Team meeting looking data on digital tablets

Seven ways early adopters are managing pre-populated VAT returns 

Here are the key lessons learned by multinationals dealing with reduced remediation and increased VAT scrutiny triggered by pre-population.


In brief
  • The validation of pre-populated VAT returns presents compliance and data challenges for tax and finance teams.
  • Businesses should make sure transactional data is accurate – from input to tax returns – as digital reporting gives tax authorities near real-time access. 
  • Compliance is likely to be onerous at first, but it is expected to deliver valuable efficiencies for both taxpayer and tax authority in the longer term.

A growing number of tax authorities are building on their E-Invoicing requirements by pre-populating value-added tax (VAT) returns in an effort to increase efficiency and accuracy and cut costs, while accelerating the overall compliance process.

It is hoped that an increase in VAT data accuracy will also reduce controversy and unlock working capital for taxpayers. Taxpayer compliance with pre-populated returns involves them reviewing, challenging and facilitating reconciliation with the pre-filled data. Taxpayers also face the risk of increasingly granular scrutiny by authorities.

Pre-population of personal income tax returns (i.e., a draft prepared by tax authorities prefilled using various digital data sources) began with Denmark in 1988 and has since been adopted by other authorities.  But its application to VAT returns in recent years – first in South America and later across Europe – marks a significant expansion of the concept into the corporate tax world. The trend, driven by the increasingly large volume of corporate taxpayer data accessible by tax authorities, is expected to continue with increasing numbers of tax authorities adopting pre-population in the months and years ahead.

As EY client Anthony Donelan, Head of Tax Technology and Transformation at consumer health company Haleon, recently said: “Even though pre-populated returns are not yet widespread, the trend is clearly visible. Now is the time for tax and other internal company stakeholders to join forces for strong cooperation to ensure the successful futureproofing of the indirect tax compliance processes.”

This approach involves addressing tax and finance data challenges to align VAT reporting with new pre-population regimes. It also involves learning from the following seven key lessons garnered by tax and finance leaders, who have already dealt with pre-populated VAT returns.

1. There are no uniform standards or guidelines for VAT data pre-population

There are international guidelines and best practice frameworks for harmonizing VAT systems, but no globally recognized rules for pre-populating VAT forms currently exist. Pre-population processes, as well as the level and accuracy of outputs, therefore can vary. The degree of variance depends on numerous factors, including the levels of automation achieved by the taxpayer and tax authority. Advanced automation enables pre-population from E-invoices and transaction records such as Standard Audit File for Tax (SAF-T), sales/purchase data, online and electric cash registers, taxable amounts and VAT calculations. Other factors affecting pre-population accuracy include the suitability of IT infrastructure, taxpayer compliance levels and the rate of legislative change. This is a complex and fast-evolving landscape. Tax teams are well advised to seek guidance from a trusted partner capable of horizon scanning, tracking the latest developments and foreseeing change.

2. European countries still require parallel compliance

When pre-populated VAT returns are introduced, there is often a period of parallel compliance during which static returns are still prepared and submitted. Taxpayers are also required to reconcile discrepancies with the pre-populated return drafted by the authorities. Multinational taxpayers may find it useful to use one of the EU countries in which pre-populated returns have been introduced as a pilot to assess readiness on a broader scale, identify gaps and formulate an action plan for remediation. At the same time, taxpayers are well advised to start designing the future-state operating model they will require when pre-population is a global requirement.

3. Faster and more cost-effective compliance… for tax authorities

The trend toward pre-populated VAT returns (especially draft returns based on invoices verified through pre-clearance) is expected to increase the speed of the compliance process for tax authorities, while bringing real-time or near-real-time liability estimates closer to realization. Pre-population also enables VAT audits to be more targeted and more contemporaneous, no longer taking place after the submission of the static return. Meanwhile, companies able to increase VAT data quality will be able to free-up capital which may otherwise be subject to audit.

4. Cost and time savings will not necessarily be shared with taxpayers

Pre-population means taxpayer time and resource shifts focus to full reconciliation of numbers. Therefore, reconciliations need to be more detailed to make sure pre-populated data is aligned to enterprise resource planning (ERP) system data. Historically, such a detailed reconciliation would take place on a more ad hoc basis when triggered by a tax audit. The ability to wait and be selective about in-depth reconciliations will no longer exist. The figures tax authorities use to pre-populate VAT returns are not always accurate, and the swift turnaround needed to identify and rectify discrepancies requires a significant investment on the taxpayer’s part. With much of the data being drawn from E-Invoicing, organizations can save considerable time, effort and resource by ensuring they achieve a high level of compliance in this area, feeding high-quality data into their systems before tax authorities use it to prepopulate VAT forms.

