18 October 2010 ~ www.taxjournal.com 1

Once upon a time, tax computations were prepared by hand. In my firm, the assistant would be surrounded by audit files and add the details needed onto 14-column yellow paper. There would then be a complicated process to review the computation; reference all the numbers and check it all added up, before handing over the computation to a typist. Finally, the typed version would be referenced again. There was a real art to preparing the computation; the

core skill was to provide sufficient clear details to minimise the volume of enquiries raised by the Inland Revenue. The next step was the massively dangerous one of preparing computations on spread-sheets. This was a timesaver, since the computer could do the calculations and corrections could be processed easily; the danger arose from the fact that the preparer and reviewer often got the formulae wrong and the machine added up just the first 22 rows of the profit and loss account, instead of the whole column. Still, it taught some people how to build checks into spread-sheets.

The first computation programmesThe major step came in the mid-1980s, when the first computation programs were devised. The underlying programming had been checked carefully, so that it wasn’t possible to add up just half the column. The references from one schedule to another were inserted automatically. The criticism levied at these new programs was that they standardised the level of detail and the result could be that too much unneeded detail was provided, making it harder for the Inspector to review and comprehend. Sometimes, though, too little detail was provided and the preparer perhaps took on the mind-set that since it was all done by machine, thinking about the computation was less important.

Linking to the underlying accounting informationWe then tried to find a way to link the computational software to the underlying accounting information. One or two brave souls tried an intricate mapping system, whereby every line in the accounting system was linked to the computation. The theory was that the computation could be produced at the touch of a button; the reality was that at its best no more than three-quarters of the information came directly from the trial balance. What happened in practice was that the mapping system needed to be redone every year, as accounting captions changed. Additionally extra manual work was needed on things such as capital allowances – although some companies have sought to train engineers to learn the correct capital allowance or repair captions and code the costs appropriately.

HMRC’s different approach The formation of the Large Business Service led HMRC to start taking a different approach to the review of computations. A few companies found HMRC trying to interrogate the underlying accounting software, using a product from Revenue Canada. However, this produced reams of data and rarely anything of much use. It was really aimed at transaction taxes and not a profits-based tax, charged on accounting profits. HMRC’s major step was the adoption of risk reviews and a focus on important risks. Figures in the 2010 Tax Gap analysis show that in 2004-05 there were 3,394 risks, with tax under consideration of £9.8 billion. Two years later there were just 1,237 risks with tax under consideration of £7.5 billion. The Tax Gap – tax on disputed issues which HMRC didn’t expect to collect – remained broadly constant at around £3 billion. Companies benefitted from a tax authority focussed on money issues, not spending time on small points.

We’re now about to start a new phase, where the computations will be linked much more closely to the underlying accounting system. The tagging required for the new iXBRL formats will move the review process to the computer and its built-in rules. The HMRC computer will check the submitted computation against a rule system and benchmark tax-sensitive items against similar computations submitted by other companies. The tax officer will receive details of the queries that the computer would like him to raise with the company. At the same time, real anonymised information will be passed to HMRC’s Knowledge, Analysis and Intelligence (KAI) group, which will provide information to aid better tax policy. Those who discussed the recent Foreign Profits reforms with HMRC and the Treasury will appreciate how significant this could be: the foreign profits data was sketchy and out of date. KAI data will help the Office of Budgetary Responsibility analyse policy proposals, as well as assist the Treasury with policy development.

The world of dataNo doubt it will take some time before companies benefit from the data analysis and benchmarking that tagging will provide. Everyone will be partially stymied by the planned changes to UK GAAP, scheduled for 2013. The few groups that have adopted full IFRS and which intend to continue using it are best placed to expand the use of tagging to aid internal comparatives and analysis; others may well chose to delay investment until there’s a more stable outlook for accounting. However, 14 column yellow paper and artistic presentation is just a distant memory as we join the world of data.

Tax computations: the long and winding road…Bill Dodwell, Partner, Deloitte

Comment

Real anonymised information will be passed to HMRC’s Knowledge, Analysis and Intelligence group, which will provide information to aid better tax policy. Those who discussed the recent Foreign Profits reforms with HMRC and the Treasury will appreciate how significant this could be: the foreign profits data was sketchy and out of date

www.taxjournal.com ~ 18 October 20102

AnalysisTax strategy: balancing

value and riskSPEED READ Companies which create a comprehensive tax strategy can benefit significantly through reducing tax cost and managing tax risk. Working to support the corporate strategy, tax directors should focus on areas such as existing and future tax risks and opportunities to create a well documented plan. Creating tax value will frequently push tax risk outside the direct control of the tax function and therefore a robust management infrastructure is needed which lays out the policies and procedures at each level of the organisation.

Mark Kennedy is a Director at Deloitte. He helps large corporates combine people, processes and technology to achieve their strategic tax goals and manage associated risks. Email markennedy@deloitte.co.uk; tel: 020 7007 3832.

M anaging tax effectively is a significant factor in the success of a company’s relationships with regulators, investors,

customers, employees and other stakeholders. As the economic, legislative and regulatory landscape changes, generating sustainable value through tax and avoiding unpleasant surprises will increasingly require a clear strategy supported by a robust framework for the management of tax risk.

What is a tax strategy?It is semantics, I know, but I think it is worth clarifying what we mean when we say ‘strategy’ as it seems in the tax world that this is often confused with governance or other policy statements. For these purposes, we understand it to simply mean a plan of action to achieve a particular goal. In the corporate context, strategies are developed by senior management, agreed with the board and other stakeholders, cascaded down through divisions and functions and progress closely monitored.

A tax strategy usually comprises goals around the themes of:n Minimisation of tax costs on a sustainable basis,

including targets for cash tax outflow (corporate taxes, irrecoverable VAT etc) and costs of compliance;

n Compliance with applicable laws and regulations which might include targets for filings, payments and potentially tax authority risk ratings; and

n Greater certainty in tax reporting giving potential targets for ETR and management of information provided to investor and analyst communities around key tax items.

These goals would be aligned with wider corporate aims, say with a target EPS measure, and supported by a plan detailing the actions, resources and responsibilities required to achieve them. One client’s Finance Director was keen to understand how often taxes were paid across the globe and whether cashflow could be improved. This led to the

extension of a standard review of supplier payment terms to include payments to tax authorities. With the amounts involved, even shaving a few days off each payment could make a significant difference.

Why develop a tax strategy?Many organisations have an informal tax strategy which, in reality, is more of a shared understanding among the finance and tax leadership of broad aims. Typically this is neither documented, explicitly agreed by the board nor communicated widely. Historically this has not been an issue as tax was not regarded as a sufficiently significant source of cost, uncertainty or value to the organisation to merit this level of consideration.

Changes in the economic, regulatory and wider landscape mean that this is no longer the case (see Figure 1).

Tax and tax compliance is increasing as a cost as tax authorities seek to do more with less, focusing resource on the higher risk taxpayers and increasing expectations of self-review for the rest. Uncertainty is increasing as legislative complexity increases, accounting standards change, tax authority settlement strategies become less flexible and transparency over areas of tax judgement (eg, Uncertain Tax Positions) increases.

