For years, governments have looked at innovative ways to manage the gaps that exist in their tax systems. Go back to the 13th century, when King John introduced an export tax on wool in 1203, from England to neighbouring countries Scotland and Wales, or the taxes on wine imports implemented by his successor, King Edward I in 1275. New systems and ideas have consistently evolved with time in order to ensure tax enforcement works as effectively as possible.
Fast forward to 2019 and many governments across the world are increasingly turning to digital technology in order to effectively combat the tax gap and ensure they collect what is correctly owed to them by law. Such tools have become more necessary than ever, as the world operates on a multinational scale where quite often a business can operate in that nation without any physical presence. South Korea has placed a particularly strong emphasis on putting systems in place to claw back tax from big tech firms which operate in the country but keep citizens' data in other countries.
The use of smart technology has become a powerful weapon in a government's war on lost tax revenue. It means a government can insert itself into every transaction a business makes, regardless of how big or small it is.
As such, modern organisations have to keep up with the regulations that technology is enabling governments to roll out at pace – and with tremendous effectiveness. Given the speed at which these complex laws can now be implemented thanks to technology, companies can quickly find themselves on the wrong side of compliance requirements.
This is particularly relevant to businesses in the midst of migrating their enterprise resource planning (ERP) systems to SAP Central Finance and SAP S/4HANA, which could suddenly find that government changes, fuelled by digital transformation strategies, impact their plans quickly and quite severely.
Ignoring the intricacies of compliance during such a complex migration could prove to be an expensive error. This is because any organisation which, wittingly or through a lack of understanding of tax processes, fails to comply with new legislation is likely to face increasingly severe financial penalties and costly audits, which result in cash flow problems and strained customer relationships.
Digital changes to tax collection are not isolated to single countries.. What started in Latin America has seen major digital transformation projects rolled out across the globe. In the UK, the biggest upheaval of the tax system for decades is currently taking place as HMRC launches its Making Tax Digital (MTD) initiative in order to shrink its VAT Gap, which is currently estimated to be Â£13.3 billion.
Further afield, India – one of the world's great manufacturing behemoths – is making greater strides to digitally transform its taxation system. Having established a committee to examine the viability of e-invoicing as a means of curbing tax evasion under its Goods and Services Tax (GST) programme, the Indian government announced that, from September this year, all B2B invoices above a certain amount will have to be generated on a central government portal.
The initiative is designed to provide greater transparency into the country's system, helping to avoid fraud and close the country's tax gap. Given its position as a global manufacturing powerhouse, the implications of India's new e-invoicing system could be far-reaching, potentially affecting any corporation with a footprint in the country. When India changes its tax laws, every global business in the supply chain needs to know about it.
The rapid pace at which governments are digitally transforming their tax systems means that global corporations have to treat national tax authorities as major stakeholders in their core business processes. Among other considerations, this requires them to stay abreast of constantly evolving compliance requirements.
Transitioning to SAP S/4HANA is already enough of a challenge for most chief technology officers, Â without having to address the different compliance requirements of various global tax authorities. But by outsourcing this compliance to a cloud-based, third-party provider, it's possible for an organisation to isolate its systems from continuous disruption. Doing so will enable its IT team to focus on more critical aspects of its SAP Central Finance digital transformation journey, safe in the knowledge that compliance updates will be made automatically.
Tax is massively important to any nation and, as governments have done for centuries, they will continue to evolve to ensure they continue to narrow their tax gaps. As tax systems become more digital, it's imperative that organisations follow suit and put smart, cloud-based technology at the heart of their SAP Central Finance systems.