Tax leaders are worried that as tax authorities gather ever-increasing volumes of data from firms, the EU's drive toward digitalization might lead to more audits.
Businesses fear that the increased data requests from international tax authorities would convert corporate data into a weapon for arbitrary audits, according to experts.
According to the tax director of an Amsterdam-based cosmetics firm, authorities might unfairly target businesses that are in compliance if they collect extensive amounts of tax data.
Regarding the impact on businesses that already have strong compliance requirements, the tax director warns that "tax authorities could use this data to come in and conduct tax audits on you."
These worries come after an uptick in the spread of digitalization, which includes live reporting and e-invoicing regulations. Due to this, tax authorities have imposed a number of rules on businesses, including the need for them to produce massive data sets and to disclose transaction-level data in real-time.
Although the laws are well-intended in their attempt to stop VAT fraud, according to him, they run the danger of deflecting the attention that should be forcefully directed at non-compliant businesses.
And that is really not the point, he continues.
Regardless of the laws put in place, he continues, businesses with a history of VAT or tax fraud were more likely to continue in the same direction.
The tax director states, "If you’ve been doing fraud your whole life, I think you will not comply with those new systems [regulations]."
The degree of distrust between taxpayers and tax officials is another issue at play.
In the interaction between enterprises and revenue services, trust is a crucial component. Businesses who submit their tax information must have confidence that the data will be kept safe and will not be used against them needlessly.
Country to country variations exist in this.
The tax director answers, "It depends on the level of trust you have with your tax authorities. In the Nordics, I am sure it’s a trustful relationship, but this is not the case in other countries."
With the international development of digitalization regulations, it is expected that businesses will be required to provide more data to tax agencies.
A tax expert at a European online marketplace says he anticipates this will have distinct effects on large and small enterprises.
Regarding satisfying tax data rules, he says, "Data is just going to spread; I am wondering what we are going to do with this data and what smaller suppliers are going to do."
He claims that while many smaller organizations are likely to be left in limbo and unable to fulfill data requirements, he anticipates major enterprises to build their own data management solutions in-house.
This might be problematic, especially for businesses that rely on accurate information exchange for compliance and auditing needs.
According to Jürgen Scholz, partner and worldwide head of indirect tax at the Düsseldorf-based consultancy WTS Global, larger businesses are expected to profit from the expansion of sometimes complicated data laws.
This is because they are able to adapt to often changing rules and put solutions in place that guarantee compliance.
The inability of smaller businesses to comply with various laws in the EU, according to Scholz, might serve to impede competition and growth.
When talking to how compliance requirements affect smaller businesses, Scholz says, "It’s so difficult, complex and expensive that in the end it would be better to stay in your home country."
What to do with all the data that organizations produce throughout operation is another major difficulty.
It is challenging to pinpoint a common strategy used by nations to handle the collecting and storage of tax data.
Tax authorities often use one of two approaches to data gathering, according to Tiina Ruohola, head of VAT at the Confederation of Finnish Industries in Helsinki: 1) a "vacuum cleaner approach" or 2) selective data requests.
Regarding the "vacuum cleaner" strategy used by some jurisdictions, Ruohola argues, "Let’s have everything, and now."
She claims that this all-encompassing approach raises crucial concerns about how information is utilized and kept once it is obtained by authorities.
"I think it’s very problematic when we are asking for a lot of data but then are not using it whatsoever," she continues.
Ruohola asserts that she is in favor of a more cautious method of gathering and utilizing data.
According to Ruohola, certain member states have had success with the latter strategy, which has had a favorable effect on their tax audits.
She has also pushed businesses to collaborate with tax authorities and exchange insights on how to utilize data most efficiently.
She continues, "Only when we know for sure that we are using the data we have can we then start thinking about whether it is beneficial to have more."
Greater regulatory convergence across the EU can be attained by tighter collaboration between member states and revenue services.
Greater uniformity and integration of EU VAT regulations may be advantageous to businesses. The gap between declared objectives and actual implementation, particularly in the area of digitalization, may exist.
The tax director at the cosmetics firm adds, "I am a bit sceptical because at the moment you can see member states trying to implement their own systems."
He expresses concern that harmonisation could occur too late because many countries have already adopted their own digitalization regimes.
As a result of a surge of live reporting and e-invoicing regulations, businesses have also been under pressure to comply. Businesses have also seen more challenges getting the resources they need to implement numerous regulatory changes throughout their whole organization.
According to the tax director, following the laws is not really a problem; the challenge is really putting the change into practice internally because of the restricted IT funds.
For instance, he claims that implementing automated inter-company billing, which should have been quite simple to do, took around six months.
He continues, referring to the time it takes to implement changes, "When you have countries that announce new regulations that will be applicable in the next year [for instance], that is not always feasible for us."
Implementation issues and inconsistencies in rules are often determined by national choices.
Frequently, resistance from nations or a desire to follow their own course of action are to blame for the mismatch in tax policy and laws.
One such instance is data, where tax authorities have control over the volume of data gathered, the information included in that data, and the ease with which firms may provide data.
"These are issues of sovereignty for member states," a policy official for the EU claims.
While everyone acknowledges that harmonisation is essential for efficient tax data administration, it seems that only a small number of member nations are prepared to relax their hold on the management of this data. Tax policy convergence is likely to remain a distant goal until this is accomplished and the EU is able to decide on this area's policy.
By fLEXI tEAM