At the same time, the value achievable through effective management of tax has never been higher or more visible. Globalisation is making it ever easier for businesses to move management, Intellectual Property, risks and functions to lower tax jurisdictions. Citigroup’s ‘tax lever’ shows that the market is becoming alert to this with an analyst report stating that ‘Any tax saving is the equivalent of pure profit. If the choice for adding value is either to generate extra value through increased sales or reduce the tax rate, it is arguably much easier to create value by lowering the tax rate. Our calculations show that a 1% fall in the tax rate as the earnings power of a c1% increase in sales’(see Figure 2).

In this new environment Finance Directors and Heads of Tax should be looking to develop and agree tax strategies which they can communicate to everyone involved in the management of taxes to ensure that their actions are appropriately directed toward group goals. Getting this right will mean that everyone in the business – from R&D to IT, to Purchasing, Sales and Marketing, Product Development and HR – looks at their area and whether it is either tax efficient or a tax risk and looks to the Tax Director and his team for direction and support.

Developing your tax strategyWhat then are the steps that should be taken by a Head of Tax in developing a tax strategy? Of course, this will be hugely dependent on the business, its markets, its tax profile and many other factors but we usually see the following general steps forming part of their plan:n Reassess risks and opportunities: sit down

with the Finance Director to analyse and

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agree existing tax risks and opportunities and how they are currently managed and communicated. Establish agreed framework for evaluating risk and future tax-planning opportunities.

n Find out where the value is: monitor the company’s current initiatives and strategic priorities with a view to aligning tax strategy and activities. Develop tax strategy including identification of one or two ‘quick wins’ to help build credibility.

n Build bridges to the business: make tax and its role in value creation easier for the wider business to understand. Create business cases for tax activity.

n Make the case for the importance of tax: prepare a plan for specific actions based on a standard framework for planning evaluation which reflects agreed appetite for risk etc. Ensure the business understands their role in the success of the plan and the potential downside of failure.

n Deliver: once your plan is in place, make sure you have the right type and balance of resources. Track delivery against expected risks and monitor how these are managed. Assess outcomes of delivery against updated strategy and risk analysis.

Getting a successful strategy in place should help drive value through tax in the organisation but what can you do to maximise the chances that the expected benefits are realised? The key is to ensure that, to mangle the Citigroup metaphor, your tax lever is actually attached to the right risk management infrastructure (ie, people, processes and systems) such that it has the right effect when you choose to pull it.

Your strategy will introduce risk which needs to be managedThe changing external environment and strategic response of leading corporates is contributing to an increased focus on tax risk management and, specifically, the development of control frameworks for tax activity, wherever it occurs within the organisation. In part this is a belated recognition of the truism that the majority of tax risk arises outside the tax function. More fundamentally, however, such control frameworks are critical where organisations increase the level of risk arising outside the tax function through their strategic decisions, eg, to develop tax-efficient supply chains or centralised service centres managing indirect taxes globally. Realising the value of such strategies can only be achieved where direction, clarity and support is provided to all those involved in managing tax risk – from accounts payable staff and treasury teams to logistics managers and the tax function. For example, one global client is looking to shift tax compliance activity to its shared service centre in India. They recognise that this introduces

significant risk, both on the transfer of the activity and its maintenance, and are working hard to recruit and train the right people, standardise the processes and provide ongoing support.

Developing your risk management frameworkIn managing the strategy it is important that a framework of resources, policies and systems is put in place that supports how tax risk should be managed within an organisation and by whom. We see three main layers:n ‘Tone from the top’– the strategic direction,

parameters for action and roles and responsibilities in respect to the management of taxes across the organisation.

n Tax activities – the processes, procedures and tools for managing tax risk within key tax activities (eg, planning, compliance, reporting, tax authority enquiries etc) across divisions and jurisdictions.

n Tax operations – the people, data, systems, knowledge and tools which support the above activities.

The tone from the topOther than the tax strategy itself, the main component of the ‘tone from the top’ is the governance or policy statement. This should be informed by wider governance and compliance standards within the organisation and define the

Figure 1: Drivers of increased potential cost, value and uncertainty relating to taxes

Cost Uncertainty Value

n Increase in targeted anti-avoidance legislation

n Tax authority allocation of resource to risk

n Clamp down on use of tax structured products/havens

n Reduction in availability of debt for leverage

n Tax authority co-operation

n Uncertainty re accounting

n FIN48 and convergence of IFRS and US GAAP

n Other disclosure requirements

n Litigation and settlement strategy

n Focus on transparency and relationships with tax authorities

n Media scrutiny of tax issues

n Globalisation – greater opportunities for greater income planning, transfer pricing, offshoring

n International tax competition

n Greater opportunities to leverage capabilities of technology

More fundamentally, however, such control frameworks are critical where organisations increase the level of risk arising outside the tax function through their strategic decisions

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parameters within which tax activity should be undertaken, for example:n A commitment to compliance with relevant

laws and regulations;n Guidance regarding the division of roles and

responsibilities (and delegations of authority) for taxes within the organisation – clearly communicating the role of group tax and others in the management of specific taxes across the different divisions and geographies;

n Requirement that all planning opportunities be assessed by standard risk criteria, escalated to the appropriate level of authority and, if implemented, managed in accordance with group policy; and

n Openness and honesty when dealing with revenue authorities – including timing and level of disclosure.

It is worth emphasising the importance of aligning the above with existing group standards. One client we worked with discovered their group policies included a requirement for all staff to ‘comply with the spirit and letter of all UK law at all times’ only when developing their tax policy. The reference to the ‘spirit of the law’ made the Tax Director uncomfortable and so they developed further guidance to help the team understand its significance in the context of tax.

In addition, the policy may include high-level expectations regarding, among other things, pricing of intercompany transactions, financial reporting of tax, people management and use of advisors and technology. Whatever the content, to provide an effective first layer of the risk framework, the tax governance statement should be endorsed by the Board or senior management (and periodically reviewed), communicated to staff, adherence monitored and exceptions followed up. Many groups find the launch of a new tax strategy or governance statement to be a good time to reinforce the importance of tax to the organisation and the role of everyone in its effective management.

Tax activitiesEach tax activity will have specific policies, procedures, methodologies and tools which control relevant tax risks. For example:n For planning: a key objective would be

that uncertainties relating to structured transactions are managed such that the anticipated result is likely to be secured. The specific controls that would look to achieve that could include: policies governing and tools enabling selection, design, implementation, maintenance and defence of transactions.

n For indirect tax compliance: a key objective would be to ensure the integrity and accuracy of the relevant VAT processes and systems. Relevant controls would then include: defined procedures for gathering, analysing and reporting data for VAT return purposes as well as maintenance of customer and other master data which may impact on VAT determination.

n For tax authority enquiries: a key objective would be to ensure that tax data and other information requested by the authorities is provided in a complete, timely and controlled manner. To this end controls may include protocols setting out how documentation should be retained, stored, reviewed and provided to tax authorities.

