Indirect digital VAT/GST compliance and tax administration ... · questions. I believe that the profession will reorganize itself by having indirect tax teams which specialize in:

Managing indirect taxes in the digital age

VAT/GST compliance and tax administration controls

New facilities and new controls: e-invoicing, e-filing and e-auditsAs businesses transform through digitization, VAT/GST compliance procedures and tax administration controls are also moving rapidly into the digital age. They are using technology to improve tax administration and facilitate taxpayer compliance. Most tax administrations now require electronic filing of periodic VAT/GST returns.

In addition, many are also requesting that taxpayers submit additional data electronically. Increasingly, tax administrations are allowing or imposing the use of e-invoicing for VAT/GST accounting. This is a useful tool for businesses, as e-invoices generally cost significantly less to produce and process than printed documents; at the same time e-invoices can also provide a useful source of data for tax administrations and a more transparent audit trail.

Tax and customs administrations are entering the digital ageEvery aspect of how tax and customs authorities operate is being transformed by technology — from the collection of taxpayer data to how tax and customs administrations conduct audits and inspections.

In some countries, such as Brazil and China, taxpayers submit detailed transactional information directly to the tax administration. In others, tax administrations collect and analyze a range of taxpayer information electronically through customs declarations, VAT/ GST returns and tax accounts. This detailed transactional data allow indirect tax auditors to build up an accurate picture of activity for individual traders and for whole industry sectors.

Electronic data processing audits (e-audits) are becoming the norm and some countries (such as France and Portugal) are imposing legal obligations on taxpayers to maintain standard tax audit files (e.g., SAF-T) for this purpose. Currently, there is no common standard format for data, which can add to the burden for multinational companies that must comply in multiple jurisdictions.

By using technology tax and customs administrations are able to carry out more audits, including more off-site and post-clearance audits, and perform them more efficiently and more thoroughly. As a result, e-audits may uncover more errors, leading to more assessments and higher penalties for taxpayers.

Even for formal errors, the sanctions for errors may be significant — especially when multiplied across years or if they are applied to individual tax invoices. Taxpayers and traders need to prepare to meet the challenge that e-audits present by focusing on indirect tax compliance and systems integrity.

Customized accounting systemsDigital companies generally employ large numbers of IT professionals who assist in building applications for every part of the business, including back office functions such as tax compliance. Due to their increasing involvement, a lot of the data collection related to indirect taxes may also no longer be performed by standard versions of ERP systems; instead, digital companies often make use of tailored-made systems or even use in-house programs created by their own engineers.

Using an in-house resource provides many benefits. But this approach can also bring unexpected pitfalls for indirect tax. For example, in-house systems may not comply with complex rules for determining tax liability, or with the data formats and data content demanded for standard audit files required in some countries.

In general, it can create risks that essential indirect tax data is not properly captured and that VAT/ GST reports are incomplete or incorrect. Digital companies need to involve tax specialists at the outset to assist them in developing in-house solutions, for example by navigating through the complexities of VAT/GST and international trade legislation and translating it into something that companies’ in-house IT engineers can build.

2 Managing indirect taxes in the digital age

Interview with a Global VAT Director in Europe

We interview a Global VAT director based in Europe about the five key areas where digital is impacting tax and identify three priorities for the future.

KnowledgeA lot of information about indirect tax is available in all sorts of formats. Unfortunately, this means that while there is more information available than at any time before, it has never been harder for a tax professional to combine and search across all these sources.

This is where advanced technologies can play a real role in improving indirect tax knowledge. There are two ways forward here. One is that all knowledge providers can agree on a standard, digitized, meta-tagged format which businesses can host in a knowledge warehouse. Sophisticated intelligent search engines can then be developed to access this data. However, I fear that this is unlikely.

What is more likely is that new artificial intelligence (AI) software will make relationship links between unstructured data and, relatively rapidly, will be able to answer questions from these disparate pools of information. Initially, such AI would cover basic questions, but as time goes by, it would be able to address more complex questions.

Governments’ use of digitalGovernments are looking at digital means to mitigate fraud and reduce costs. However, invariably there will be different platforms, systems and data requests, even within the EU, which could not standardize a simple thing like a VAT return. The result will be a burdensome cost to business as it meets these myriad demands.

I am not concerned about transparency as tax authorities can demand data already, but I am concerned that tax authorities will want more and more information without any reduction in the burden to business.

I can foresee a transitional period whereby we move from traditional tax audits to the future automated tax audits where tax authorities will prepare the VAT return automatically from data uploaded electronically, and they will send it to the business to confirm. Traditionally, businesses reconcile VAT returns back to general ledger and subledger — an internal process and check.

