How technology and automation can transform tax functions

In brief

• Tax authorities around the world are digitalizing tax administration systems to allow seamless integration with taxpayers and real-time assessment in today’s globalized economy.
• To meet the increasingly complex tax obligation requirements, taxpayers are also leveraging technology and automation, including data analytics.
• However, many taxpayers underestimate the level of complex tasks and resources that are needed to implement their technology deployment strategy properly.

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? 

To this end, technology and automation are seen as the means to alleviate an increasingly stressed tax function. Digitalization 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 a 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 of 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 data. They 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 digitalization practices highlights several similarities:

1.     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 standardized 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 digitalize the country’s processes in order to gain efficiencies and move up the value chain.

2.     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.