The specific nature of the controls will vary within an organisation depending on who is operating them and where. For example, policies and systems in place within an offshore shared service centre will be far more detailed, process-driven and documentation-heavy than those for a small team of international tax planners based in the corporate centre where principles-based guidance would be more appropriate. Variations may also be driven by the specific needs of a business division, eg, the need to manage Insurance Premium Taxes in a business that underwrites corporate risks, or jurisdiction, where tax legislation and authority practice can clearly differ from location to location.

If well designed, such controls should support proactive tax management and not act just as a brake. One client we assisted with the development of controls around planning found that, once in place, more and better ideas emerged and were implemented. This was because many people in the business assumed it was more conservative than the Board actually wanted. Clarifying this through a stated strategy and reflecting this in the tools they used to assess planning ideas meant that tax staff were encouraged to bring new ideas to the table.

Tax operationsInformed by the tone from the top, the ‘tax operations’ is the people, processes and systems through which the tax activities are delivered. Establishing this infrastructure in an appropriate way is critical in enabling the tax strategy to

Figure 2: Unlocking tax value – the tax lever (courtesy of Citigroup Investment Research, 2008)

Creating value through tax rate reductions

Increase sales

Reduce tax rate

9% fall in tax rate Equates to…8.7% annual increase in

revenue

Each tax activity will have specific policies, procedures, method-ologies and tools which control relevant tax risks.

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be delivered and the associated risk effectively managed. Considerations at this level of the framework would include:n Organisation: centralisation versus

decentralisation of tax resource; use of shared service centres; near/off-shoring; outsourcing.

n People: requirements (skills, experience, qualifications); recruitment; performance management and incentivisation; development and training.

n Information and data: knowledge management; tax data warehouses; intranet and portals; XBRL and efiling.

n Process and systems: set-up and maintenance of ERP and accounting systems; use of bolt-on technologies (eg, for tax reporting, financial statements); tax return technologies; workflow systems.

The final element of the infrastructure is risk control itself. Part of risk control involves reviewing the existence and effectiveness of the controls that make up the overall framework, identifying gaps and issues and ensuring that there is appropriate follow-up. A further part is the process that enables the organisation to identify, evaluate, manage and report new tax risks and ensure they are incorporated into the framework on an ongoing basis. Such reviews

and processes can be carried out through self-assessment, internal or external exercises. Whoever does the review the key is that the risks identified are owned, and actively managed with regular update reports.

Balancing value and riskThe developing economic, legislative and regulatory environment presents significant tax challenges to large businesses. Leading organisations are ensuring that they have a clear strategy to manage the threats and opportunities that these challenges present, aligning this with their wider corporate goals and ensuring that they have buy-in from the Board. These organisations recognise that strategic decisions to reduce tax cost, eg, through tax-efficient supply chains, increase the level of tax risk as the activities which underpin the strategy’s success lie outside the direct control of the tax function. To manage this increased level risk, these companies are developing control frameworks which position them better to control tax-related activity wherever it occurs and identify and address risks as they arise. Businesses that can get the balance of strategy and risk right will have a competitive advantage over their peers as they are able to consistently deliver value through the effective management of their taxes. ■

The key is that the risks identified are owned, and actively managed

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I t has been hard to miss the promotion of HMRC’s new electronic filing format, iXBRL, as a potentially efficient filing

mechanism carrying with it promises of future transformation for both the regulator and filers. But will its mandatory introduction in April 2011 ultimately leave UK companies better off from the opportunities created or are there longer term challenges being obscured by the rush to ensure immediate compliance?

Failure to recognise and address the less obvious challenges up front is likely to cause unnecessary disruption and cost later. At the same time, understanding the opportunities that iXBRL could bring to current processes and technologies gives tax, finance and IT functions the chance to build real value into the otherwise complex and involved new process of adopting the new standard.

Current iXBRL challengesIn the short term, most organisations are implementing strategies around inline XBRL (iXBRL) to maintain the status quo. The established use of corporation tax software by companies and tax agents will mean that generating iXBRL tax computations will not be a major undertaking. Therefore, tax and finance professionals are heavily focused on the immediate statutory accounts challenges presented by the HMRC’s new filing format:n Does the responsibility for iXBRL filings sit

with the finance or tax function?n What implementation options make most

sense: software bolted on to existing processes, more integrated solutions or outsourced tagging?

n When should preparation and testing begin?n What quality standard is required during the

HMRC ‘light touch’ approach to filing in the first two years? To help adoption of the new

requirements, HMRC has designated the first two years of electronic filing as a transitional ‘soft landing’ period and will not seek to penalise companies that have made best efforts to comply with the new requirements.

n How are taxonomies mapped to statutory accounts? How is consistency of ‘tagging’ achieved between multiple entities? How are the HMRC ‘minimum tagging lists’ for the UK GAAP, UK-IFRS and corporation tax computational taxonomies best used?

While it is understandable that businesses focus on these immediate questions, they would also be sensible to consider some future issues that could lead to compliance difficulties later.

Upcoming challengesRegulatory change and uncertaintyFrom April 2011, electronic corporation tax filing to HMRC becomes mandatory. In addition, the UK Accounting Standards Board has proposed the transition to a new UK GAAP (based on IFRS accounting standards) by 2013.

Companies are reluctant to introduce multiple changes to their underlying accounts production process given the uncertainty concerning the timing and the significance of changes to the introduction of IFRS. This is compounded by the introduction of iXBRL: will any process changes made to accommodate iXBRL under current UK GAAP have to be repeated once it is replaced?

XBRL/iXBRL is fast becoming the ‘de facto’ standard for electronic filing; however localised efforts differ from country to country. For example, extensions to the underlying taxonomy, while required in the US are not available in the UK. The two countries even use different versions of the IFRS tagging definitions (the taxonomies). The UK uses a greatly modified IFRS taxonomy, adapting it to common practice reporting purposes and adding industry-specific tags.

Other UK regulators are also supporting the use of iXBRL. Companies House is introducing an iXBRL filing platform, aligning it with HMRC but not mandating its use yet. As a result companies are left with the dilemma of whether or not to electronically file their statutory accounts to Companies House with little incentive being provided to do so.

Quality considerationsFor HMRC, the advantage of iXBRL is the availability of tagged, and therefore comparable, electronic data. While their filing does not require assurance on tagging, the information submitted will be available for analysis and scrutiny against the wider population of company submissions. It follows that ensuring the accuracy of the submitted iXBRL is very important.

In the US, XBRL filings to the SEC are publically available. Given the wide range of users of this information, companies are beginning to involve

AnalysisiXBRL: its future impactSPEED READ Will the mandatory introduction of iXBRL in April 2011 ultimately leave UK companies better off from the opportunities created or are there longer term challenges being obscured by the rush to ensure immediate compliance? UK companies are focused on the immediate task of complying with HMRC’s mandatory electronic requirements and the short-term challenges that this brings. However, the longer term implications of iXBRL should not be ignored by tax, finance and IT functions. The adoption of iXBRL could provide real opportunities to transform tax compliance, reporting and accounts production.

Demian de Souza is part of the Deloitte iXBRL team. He has over 10 years experience of helping tax departments implement compliance technologies and is currently focused on helping businesses prepare for the introduction of mandatory electronic filing to HMRC. Email: ddesouza@deloitte.co.uk; tel: 020 7303 3241.