In the future (and already in countries such as China and Brazil), the process will be to reconcile to external data. In this era, a business will need to be on top of its data, using sophisticated checks to ensure accuracy and to reconcile to the tax authorities’ calculations. Creating certainty will be a cost to business, which will not be helped by a lack of standardization by different tax authorities on what they require and in what format.

Business modelsImpact on business: Digital is an additional cost-driver tool as it increases the ability to automate routine repetitive processes, allowing focus to move to interpretation of detailed analysis, quality checks and analysis of commercial structures, which themselves will be carried out digitally. Again this is where a data warehouse is necessary to hold all the relevant information.Digital automation will allow a business to be compliant and be able to react quickly.

Digital is affecting business models dramatically. A key focus here is the Industrial Internet of Things (IIoT). Traditionally, companies such as ours have been a manufacturer of “kit,” or equipment, but in the future, it will build software platforms on which industrial apps can sit. These apps will monitor the “kit” and link them to other machines via sensors enabling customers to use their equipment much more efficiently.

ERP systems, tax enginesERP systems and tax engines are now well-established digital tools that a VAT manager can use. However, what is very frustrating is that there is no global set of rules which cover all countries.

While tax engines are good, they only work for the countries which are currently supported. For developing economies, like Africa, which is becoming a major market, tax engine providers will only respond to demand, so entry into these markets is a burdensome cost from a compliance point of view.

No information is available in a digital format on the tax rules around the world, unlike the US, where the rules for 7,000 tax jurisdictions are available on a CD-ROM/DVD.

Data warehousingBusinesses need more information for indirect tax compliance than just the data held on ERP systems, and legacy systems are often short of the data attributes needed. Data warehousing is a developing concept that may provide an answer for collecting, collating and formatting digital reports for governments and for enabling sophisticated data analysis for the business.

The value of data warehousing can be enhanced by combining knowledge from different sources. For example, by augmenting ERP data relating to customs with information about free trade agreements and duty rates, sophisticated supply chain analysis can be made.

3Managing indirect taxes in the digital age

Interview

As an analogy, instead of just selling light bulbs, businesses will sell lighting solutions for a town with smart meters and sensors tracking traffic and crime. This means that businesses will inevitably move from being just manufacturers to being software developers and providers, moving from supplying goods to goods and services.

This means that in-house tax teams will be faced with a whole range of new challenges — trying to understand just what is happening, categorizing it and reporting it in the right country. Large established businesses will need to follow the practice of many start-up software enterprises by embedding teams to focus on a project and, if it fails, moving quickly onto new opportunities.

Digital tax strategy: Our company has appointed a Senior Automation Leader, with software IT teams looking at data warehousing and business models. It has also established a team looking at tax and new digital models. The objective is to be able to make more sophisticated commercial decisions in real time.

My own role has recently expanded to look at digital to try to understand what is happening and what the compliance consequences are. However, the big challenge here, from an indirect tax perspective, is that the legislation is lagging behind the technology.

I see a big change with how business and the profession manage knowledge. In the future, I see the profession offering an artificial intelligence subscription service which enables the client to ask a question which will be answered automatically after a sophisticated analysis of extensively linked digital knowledge databases.

This will cover basic questions initially, but the knowledge software will learn and develop itself to answer more complex questions. I believe that the profession will reorganize itself by having indirect tax teams which specialize in:

• ERP and tax engines• Data analysts and data warehouse

management experts• Consultants for more complex

questions and reviewing contracts• Knowledge management experts who

keep the knowledge software on its toes

Three priorities1 Data is now in a format that allows us to do whatever we want with it.

Identifying the correct universe of data attributes by which information is identified in a data warehouse will be critical.

2 Software as a service — analyzing the new software services to assess how they should be treated from an indirect tax perspective.

3 Keeping your mind open to new ways to approach problem solving using all the digitized tools that are available (or can be developed) will be the challenge — especially to those of us who have been in VAT for a number of years. We will look back in five years’ time and be amazed at just how manual and disjointed our current processes are.

The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.


Interview

Interview with Ivan Ozawa Ozai

We discuss the impact of digital with Ivan Ozawa Ozai, Associate Director of the Tax Advisory Office, Department of Treasury, State of Sao Paulo, Brazil and judge in the Administrative Tax Court of the State of Sao Paulo

The challenge was how to implement a common invoice template based on a harmonization of these regimes so that the digital reports and invoices could be shared with all the states via a single database. This was very important for allowing the authorities to monitor all the transactions in a supply chain, especially as so many of them are interstate transactions.

Gaining consensusAs you can imagine, getting consensus from the 27 states was a big challenge, especially as there is “tax competition” between the states. However, the federal government set up a committee in which all the 27 states were represented. It was not as if this was a totally new idea, as developing a common paper invoice template had been under consideration for some time before.