5. The dominant trend is for increasingly granular tax data, faster

The dominant global trend is for tax authorities to collect information directly from businesses electronically in real-time or near-real-time. Many European jurisdictions, including the UK, Spain, Italy, Hungary and Poland, have already introduced digital regimes which affect VAT reporting, such as E-Invoicing. The move toward digitalized and streamlined VAT reporting systems is not confined to Europe, however, with countries such as Brazil, China and Argentina having already acted. In some countries taxpayers are normally required to submit transaction details and/or invoices either in real-time or soon after the event. In other jurisdictions, however, businesses cannot complete a transaction with a customer until a document number has been received in real-time from the tax authorities.

6. Enhanced taxpayer insight

Pre-populated returns give the taxpayer a greater insight into tax authorities’ VAT expectations. Within a purely static VAT reporting regime, taxpayers should first await an audit. For example, the pre-population of import figures in France gives taxpayers insight into numbers held by the customs authorities with only a month’s delay. Previously, they would receive such insight many months or even years later, during an audit.

7. Data is key to successful pre-population

Pre-populated VAT returns present another compelling example of why high-quality data is now fundamental to the tax and finance function’s future operating model. Pre-population involves live/near-real-time access to transactional data by tax authorities via various digital reporting sources including E-Invoicing. This will make downstream data remediation impossible. Teams are instead advised to adopt a proactive stance on data quality, including:

  • Improving governance at the point of data entry
  • Understanding how that data is used
  • Recording how data linkages are formed
  • Understanding how data is subjected to calculations from the point of invoice entry through to reporting
  • Ensuring compliance with existing data regulation including E-Invoicing

This proactive stance includes answering fundamental questions such as: Who is responsible for VAT data? Where is it held? Why is data inaccurate and who owns the remediation process? The bigger the organization, the more extensive and convoluted this process will be, with tax and finance teams working through multiple IT systems. Once these questions are answered, governance frameworks can be designed to address issues and deliver data quality. Accuracy and timeliness can only be achieved if taxpayers are fully compliant with E-Invoicing and other digital reporting requirements. For example, many established taxpayers have historically focused on SAF-T compliance. In jurisdictions such as Romania, however, pre-populated returns should drive non-established companies (those liable for VAT but without a physical presence) to get their e-reporting sources in place correctly from the start (with an upcoming deadline for SAFT compliance from January 2025). As a result of pre-population, organizations are now required to have a reporting data flow which includes all of the following sources:

  • E-invoices, used for business-to-business transactions from January 2024.
  • e-transport, which requires detailed reporting of transport information, including sender and recipient details, goods description, and transport routes.
  • e-SAF-T, the international standard for electronic exchange of reliable accounting data between organizations and tax authorities.
  • Electronic cash registers, which record sales transactions accurately and achieve compliance with tax regulations.
  • Integrated customs IT systems and other IT systems, which amalgamate various customs processes and data to streamline customs operations, enhance efficiency, and achieve compliance with international trade regulations. 

The quest for accurate data is further complicated by the fact that data input is often the responsibility of third-party, shared services functions whose members generally lack the skills or even the mandate to verify data.

How to prepare for pre-populated VAT returns

Pre-population will doubtless add additional work and layers of complexity for tax functions serving a multinational footprint. Tax leaders can reduce the impact and ease the transition in a number of ways. For example, they can reconcile ERP data used in static VAT returns with the data used by tax authorities in pre-populated returns. It can also make great sense to conduct a gap and root-cause analysis, identifying data mismatches and remediating gaps and errors.

Tax and finance leaders are also well advised to shift attention to addressing data remediation issues further upstream. For example, ensuring E-invoice compliance, compiling an inventory of data sources feeding pre-populated returns, ensuring correct configuration of ERP system and live-data reporting, process analysis and improvement. With a focus on the longer term, leaders should formalize the internal business case for developing a robust and future-proofed approach to data governance. 

Summary

Validation of pre-populated VAT returns is posing a significant challenge for tax and finance teams, increasing scrutiny as well as the pace of VAT compliance. This new regime will eventually create an opportunity, however, to liberate much-needed capital from protracted controversy proceedings, while also presenting a compelling case for strengthened data governance. 

Related content

What ViDA means for the rise of global e-invoicing

Commission’s VAT in the Digital Age (ViDA) proposal is a game changer for global businesses and their tax functions. Learn more.

14 Apr 2023 EY Americas

How global businesses should prepare for ViDA and rise of e-invoicing

In this podcast we explore the challenges, potential impact and opportunities created by the VAT in the Digital Age proposal. Learn more.

19 Oct 2023 38m 5s

Why tax transparency is more complex and how businesses can comply

Governments know more than ever about businesses’ tax affairs due to advanced technology and the OECD BEPS frameworks.

22 Nov 2021 EY Americas

    About this article

    Authors