There is an SAO impact where iXBRL tagging problems lead to an incorrect calculation of the company’s tax liabilities

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their auditors in assuring their tagging decisions are appropriate. At present, the iXBRL data filed with HMRC is private, and submission to Companies House is not yet compulsory; however the greatest value of iXBRL to Companies House is in making this information available in its electronic format, so the quality of what’s sent then becomes more significant.

In many of the UK’s largest groups, tax departments are also now complying with the Senior Accounting Office (SAO) legislation. This requires internal sign-off that appropriate tax accounting arrangements have been established and are maintained. HMRC has made it clear that to the extent that iXBRL is an exercise in tagging data calculated elsewhere, it does not directly interact with SAO sign-off.

However, it is also clear that there is an SAO impact where iXBRL tagging problems lead to an incorrect calculation of the company’s tax liabilities.

Companies should therefore be considering their processes around iXBRL submissions and determine what level of additional review and validation is needed to:n understand and address the risks associated

with iXBRL-tagged financial information;n obtain assurance relating to the accuracy,

quality and reliability of iXBRL-tagged financial information.

Ongoing maintenanceThe ongoing compliance obligations once the initial iXBRL filing exercise is complete are not fully understood by most businesses. iXBRL production adds layers of complexity on to the traditional financial and tax close process and rollover to the next reporting period.

Any change to underlying tax or financial reporting regulations, must be reflected not only in the reports and filings, but also in regular releases of the taxonomies supporting them.

Currently, applications consuming documents mapped to different versions of the XBRL taxonomies interpret the taxonomies and the data points mapped to them as different concepts. For example, the disclosure for Net Profit mapped to the 2010 IFRS taxonomy is an entirely different concept to the disclosure for Net Profit mapped to the 2009 version.

At this time there is no mechanism for managing compatibility between different XBRL taxonomies. It is presumptuous to expect that the iXBRL software will deal with any roll forward and automate all new mappings, especially as preparers are ultimately responsible for them and real judgment is involved. This puts an emphasis on maintaining a detailed record of the tagging decisions and the reasons behind them so as to support necessary future changes.

OpportunitiesAlthough the immediate challenge of presenting accounts in iXBRL is seen by many as a

compliance burden, there should be real benefits to iXBRL in the longer term.

In 2010, most UK organisations are implementing short-term strategies around iXBRL; however the more informed are already thinking about what the future technology and reporting landscape will look like. Over the next two to three years, software in the iXBRL market will become more sophisticated, integrated and functional – allowing the focus to shift from simply generating iXBRL to its consumption and use.

Accounts production and process improvement?iXBRL forces companies to focus on the processes of financial reporting when considering their implementation options. The detail of the mapping, tagging and review puts the nature and quality of disclosure, as well as existing systems and processes, under the microscope. iXBRL will provide many with the opportunity to review and improve traditionally ‘piecemeal’ financial reporting processes.

A recent Deloitte survey showed that 80% of respondents prepare their accounts in Excel or Word, and 84% of these are in UK GAAP. For the majority of these companies, building a more sustainable IFRS based platform for accounts production that makes the best use of iXBRL is a question of ‘when’ rather than ‘if ’.

An obvious iXBRL alternative to the current mechanisms for accounts preparation is the use of accounts production software. Most organisations already use specialist software for tax compliance, but choose to retain Word and Excel for accounts due to the flexibility and ease of preparation of disclosure they provide. Accounts production tools have generally only prospered in the accountancy practice domain, however many corporates are now evaluating the accounts production software on the market to see if their disclosures can be prepared in a more automated way, using a tool which will do the majority of iXBRL tagging on their behalf.

This sort of software typically requires mapping from a source trial balance into their own account codes. Disclosures are built up through a series of templates, and journals are raised within the software to manage adjustments to the final disclosures. The products vary in their flexibility and typically the tools that enable a great deal of customisation require more user input for initial implementation of templates (which in turn means more work to complete and review the iXBRL tagging). In contrast, the software products which

The ongoing compliance obligations once the initial iXBRL filing exercise is complete are not fully understood by most businesses

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provide disclosure ‘out the box’ can be harder to adapt to company specific style changes in structure and ordering.

However, putting the immediate issues aside, these sorts of tools will be well placed to enable accounts production automation and integration with the tax compliance process as part of projects aimed at achieving the lowest cost, sustainable solution.

Common Global Standards: iXBRL and IFRS working together?Given that iXBRL and IFRS are both global standards, with increasing regulator adoption worldwide, it is time for finance and tax functions to consider the opportunities and benefits of aligning to these standards within their organisations.

From a tax reporting point of view, the key barriers to globalisation have been the lack of universally applied standards for tax accounting methods, communications and quality controls. Most companies have developed effective approaches for managing reporting risks and requirements locally, but fewer have done the same globally.

However, the move to IFRS-based accounting standards leads to a standardised framework for tax reporting, and iXBRL provides the common electronic global standard to underpin this reporting.

The greatest power of iXBRL comes from embedding it as early in the financial process as possible. The global XBRL consortium has produced a ‘Global Ledger’ taxonomy, which is independent of particular reporting standards and systems. This particular taxonomy is intended to enable the efficient handling of financial data and business contained within an organisation, often scattered around many accounting systems. The taxonomy maps this data and through its standardised tags provides the link between financial reports and the detail behind them.

Some commentators suggest that through the integration of XBRL into the global financial reporting process, a company can streamline and automate the creation and validation of all their financial and management reporting. This would act to reduce typically laborious and error-prone manual reporting processes on an ambitious scale.

All this points to increased visibility of financial information on an international basis, both within groups and externally. IFRS and iXBRL together could provide a framework around tax reporting and other financial information that enables companies to perform comparative analysis and industry benchmarking much more easily.

Automating the tax process?In addition to driving improvements in financial and tax reporting there are some that advocate more fundamental uses for iXBRL. The starting point for the Corporate Tax computation is the accounts and trial balance, but the preparation, review and completion process tend to be

segregated due to the different technologies and people involved.

Certainly there is a significant amount of information included in both the computation and the accounts and the challenge is to determine how to best automate the process of preparing tax computations using iXBRL tagged source data and statutory accounts.

The reality is that the specific requirements of tax compliance (for example, the calculation of capital allowances) and the different data sources it relies on will continue to act as stumbling blocks in the near term, but iXBRL certainly brings the prospect of real automation closer.

Going beyond complianceAvailability of iXBRL data has the potential to provide the platform for the ‘ultimate’ self-assessment: where data across group companies is readily available to be compared, analysed and benchmarked internally, accessed by consultancies and business service providers, or used by company auditors. iXBRL-tagged data facilitates the automation of data validation and analysis, reducing time consuming collation and re-entry of information.