So, in moving to common electronic invoices introducing a common digital e-invoicing platform, much of the groundwork and trust were already in place. Thus, although there is tax competition between the states, when they can see the benefits that they will gain from the SPED project, there is a good level of cooperation.

New audits for a new eraThe Government needed to invest a great deal in the IT systems to operate SPED, which was a challenge in itself, but a far greater challenge was training the tax collectors and tax authority personnel in the new techniques and approaches resulting from the digital collection of data.

Traditionally, audits were carried out on-site by reviewing hard copy documents. SPED is a paperless system, so new audit procedures had to be designed and developed and be matched by appropriate training for the auditors.

This challenge is not just confined to the Government; it also applies to taxpayers. They must train their staff in the new techniques and processes, as well as invest in adapting their ERP systems to produce the data requested in the required format.

Benefits of SPED for the tax administration and taxpayersAs VAT is a transaction tax, the ability to “see” the invoicing online across the supply chain means that we are able to identify gaps in the VAT reporting far earlier than previously, almost effectively in real time. This enables us to focus our resources more effectively, and thus we can be more efficient and provide greater revenue security.

Taxpayers also benefit from the invoicing validation process — before an invoice can be issued, the taxpayer has to submit it to us for checking and validation. The taxpayer’s customer is thus assured of the validity of the invoice and in processing a VAT credit.

Proactive relationship with taxpayersThis level of transparency in SPED allows us to build a more collaborative relationship with taxpayers rather than it being a confrontational one. It allows us to focus more on preventive measures instead of repressive ones.

For example, SPED enables us to identify more easily both the common and exceptional errors that taxpayers make and advise taxpayers about them electronically far more quickly than through the traditional on-site audit. Thus the “lifetime” exposure to an error is considerably shorter with the resultant cost reduction in terms of the size of assessments and penalties.

Challenges in Brazil’s system, SPEDBrazil arguably is the leading country in the development of digital reporting by taxpayers and in the digital interaction between the different tax authorities in the country, at federal and state level.

The Brazilian system, known as SPED (Public Digital Bookkeeping System), was inspired by a similar project in Chile, and it was initiated in 2005. SPED encompasses three major projects: electronic invoicing, digital tax bookkeeping and digital accounting bookkeeping.

Invoice templateThe most difficult task initially was to develop a common invoice template suitable for all taxes. This was particularly challenging for VAT, which is a state tax in Brazil (levied in 27 states) rather than a federal tax based on one set of rules.


Interview

SPED will only be fully effective once all taxpayers are on the system, and that is one of the drivers in planning the future development of SPED.

Future development of SPEDThe SPED project is over 10 years old and it is not finished yet. The plan is that in the next 5 to 10 years, we will completely eliminate paper. A key is the spread of electronic invoicing, and, at the moment, industrial-sector taxpayers and wholesalers are completely e-invoice-based. Within five years, the largest

retailers will also operate completely e-invoice-based, and within 10 years, even the smallest retailer will use e-invoices.

In some respects, the goal to eliminate paper is self-fulfilling in that the use of e-invoicing will infiltrate at all levels as the larger taxpayers will insist on their suppliers e-invoicing them, and those suppliers will insist on their suppliers e-invoicing them and so on. As an aid (and encouragement) to take up e-invoicing, in the State of Sao Paulo, we have developed a free software system for smaller companies.

Another area where we are pursuing a proactive relationship with taxpayers is through our advanced tax ruling process. The ruling system was available before, but it was paper-based until 2012. Now, taxpayers can enter our tax portal and submit their ruling requests electronically. We respond by email, and overall it is faster and more accessible.

The number of tax ruling requests has tripled, which has given us another challenge as we have had to increase the number of personnel to meet this demand. This has not been easy because this team needs to be highly specialized since these rulings are binding and they are a point of reference for other taxpayers. For the last six to eight months, we have been publishing them on our website, which has improved our relationship further.

Tax auditsThe whole nature of tax audits has changed. The digital reporting and the submission of e-invoices by taxpayers for validation mean that we have a more efficient collection and analysis of taxpayers’ information. Having tax information in a digital format means that we can process tax provisions more quickly and accurately. As we can more easily identify errors, we can see how and where the legislation needs amending to close loopholes or provide clarification.

SPED has introduced a new dimension to our audits as these are now conducted primarily off-site. It requires a different breed of auditor with teams specializing in specific sectors and in interpreting data. It means that, for most taxpayers, we only go on-site if there is a particular issue that needs addressing.

As noted, we advise taxpayers of errors in advance of any on-site visit, which allows them time to make corrections. One big advantage of SPED is that it is giving much better information to help us identify and counter fraud. Indeed, this is one of the objectives behind the project: to reduce fraud and secure revenues.

