming e-Invoicing and eSales reporting requirements (as introduced by the TRAIN Package 1) presents a significant advancement for the BIR in terms of digitalizing tax administration. With point-of-sale data, and (possibly) payment/purchase data in digital format, the BIR will soon be able to capture much more valuable transactional-level tax Big Data. This may enable the bureau to perform much more complex (perhaps, even real-time) analytics, improve selection of taxpayers for audit, rationalize tax findings (e.g., tax findings arising from discrepancies in transactional level data), and streamline (and potentially even automate) the entire tax audit/examination process.
Traditional tax functions are often compliance-driven and reactive. Filing of returns and related reports are often motivated by the desire to avoid penalties for late or non-submission. Similarly, modifications to strategic and operational aspects of the tax function are often made in response to the most recent tax controversy exercise or regulatory changes. Tax risks are typically analyzed and addressed at the time of preparation of the returns — or sometimes even post-filing, in preparation for or in response to a Letter of Authority for tax audit.
As tax authorities employ more and more digital data collection methods, increasing the amount of data collected, and accelerating the frequency at which data is being collected, taxpayers may soon find that a reactive approach to tax compliance may no longer be sufficient, albeit relevant. Taxpayers must learn to take a more strategic approach to managing their tax risks.
In developing a digital tax strategy, businesses may want to consider the following key elements:
Digital Tax Effectiveness — a business must consider how it can continue to effectively manage tax risks in the face of evolving technologies in its business environment. Disruption and innovation are creating new businesses or changing how taxpayers operate their businesses. Artificial Intelligence (AI)-based services rendered over the Internet, for example, challenge traditional tax concepts such as situs or object of taxation, creating a new set of tax risks that taxpayers will need to identify, understand and manage.
Tax Technology — taxpayers should also consider how best to leverage technology to improve the tax function. Many businesses undergo functional, business or enterprise-wide transformation exercises — and are investing heavily in digital tools and technologies like big data/data analytics and automation for operations, human resource management, customer experience or after-sales support, financial analysis or management reporting, governance and monitoring, just to name a few. Yet, the tax function tends to remain under-invested in these technologies, continuing to rely heavily on spreadsheets and manual processes. The future of tax compliance necessitates that the tax function should be able to shift its resources from mere compliance-driven routine processes like return preparation and submission, and transition into other business activities where tax technical expertise is more valuable to the rest of the organization.
Tax Big Data — as tax authorities collect more and more data in standardized, digital format, a business will have no choice but to comply — and will therefore already have on hand the same digitalized data, together with the tons of other data and metadata generated by processes within the IT environment through which the data required by tax authorities was created. With the volume of data already available, and considering the costs that went into producing those data, a business should find ways to leverage analytics to extract value-adding, tax-relevant insights from the abundance of data. Beyond just determining “what” the tax risks are, tax big data, if properly harnessed, can also potentially provide insights such as “why” the risks are so, identify systemic versus isolated issues, or be consolidated to improve governance and monitoring.
Digital Tax Administration — taxpayers must be prepared for regulatory changes and the increasing transparency requirements of a tax authority using digital means for tax administration. Taxpayers must therefore be “ready” for a digital tax audit, which may be inevitable. This is more than the usual office or desk audit performed by the tax authorities. As tax authorities increase their ability to collect more data at more frequent intervals and at a much more accelerated pace, a taxpayer must be confident in the quality of data being submitted, as well as in its own ability to retrieve and provide the data required by the authorities in a digital tax audit.
As tax authorities embrace digital, taxpayers will, at the minimum, have to comply. Taxpayers must be able to keep up with evolutions in digital tax administration, from increasing digital reporting requirements to dealing with a digital tax audit. Preparing for a digital tax administration, however, will entail costs to the taxpayer. In order to maximize the value of investing in tax technology, taxpayers must also consider an effective digital tax strategy — a strategy that is able to address the tax risks of the evolving business environment, maximize the capabilities of the available tools and underlying digital data, and provide confidence in the quality, accuracy and completeness of data submitted to the tax authorities. In order for a business to properly evolve its tax function, it must therefore proactively develop a digital tax strategy that is customized and best suited to the organization.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Lee Celso R. Vivas is a Tax Partner of SGV & Co.