The objective is for the same iXBRL data to be used for internal management reporting, as well as compliance with both accounts and tax regulators on a local and global level. This ‘enabled reuse’ of data is one of the ultimate goals of the creators of XBRL, however it is yet to be fully realised by most businesses. To date, the more immediate gains have been recognised by regulators forcing the adoption of the standard.

iXBRL may also prove to be the standard for transferring, collecting or consolidating data from multiple disparate source systems. For example, If countries continue to move to report in IFRS for entity only accounts and choose to implement iXBRL enabled systems, then consolidation for tax reporting purposes is supported on a global scale with a reduced need for local GAAP adjustments and less of the frustrations around transferring information through a series of disparate system interfaces.

Is iXBRL the future?UK companies are correctly focused on the immediate task of complying with HMRC’s mandatory electronic requirements and the short term process and technology challenges that this brings. However, it is also clear that in addressing the immediate issues, the longer term implications of iXBRL cannot be entirely put to one side.

Providing the technologies continue to develop, the adoption of iXBRL will provide real opportunities to transform tax compliance, reporting and accounts production. How effectively these are realised for companies depends on their awareness of the bigger issues and opportunities created, as well as the appetite of their tax, finance and IT functions to embrace the new standards as willingly as the global regulators. ■

For related reading, visit

www.taxjournal.com:

Tax reporting: an in-house perspective (Nick Watson, 18.11.10)

Budget comment: reducing the compliance burden (Mike Sufrin, 5.4.10)

Tax consulting 2.0 (Chris Walsh, 15.3.10)

The SAO regime in practice (Alan McPherson, 1.3.10)

18 October 2010 ~ www.taxjournal.com 9

Analysis The future of tax data

analyticsSPEED READ Tax is entering the world of electronic data. In the UK from the 1 April 2011 all corporate tax returns will be filed in an electronic tagged format. The existence of such a large volume of tax data will present opportunities to use the tools and techniques of data analytics to create a new discipline ‘Tax Data Analytics’. This can enable practitioners to quantify the tax benefits available to them, to eliminate manual investigation of fact patterns, to assess possibilities and to decide where to focus resources for maximum benefit quickly and effectively.

Albert Fleming is a Tax Partner at Deloitte. He is part of the Deloitte Tax Management Consulting practice and specialises in tax technology implementation and advice. Email: afleming@deloitte.co.uk; tel: 020 7303 0467.

‘The volume of data in the world doubles every 18 months. The opportunity of the century is to create insights out of all this data … allowing billions of records of data to be analyzed at the speed of thought.’ SAP Co-CEO Bill McDermott.

Technologists and consultants have talked excitedly about data analytics and business intelligence for some time and theorised on how businesses could make a step change in performance if they could use the data generated through serving customers and running their businesses to make better business decisions.

Tax is now entering the world of electronic data. In many jurisdictions tax authorities have introduced electronic filing for tax returns (eg, US, Germany, UK and The Netherlands) and public company filings to regulators are following a similar trend. Tax authorities and other regulatory bodies will soon have access to a significant volume of data from company accounts to tax computations and filings. The emergence of eXtensible Business Reporting Language (XBRL) as the language for the electronic communication of business and financial information is revolutionising reporting around the world and will open the door to data analytics for tax.

The technology tools for capturing and analysing large volumes of data are rapidly becoming more sophisticated and accessible to the non-technical user. As the volume of data has increased there has been a notable advance in the business intelligence, data mining and data analytics technologies. Consolidation in the software market has been led by the desire of the Enterprise system vendors to add data analytics and business reporting capabilities to their offerings. So, in the past few years IBM purchased Cognos, SAP added Business Objects to its portfolio and Oracle acquired Hyperion.

What is tax data analytics?Analytics is a term which has evolved in the market to describe the combination of skills, technologies, applications and practices for continuous, iterative

exploration and investigation of data. This data could be structured (databases) and unstructured text (documents); financial and non-financial; proprietary and third party. Analytics involves both predictive and exploratory modelling of data with the goal of highlighting useful information/trends, suggesting conclusions and supporting decision making.

With large volumes of data, analytic techniques can be used to predict trends and gain insight into consumer behaviour. Researchers at Hewlett Packard analysed posts to the micro-blogging service Twitter to try to predict the future box-office takings of a blockbuster film. After the numbers were crunched on nearly three million Twitter updates and factoring in the date of the movie's release and the number of theatres in which it was released, the Twitter method proved to have a 97.3% accuracy rate at predicting the opening weekend box office takings of the film, making it the most accurate prediction available.

Analytics can support decision-making in a wide and diverse range of areas. It represents a way of obtaining ‘hindsight’ (what happened?), ‘insight’ (why did it happen?) and ‘foresight’ (what happens next?) about operations. It allows us to look at an organisation from the ‘inside-out’ and take everyday information we capture during the course of business and turn it into actionable insight.

In the process of tax compliance huge amounts of data about an organisation are captured, augmented for tax and submitted to the tax authorities. With the move to XBRL that data will now be in an electronic form and be amenable to data analytic techniques. Tax Data Analytics is the process of reusing that data to gain insight about the tax processes and profile of the organisation.

Why are analytics important to tax?Analytics will become the part of the ‘next generation’ toolkit used by Revenue authorities and practitioners in industry and to assist in managing tax compliance:n Risk assessment: Through benchmarking the tax

profile against other companies and prior periods it will be possible to compare tax profiles of different organisations and identify risk triggers which could flag the company for a tax audit or enquiry.

n Reducing the risk of errors: Errors will become more obvious. If an error makes your figures appear large or small when benchmarked against those of similar organisations or prior periods, the figures can be quickly investigated. Where the figures are correct, they may suggest an opportunity for changes within the business that could improve its tax position.

n Identifying additional tax saving opportunities: Managing your cash tax payment is now more of a reality. Analytic techniques allow you to assess opportunities that arise either retrospectively or prospectively to identify which are best suited to your organisation and to react.

n Cost reduction efforts (via identification of process inefficiencies): Using data analytics to

In future the existence of electronic records for the entire tax compliance process will allow companies to quickly estimate and substantiate such tax claims [as Fleming claims]

www.taxjournal.com ~ 18 October 201010

identify repetition, reworking and manual steps in processes which can then be streamlined and automated.

n To develop the business case for future investment: Being able to demonstrate the impact of business decisions in tax terms will help to make those business decisions better informed.

Recently, the IBM analytics team rolled out a tool called ‘Tax Collections Optimizer’ which assists the revenue agency in collecting the maximum amount of tax by analysing data around case load, personnel available and the likely effectiveness of the collection effort. For instance, IBM’s software will tell a collections agent the best time to schedule a personal visit or when to call a delinquent debtor.

What tools should be in the standard tax data analytics toolkit?Currently there are few tools and technologies available to practitioners to analyse tax data. With the imminent move to full electronic filing and the XBRL tagging of all tax data, new approaches and techniques will emerge.

Tax benchmarkingFrom 1 April 2011 all UK corporate tax returns will be submitted in iXBRL, giving companies a standard tax data file, allowing their data to be compared against each other. This can be of great benefit and will facilitate insight and review of a company’s tax profile quickly and easily. Services will emerge to allow companies preparing a tax return to be able to carry out a ‘pre-filing check’ to establish where their data sits within a comparable population of data filed with the Inland Revenue. As a result, they will be able to undertake further investigation and ensure that they have appropriate support documentation available for amounts that appear at first glance to be high or low in the range of similar filed computations.

