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The Murky Future of VAT and Corporate Income Tax Returns in the EU

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Jul 8th 2015
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Are traditional value-added tax (VAT) and corporate income tax returns doomed? The tax authorities in Europe – and beyond – hope so.

Advances in electronic reporting and file sharing may mean the end of these returns over the next 10 years. The tax man is able to directly peer into accounting systems and spot anomalies, as well as potentially calculate a company's VAT, employment tax, or corporate income tax liabilities in advance. The result? This would put companies in the position of having to defend their own tax liability calculations.

Currently, there are two initiatives driving this movement that are being progressed by European Union (EU) tax authorities: Standard Audit File for Tax and electronic ledgers.

Standard Audit File for Tax (SAF-T). SAF-T is an international electronic protocol that's being adopted by tax authorities to have companies report their taxable transactions. It enables fully automated data exchange between companies and the tax authorities. SAF-T was developed by the Organization for Economic Cooperation and Development (OECD) and is an XML standard format that captures data on invoices, purchase orders, payments, inventories, and fixed assets.

Several EU tax authorities have now adopted SAF-T into their tax audit procedures, including France, Portugal, Luxembourg, and Germany. Typically, prior to a formal tax audit, the tax office will request a full SAF-T report of the transactions covering the period under review.

SAF-T is important because it will empower tax inspectors to perform analytical reviews of a company's taxable transactions in advance of an audit – and potentially identify anomalies not reported in returns. This provides tax inspectors with a huge advantage over CFOs, or finance departments, ahead of any investigation.

Electronic ledgers. E-ledgers are complete downloads of all taxable transactions from a company's enterprise resource planning system, including invoice details and intra-community supplies on purchases and sales. The primary use of e-ledgers is to detect domestic and international VAT fraud. E-VAT ledger requirements have now been implemented in Estonia, Slovenia, Bulgaria, Slovakia, and Spain. The Czech Republic is next.

What is the End Game?
Both of these developments show the willpower of tax authorities to gain deep access to a company's accounting records and be on the front foot in terms of determining the correct taxable amount. For finance departments, it means there must be improved accuracy on the determination of taxable transactions and systems that get calculations right in real time. Improvements in tax engines and analytical tools must be achieved to keep ahead of the tax man.

About the author:
As the leader of Avalara's Global Tax Alliance, Richard Asquith helps businesses understand and manage their tax-compliance obligations as they enter or expand into new markets. Previously, he was with TMF Group, where he founded and led its global VAT practice for nearly 10 years. He began his career at KPMG in the United Kingdom and later joined Ernst & Young, working in Russia, Hungary, and France, assisting companies entering new markets. Contact Richard at [email protected].

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