While ESG reporting itself does not have to do much with taxes, the point is that governments want taxes to help fund ESG initiatives (like with decreasing VAT gap in EU, see the Commission’s study as a reference: VAT Gap (europa.eu)) and the public wants to be able to see that organizations are doing the ‘right thing’. Everyone has a vested interest: sustainability, social justice and avoiding the negative effects of climate change. Tax and tax transparency play a central part in all discussions on these issues and when tax functions are involved in ESG and sustainability planning, Data Analytics can be one of the governance tool to comply with tax transparency and compliance requirements
The trend towards real-time tax data
Although the tax function in particular relies heavily on data-driven decision making, not all companies have yet realized the relevance of data and technology. Every single tax calculation either for direct or indirect tax is ultimately based on data generated in real time. For some years now, national tax authorities have also begun to take advantage of this. The digital transformation in taxation has already begun around the world and has even picked up speed with the Covid-19 crisis and accordingly, many tax authorities are demanding full transaction transparency from companies, such as in case of the Spanish or Hungarian real-time reporting, the Italian and Polish e-Invoicing or the Romanian SAF-T. Furthermore, there are several other European and global initiatives to further digitalize and thus reduce VAT leakage in connection with indirect tax revenue collections (e.g. electronic cash register in Czech Republic 2023, digital governmental procurement in Denmark 2023, e-Invoicing in France 2024, extension of electronic B2G requirements in Germany 2022-2024, SAF-T in Hungary 2022/2023, e-Invoicing in Serbia 2022/2023, e-Invoicing in Slovakia).
For this reason, companies should view the upcoming challenges as an opportunity to review and optimize their tax data management: By this we mean a set of technology-assisted processes by which data is prepared for tax purposes.
Underlying data quality issues
Tax data management is nothing new. However, in most companies, many processes still consist of manually compiled spreadsheets. The drawbacks are obvious: processes are slow and expensive. Data analysis, especially with regard to tax compliance relies heavily on several data sources collected through various reports. As a consequence, tax departments spend over 70 percent of their time on data-related activities and only 30 percent or less on actual compliance. The time and effort required to ensure data quality will become a costly problem for companies that do not position themselves in time for digital transformation.
Compliance requirements, the number of details that need to be reported and the frequency of those reports are increasing rapidly. The biggest change in data management is the transition from manual data processes to high-level automation. While many tax departments know they have a data problem, they need expertise to effectively implement technological and organizational changes. Most initiatives fail because the wrong technologies are used or tax data management cannot be implemented correctly in the tools used.
A successful implementation of tax data management should always begin by first identifying the data challenges facing the organization currently as well as future challenges that may arise from new compliance and regulatory changes. The goal is to meet all of these requirements with a single data management solution that achieves as much synergy as possible. Subsequently, the required data processes must be designed. These should aim at reflecting the data needs and the structure of data generation. Translating these control processes into technological requirements and finding the right infrastructure can be a challenge. It often takes someone who is well-versed in the tax challenges and available technologies to achieve this.
In a nutshell, you need the proper data at the right time and confidence in the quality of your data set. A reliable overview of the entries and transactions as well as their impact on the tax function makes for an informed decision-making in real time.