Tax trend analysisThe number and sophistication of opportunities in tax are increasing. But as they arise, they generate immediate scrutiny by the Revenue and the time available for companies to take advantage of opportunities is short. Tax practitioners need to become faster at assessing the potential benefit of new opportunities and moving to take advantage of them. This technique enables companies to better understand their tax data. At its simplest, this can be just a more intuitive presentation (rather than in the format of a standard tax computation or return).

Items of tax data in isolation tell a business little, but when compared with other data (for example the ratio of fixed asset additions qualifying for capital allowances) or with the same detail over a period of time, trends can emerge. These figures can be used to focus planning, forecast and budget activities. Once again the standard format of the XBRL tax filing will enable better analysis and reporting.

Tax predictive analysis and modellingThe pace of change in tax law means that it is important to be able to assess the impact of changes and take swift action in response. Fundamentals of UK law are being frequently challenged through EU legislation, often with retrospective effect and tight deadlines.

By defining a ‘tax query’ against a population of tax computations they can be reviewed automatically to highlight those with a certain fact pattern. This can be used to quantify the historic effect of the query and model the future benefit that a particular course of action might promote.

Cases like Mansworth v Jelley ([2003] STC 53) show the degree of sophistication and accuracy that search and retrieval applications could offer. As you will recall, the case had the effect of either decreasing capital gains or increasing capital losses arising from the exercise of unapproved share options and sale of shares. The Inland Revenue indicated that it would not appeal against the decision on 8 January 2003. That meant that individuals needed to make claims for 1996/97 by 31 January 2003 to take advantage of the decision. Given the short time period, ‘Predictive Analysis’ techniques would have been invaluable for anyone with a significant number of personal tax returns. Predictive analysis could have been used to quickly identify those tax returns which could be affected, together with an estimate of the potential tax repayment.

Tax data miningThe move to electronic data for tax returns and the widespread availability of electronic financial information will allow taxpayers and the Revenue to undertake more sophisticated tax audits and to better respond to requests for information and analysis.

In the case of Condé Nast/Fleming claims (see Fleming (t/a Bodycraft) v HMCE [2008] STC 324) for under-declared or overpaid VAT, they can potentially go back as far as the inception of VAT in 1973. In future the existence of electronic records for the entire tax compliance process will allow companies to quickly estimate and substantiate such tax claims.

ConclusionWe are only six months away from the introduction of XBRL filing for corporate tax returns in the UK. The existence of such a volume of detailed tax data will create a tax data analytics discipline. This presents a very real opportunity to most organisations and to the tax authorities.

Ultimately, it promises the possibility of considerable tax savings. However, it also offers tax practitioners a better understanding of the material components of the tax charge and an improved ability to develop and present proposals for managing that charge. Furthermore, it can enable practitioners to quantify the tax benefits available to them, to eliminate manual investigation of fact patterns, to assess possibilities and to decide where to focus resources for maximum benefit quickly and effectively. ■

For related reading, visit

www.taxjournal.com:

Fleming claims and restitution (David Southern, 16.9.10)

Tax consulting 2.0 (Chris Walsh, 15.3.10)

18 October 2010 ~ www.taxjournal.com 11

AnalysisFinance transformation

programmes SPEED READ The current financial climate is increasing the pressure for Finance Transformation programmes to deliver increasing levels of cash and efficiency savings. Tax can play a central role in providing those savings if the right focus and expertise is applied during the programme. The savings provided can be significant in their amount, low-risk in nature and usually arise on a recurring basis. These factors are all now changing the way that tax is interacting with Finance Transformation programmes – moving from the traditional model of being a peripheral end-user to being a key business partner within the process.

Rachel Taylor is a Director in Tax Management Consulting at Deloitte. She specialises in the tax aspects of Finance Transformation programmes and, in particular, in the configuration of financial accounting systems (SAP, Oracle, PeopleSoft, etc) for tax purposes (across corporate, indirect and employee taxes). Email: rtaylor@deloitte.co.uk; tel: 0207 007 9540.

T he drive to find cash and efficiency savings and to integrate diverse business and finance functions following a merger or

takeover (especially where this involves multiple jurisdictions and diverse business sectors) is leading to increasing number of businesses undertaking finance transformation programmes.

These programmes can cover a broad spectrum of activities, including implementation of a new ERP (Enterprise Resource Planning) system (such as SAP, Oracle, PeopleSoft), finance process improvements, business model enhancements, establishment of a Shared Service Centre or post-merger integration changes.

The demand from the Board for strong return on investment for such programmes has never been greater. The contribution that the tax can make to improving that return, both in cash and efficiency terms, is significant and should be one of the key considerations as part of any Finance Transformation.

The need for high quality tax solutionsIncluding tax within a Finance Transformation programme is now increasingly recognised as essential for a number of reasons, in particular because of the way that external scrutiny of the quality of tax reporting within a business has increased significantly since the introduction of the Senior Accounting Officer (SAO) regulations. The historical position of tax functions being able to rely on the data that they received without having a thorough roadmap and understanding of its origin and calculation is no longer viable.

In addition, in light of the rapidly changing tax environment (for example, the introduction of the 2010 ‘VAT Package’ changes or the use of VAT rate changes by Governments as a response to the economic climate), financial systems and processes now have to be flexible enough to deal with these

potentially significant changes at relatively short notice.

Businesses are increasingly understanding that their accounting systems can play an integral part in identifying and capturing tax cash and cash-flow savings. These savings can arise across the full breadth of taxes, corporate tax, R&D tax credits, transfer pricing, capital allowances, VAT, customs and excise duties and employee taxes, and can be accessed by improving the quality and detail of the information available to the tax function from the core accounting systems. The cash savings that can be achieved are usually significant – often in the millions of pounds annually for large businesses.

The changing role of tax within finance transformationsThe driver for this change is an increasing awareness of both the ‘push’ and ‘pull’ elements of closer working between tax and the Finance Transformation teams; the ‘push’ element being how costly it can be to get the project wrong from a tax perspective and the ‘pull’ element being the huge tax savings that can be reaped with the right level of focus and expertise.

In addition, the tax function is increasingly recognised as the number one user of any accounting system, in terms of the volume, variety and impact of their interactions. Virtually every transaction within the accounting system will have a direct tax and/or an indirect tax impact. Tax also relies on information from a vast range of the standard accounting system modules across the full financial spectrum of data, taking in customer and vendor information, human resources data, procurement, invoicing, etc.

In addition, there is the compelling fact that taxes (across corporate tax, employee and VAT) can equate to a significant percentage of net income. Any actions that can work towards ensuring that the right amount of tax, but no more, is paid should be high on the agenda of every organisation.

