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The digitalisation of tax in the EU: 5 megatrends in evidence

There’s no denying that the way tax is managed by businesses has advanced at a rapid pace over the last 15 years.

The era of digitalisation is upon us, with countries across the world – and especially in Europe – mandating e-invoicing, SAF-T, real-time reporting and other digital processes.

We recently wrote about the proposed 12-month delay to the implementation of the VAT in the Digital Age initiative; a scheme that will introduce a series of wide-reaching digital systems and methods on tax across Europe.

A multitude of factors and benefits are behind this drive for digital perfection and we remain many years from utopia. But even now, still in the relatively early days of digitalisation, evidence of its positive impact on the tax industry is becoming clear.

Here are five digital megatrends we’ve identified in the European Commission’s new Annual Report on Taxation 2023 that it’s worth keeping an eye on:

1) Digitalisation has simplified tax management and reduced costs

The entire process of managing tax – from source through a company’s systems and to submission to the tax authorities – has been simplified by digitalisation.

It’s now easier for tax teams to keep track of everything from the deadlines for filing to day-to-day reporting; driving vast gains in performance while lowering costs and freeing up skilled tax professionals to focus on more valuable projects away from day-to-day requirements.

With 81% of large businesses utilising an ERP, the majority of organisations are well placed to benefit from e-filing. A 2020 report by Kochanova, Hasnain & Larson concluded that technology has driven a reduction in tax processing costs for businesses, while simultaneously improving compliance levels.

2) Digital preparation of taxes is 27% faster than traditional methods

Digital filing of VAT and other taxes is having a significant impact on reducing the time it takes businesses to prepare tax data and documentation. What’s more, this trend is even greater when e-filing is combined with e-payment systems for maximum effect.

The report also found businesses utilising both e-filing and e-payment solutions enjoy a 3% reduction in the time required to prepare and pay taxes in the year of adoption; rising to 8% in the first full year after implementation, 12% in the second year and up to 27% by the fifth year post-deployment.

The impact of technology was only found to be considerably greater than traditional methods when multiple systems are in operation, indicating those that invest in the most advanced solutions will feel the largest benefits.

3) Time to comply has fallen 30% since 2004

According to the latest Paying Taxes report by the World Bank, the average time it takes a business to comply with consumption tax obligations (also known as the Time to Comply Indicator) is 57 hours.

This is significantly lower than the 81 hours companies required to ensure compliance with the relevant tax legislation in 2004.

The period between 2004 and 2014 saw an acceleration in worldwide adoption of digital tax filing, while in later years e-payment systems have also become common.

It’s anticipated that the planned rollout of further digital tax requirements across the EU over the next five years will continue to drive down the Time to Comply Indicator; helping businesses to enjoy key operational benefits such as improved efficiency and reduced costs.

4) Digital reporting requirements differ but are always effective

In 2019, Italy became the first EU country to mandate e-invoicing for B2B transactions. A total of 12 member states have since imposed Digital Reporting Requirements (DRRs), with two more set to follow.

DRRs come in several forms, but most of these countries are advancing with plans to implement mandatory e-invoicing, although some have opted to focus on SAF-T, real-time reporting and VAT listing.

Regardless of which digital schemes a country introduces, the consensus is that DRRs increase data visibility, drive greater revenue and deliver operational benefits to businesses.

Some examples of successful DRRs in the EU include:

  • Czechia has introduced Electronic Records of Sales (EET). This mandatory system means real-time data relating to cash payments for goods and services involving some 600,000 subjects is communicated to the Ministry of Finance.
  • Spain is now a zero-paper administration. All companies included in the monthly registry of exporters are obliged to submit a VAT return alongside an electronic listing of all transactions completed during the month under the system known as SII. In 2017, the system was expanded and taxable persons now have a deadline of four days to submit data for each transaction they carry out.
  • Hungary’s Real-Time Information Reporting (RTIR) was introduced in 2016 and all VAT-registered businesses must comply. Since 2021, data for all intra-community, exports and B2C transactions must be submitted. While e-invoicing is not yet mandatory in Hungary, the XML file submitted to comply with RTIR can be used as an e-invoice.

5) Digitalisation is central to the fight against fraud – and it’s raised revenues by 1.9%

Tax authorities are pushing to create an increasingly digital tax landscape as they bid to combat VAT fraud and evasion.

By expanding the scope of digital reporting, authorities are able to enjoy 360-degree visibility of tax data throughout its journey, empowering them to quickly identify and take action in cases of suspected wrongdoing.

The widespread introduction of digital reporting systems is also having a positive impact on VAT revenues.

Member states that have chosen to mandate digital reporting requirements have experienced a 1.9% increase in the amount of VAT collected, while Hungary – a country that has been at the forefront of introducing digital systems and processes for tax – saw its VAT gap reduce by an average of more than 3% each year between 2017 and 2020.