Involving tax from the startInvolvement from tax is best started from the very inception of Finance Transformation programmes – fundamental decisions are made at the vision and planning stages of the project that have a significant impact on how effectively tax can interact with the resulting systems and processes.Key tax considerations can include:n Have all tax requirements been appropriately

understood and included in the scope of the project?

n Have all opportunities for cash and efficiency savings been explored?

n Can the proposed systems deal with all tax calculation and reporting requirements as standard and automated?

n Will additional software be required – eg, a tax engine, tax accounting software, etc?

n If a global template is being used, how will this be flexed for individual country requirements?

n What level of automation and logic will be

Including Tax within a Finance Transform-ation programme is now increasingly recognised as essential

www.taxjournal.com ~ 18 October 201012

involved in the determination of tax calculations and how will these be achieved in the system?

It is sometimes unclear to Tax Directors what level of involvement and impact they can have with Finance Transformation programmes. All too often, the view is that they will not be able to influence the scope and content to any appreciable degree, so the outcome is that they have a ‘light touch’ involvement with some initial ‘requirements gathering’ workshops. They then have to wait months to see what the resulting system looks like for tax purposes – usually with non-transformational or disappointing results.

When we work with Tax Directors to get the most of these opportunities, we are able to provide guidance on how best to engage with the project team, what the options are for excellence in leading-edge solutions, what the appropriate resourcing levels are for tax within the project and what the cash and efficiency savings could look like for their particular business. An overview of what the potential benefits might look like can usually be achieved in a short period of time by leveraging experiences of past projects.

The cost and upheaval of considering these questions once key decisions have been made could be so significant that any later changes become economically unjustifiable.

In that event, work-arounds can be the only solution; however, these may not only be expensive to design and implement (invariably being bespoke in nature), but are also unsupported during subsequent upgrades or rollouts. Work-arounds add increased costs throughout the life of the underlying software system and generally have fewer controls around them than an embedded solution.

Often a Tax Director can be left uncertain as to how to engage most effectively with the Finance Transformation programme through lack of visibility over what the potential tax enhancements would look like in practice or unfamiliarity with large-scale change projects. In that situation, an experienced tax implementation adviser can provide invaluable insights into how best the opportunities can be maximised.

The evidence for tax involvementOften the costs of a lack of involvement from tax are masked by the fact that a system may appear to be operating correctly. However, whether that system is actually providing accurate information or operating in an efficient manner is not generally visible without closer inspection. That closer inspection can only be done by performing a review of the set-up and functionality of the system from a tax perspective.

The results of such a review can be eye-opening. Deloitte regularly works with clients to perform standard reviews of accounting systems to assess their operation against both leading practice and the specific client needs. In 100% of cases, we have been able to identify efficiencies or improvements that the

client could achieve. Of those reviews, approximately 10-15% identified significant changes that could be put in place to fundamentally improve or enhance the way that the system was currently operating.Common issues include:n Incorrect tax calculations being performed

in the system – leading to extensive use of spreadsheets, multiple adjustments and/or highly manual processes to support the final tax reporting;

n Inability to deal correctly with local country compliance requirements, cross-border transactions, Incoterms, differentiation between goods and services, foreign VAT registrations, etc;

n Manual selection of tax treatment for transactions – this usually occurs because the full automation potential of the ERP system has not been maximised;

n Incomplete and inaccurate master data (i.e. standing information held in the system on customers, suppliers, products, pricing, etc.);

n Lack of detail to support corporate tax decisions or calculations – the most common areas we encounter include inadequate data as standard for transfer pricing adjustments; insufficient detail on fixed asset transactions; inability to report on Research & Development (R&D) activities; lack of automated reports showing P&L analysis across common adjustments (legal and professional fees, entertaining, marketing, etc.);

n Inefficient reporting for such areas as VAT returns, EC Sales List, Intrastat and reconciliations between the different reports.

There is a growing appreciation that the maximisation of a Finance Transformation programme for tax purposes requires a specialist and experienced skillset to ensure that all potential savings are identified and delivered as part of an integrated tax workstream.

Some tax functions may be able to both recognise and articulate the need for involvement from tax in Finance Transformation projects. Usually, for that to happen effectively, there needs to be resource with knowledge of the inherent functionality of the ERP system; the ability to commit large periods of time (often over a period of a year or more); and access to the decision-makers within the Finance Transformation project team at the appropriate time. Despite this large shopping list, the benefits invariably significantly outweigh the costs and it is necessary for this resource to be found, either in-house or with an experienced external partner.

Adding value at every stageThe value that the tax function can add during a project is not confined to one stage of the implementation; the benefits start with the vision and planning phases and run right through to full rollout and operation.

It is sometimes unclear to Tax Directors what level of involvement and impact they can have with Finance Transform-ation programmes

18 October 2010 ~ www.taxjournal.com 13

Vision and planningConnecting with the C-Suite (CEO, CFO, CIO, etc) is critical to creating a value-focussed vision and to obtain senior management commitment. Designing the business case on a tax-sensitised basis can often highlight significant cash savings, increase the Return on Investment for the project and also align the project to business goals around governance, risk and compliance.

Design and buildThe design of the project should facilitate and enhance the overall business objectives by embedding key tax requirements into the system. These requirements should be viewed in the widest sense and not just restricted to existing reports; there is a huge opportunity at this stage to add value in terms of both efficiencies and cash savings (for example, sensitising the data to allow collection of sufficient data for R&D claim purposes or appropriate data capture for optimisation of payments of transaction taxes).

Deliver and operateThe value that tax can add does not stop at designing leading-edge systems and processes; the tax function has a key role to play in ensuring that the system remains tax efficient post-implementation. The tax landscape is constantly changing, with new

opportunities and risks continuously arising. With the proper collaboration between tax and finance, these changes can be appropriately reflected in the systems and processes, vastly reducing risk and greatly increasing value to the business.

This collaboration needs regular and informed communication between tax and the finance and IT functions within a business, so that all required changes or enhancements can be properly understood, scoped and incorporated into the overall business operations in a managed and controlled way.

Looking to the futureLooking forward, the demand for increased cost savings and efficiencies from the Board will continue to increase. The maximisation of tax benefits within a Finance Transformation programme is a powerful tool to deliver on the increasing need to identify new value for the business.

A Finance Transformation is the perfect opportunity for tax to create huge value to the business and ensure that compliance is safeguarded.

Together the tax and finance teams can deliver genuine value and cost savings to the organisation as a whole; improve the operational experience post-implementation; increase accuracy and efficiency of financial reporting and significantly enhance governance and control. ■

The value that tax can add does not stop at designing leading-edge systems and processes

www.taxjournal.com ~ 18 October 201014

E -invoicing is ‘the ability to issue, receive and archive invoices in an electronic way, taking into account requirements from

the local tax authorities’. It can reduce overhead and storage costs, improve supplier relationships with clients, minimise accounting mistakes and, most obviously, speed up the invoicing process. E-invoicing has been available for more than a decade, but has only recently begun to generate real enthusiasm from the business community, largely due to the variety of solutions now available, and a clearer articulation of the cost and process benefits. Organisations are now moving towards e-invoicing in larger numbers, recognising that the technology will start to replace traditional paper-based invoicing over the coming years.

From a VAT perspective, the invoice, either in paper or in electronic format, is the key element reflecting the business’ compliance with VAT legislation and guaranteeing its right to deduct VAT. Therefore, implementing e-invoicing requires, in addition to an obvious IT know-how, significant care to ensure compliance with VAT legislation. This becomes even more important when doing business in an international context and it is in this field that many of the challenges lie.

Although e-invoicing legislation seems rather simple at first glance, disparate domestic measures across the EU, added to the difficulty for businesses to determine which Member State’s legislation applies to them, has hindered a faster expansion of the process. However, actions at the EU level to tackle the obstacles that EU VAT legislation still imposes on e-invoicing could change this.

European legislation: the state of playAccording to the current EU legislation, invoices can be sent by electronic means ‘subject to the customer’s acceptance’ and provided that ‘the authenticity of the origin and the integrity of the content can be guaranteed’. Until recently, this authenticity and integrity could be secured by using an advanced digital signature, electronic data interchange (EDI) or any other means accepted by the countries concerned.

Member States can impose supplementary requirements to those listed above, eg, an additional paper summary in the case of EDI invoicing or the use of a qualified certificate when using a digital signature. Member states can also impose specific conditions where electronic invoices originate from non-convention countries.

Domestic landscape: where do we stand? The practicality of e-invoicing varies from one country to another because of the f lexibility available to the Member States discussed above. As a result, companies using cross-

border e-invoicing must abide by both foreign and domestic rules in order to remain fully compliant. Cross-border invoicing is therefore seen as a major obstacle for efficient use of e-invoicing by European multinationals. Companies are trapped in a web of domestic and foreign rules and often have difficulty assessing which legislation applies to them.

From a VAT perspective, the place of supply rules for goods and services will determine the applicable legislation for e-invoicing. Let us take the example of a German company, selling

and dispatching machinery spare parts to a UK business partner. On a regular basis, the German entity also provides IT consultancy services to this same client. From a VAT perspective, delivery of goods within the European Union is treated as ‘intra-EU supply’ taking place where the transport starts – in this case Germany. Since German VAT legislation applies to this sale, if an electronic invoice is used and digitally signed, the digital signature should be based on a qualified certificate and created by a secure signature creation device as set out in German VAT legislation.

For the IT services rendered, under the general ‘reverse-charge’ rule, a cross-border supply of

SPEED READ Recent legislation passed by the EU aims to simplify the current VAT compliance requirements in each Member State by 2013 through establishing a set of common rules that recognises paper and electronic invoices in the same way. While requirements around specific technology to guarantee the authenticity and origin of the invoice have been phased out in the new legislation, it still gives Member States the option to introduce differing requirements around the audit trail between the supplier and customer, which could prove challenging for cross-border business activity. However, it remains to be seen whether the national legislation that must be introduced across the EU by the end of 2012 will hinder or benefit businesses from a VAT perspective.

VAT focusVAT compliance

automation: E-invoicing

Marc Hoessels is a Tax Partner at Deloitte. He is responsible for the tax management consulting practice in Belgium and has more than 14 years of experience in indirect taxation for large multinationals (shared services and distribution centres). Marc is the responsible partner on e-invoicing and archiving. Email: mhoessels@deloitte.com; tel: + 32 2 600 67 10.

Following the new Directive, an invoice will be compliant and valid provided ‘a reliable audit trail between an invoice and a supply’ can be evidenced

18 October 2010 ~ www.taxjournal.com 15

services between business partners is located for VAT purposes where the customer has established its business – in this case the UK. According to UK VAT legislation, a digital signature or the use of EDI are no longer required, to the extent that the integrity of the contents of the invoice and the authenticity of the origin can be guaranteed.

This relatively simple example shows the extent to which multinational companies operating across borders are faced with differing, and sometimes contradictory, e-invoicing requirements based on the nature of the goods or services they supply.

Therefore, as part of its Action Programme to reduce business administrative costs by 25% by 2012 and tackle VAT fraud across the European Union, the European Commission acknowledged the necessity to reform the legislation and adopted, in early 2009, a proposal to amend and simplify EU rules on e-invoicing. It stressed the need to

treat electronic and paper invoices equally and remove additional requirements imposed by the Member States. The European Commission estimated that €18 billion of potential annual costs savings could be achieved across the Union by lessening administrative burdens linked to e-invoicing.

Simplicity ahead?As the next step in the e-invoicing harmonisation and simplification process the European Union adopted a Directive simplifying VAT invoicing requirements earlier this year, in particular as regards electronic invoicing. The new Directive sets out to ensure the acceptance by tax authorities of e-invoices under the same conditions as for paper invoices and to remove many of the current obstacles around e-invoicing. The new provisions enter into force from 1 January 2013.

UK legislation and guidance already seems to be in line with this new Directive. Indeed, the new Directive allows taxpayers to freely decide on the business controls around safeguarding authenticity of origin and the integrity of content by means of an audit trail.

However, following the new Directive, the requirement to guarantee authenticity and integrity is imposed on both electronic and paper invoices. Specific processing technologies,

such as EDI, can no longer be imposed on the business since an invoice would now be compliant to the extent the taxpayer can evidence that the authenticity of origin and the integrity of content are secured.

In this respect, businesses will face a new challenge. Following the new Directive, an invoice will be compliant and valid provided ‘a reliable audit trail between an invoice and a supply’ can be evidenced. A ‘reliable audit trail’ seems the new cornerstone for issuing compliant invoices (both for paper or electronic versions). There is, however, no guideline as how to define and measure this audit trail. Once again, audit rules will be determined on a domestic basis, imposing new barriers to invoicing in an international environment. National legislation will hopefully determine which documents should be retained by the supplier and customer in order to evidence the supply (for example the document flow between contract and payment receipt) throughout the entire storage period.

Underlying documentation requested by tax authorities could therefore vary from one country to another, bringing new administrative burdens to economic operators and penalising smaller undertakings for which keeping a ‘reliable audit trail’ can undermine the benefits of cross-border expansion.

A bright futureDespite the challenges e-invoicing is on the rise, and traditional paper invoicing is in decline. The significant benefits that it brings around lower processing cost per invoice, quicker payment for both supplier and customer, secure and robust invoicing processes and significantly reduced storage costs, mean that the commercial rationale for the introduction of this technology will often far outweigh the burden of navigating current and future VAT legislation in this area.

Although the current legislation regarding e-invoicing has not proven as clear and straightforward as the Directive would seem to indicate, it does represent a movement towards harmonisation and simplification.

However, the questions raised are important ones. Organisations looking to take advantage of this technology must navigate current legislation in order to guarantee authenticity and integrity, which can be defined differently across the Member States, whilst looking ahead to the national implementation of the changes announced this year to ensure that systems and processes are able to meet the new conditions.

Whilst there are challenges, we expect to see many companies over the coming months starting to build the case for e-invoicing from both an IT and tax perspective and put in place policies to ensure that VAT compliance is maintained throughout the process, allowing organisations to realise the full range of benefits that this technology offers. ■

For related reading, visit

www.taxjournal.com:

Fleming claims and restitution (David Southern, 16.9.10)

Tax consulting 2.0 (Chris Walsh, 15.3.10)

Although the current legislation regarding e-invoicing has not proven as clear and straightforward as the Directive would seem to indicate, it does represent a movement towards harmonisation and simplification