Lessons for tax authorities in other countriesI believe that Brazil is in the forefront of digital reporting and is setting the world benchmark and a point of reference for other countries.

I think the key to the success we have achieved with SPED is that:

• We recognized that it is a long-term project, and we have built in sensible objectives and milestones.

• We achieved consensus through the Federal Committee, to which the 27 states were invited and represented in developing the key structures, the e-invoice template, the format for filing and the IT structure.

• We invested in our tax collectors and auditors because we recognized that the focus of audit would change, requiring new skills in the digital world.

• We cooperate closely with business, listening to their concerns, and we have adjusted timelines to give taxpayers time to adapt their systems and procedures, including training their personnel.

• We have demonstrated quickly how SPED is a benefit to taxpayers also, and not just the tax authorities. The relationship is collaborative.

• We rolled out SPED gradually by cascading the obligations from largest taxpayers down to the smaller taxpayers. This will allow SPED to extend to the smaller retail shops naturally before we bring them into the system compulsorily.

• Finally, underpinning SPED is standardization covering both federal and state obligations. Taxpayers have recognized that this eases their compliance costs, especially for businesses operating in multiple states.



Interview

Africa: navigating the various VAT regulations

Use of VAT technologyThere are 54 countries in Africa and no real harmonization of value-added tax (VAT). One country may require preprinted paper documents, with pink slips attached to invoices stamped by officials, while a neighboring country may require everything to be digital. That creates challenges for multinational companies that operate in the region, making it difficult to centralize VAT compliance and control procedures.

When talking about VAT and technology in the region, I often use the word “leapfrogging.” The example that springs to mind is Kenya, which introduced electronic fiscal devices (EFDs) in 2005 and requires every company to have one. It records each sale and sends information to the tax authorities.

But the receipt of the EFD must be produced for an invoice to be valid for input VAT deduction, so the system remains a mix of paper and digital. A number of other countries have introduced EFDs in Africa, including Tanzania in 2010, Zimbabwe in 2010, Rwanda in 2014 and Malawi in 2014. Mozambique is currently considering introducing them.

However, with tax modernization, EFDs are almost outdated. From 2013, Kenya has had an i-tax system (integrated electronic tax filing). Since August 2015, taxpayers who are not registered under i-tax cannot file tax returns. Now that both the seller and the purchaser have to book invoices under i-tax as a way of declaring input and output tax, the EFD is becoming obsolete.

Contact

Folkert Gaarlandt+27 11 772 5220 [email protected]


Insight

mailto:[email protected]

Mexican businesses: confirm your audit trail is intact

Digital tools in the tax compliance cycleIn Mexico, the use of technology and analytical solutions has become essential as part of the interaction between taxpayers and the Mexican Tax Authority (MTA). Through initiatives such as the mandatory usage of electronic invoices, the obligation to file electronic accounting records, mandatory online filing of tax returns and payments, the tax mailbox, electronic signatures and electronic audits, the authority is analyzing information almost in real time. With these new tools, the MTA can almost review a taxpayer’s compliance 100%.

In 2015, the MTA received more than 14 million e-invoices per day from 4.9 million companies and individuals. Also, a year after the system was implemented, more than 100,000 companies filed their electronic accounting records every month — a number expected to grow significantly by the end of 2016. Receiving information electronically, combined with sophisticated data analytics, has allowed the authorities to detect irregularities and errors at the various stages of the tax compliance cycle.

The MTA calls this process the “digital DNA of tax compliance” and it has helped the authority automate, facilitate and simplify its tax control and service tasks within the tax cycle. It has also reduced the authority’s response time and assisted in data analysis to generate valuable information that is being used, among other things, to program tax audits.

Digital services are definitely making it easier for the MTA to carry out its tax collection duties. For example, new companies can complete their tax-registering process online without visiting a local office and can access more than 150 digital services using their electronic signatures.

Regarding indirect taxes, in January 2016, the MTA announced the implementation of a completely automated process for VAT refunds. This new service will be available for small businesses shortly and will expand to other taxpayers in subsequent years. It is claimed that the program will let taxpayers obtain their VAT refunds in as little as five days.

This new mechanism uses the information from electronic VAT returns, e-invoices issued and received, and customs

declarations. That information, combined with a predictive model to detect risky refunds and inconsistent VAT from noncompliant suppliers, will allow the MTA to calculate the monthly VAT balance available for each taxpayer.

What this means for businessConsidering the new framework, which uses digital technology, companies must understand the importance of having a complete audit trail for all their tax information and must be aware of the associated risks, e.g., in the selection of their suppliers.

Continuing to rely on traditional VAT processes rather than adopting an end-to-end solution could result in unrecoverable VAT balances, balances recovered after long periods, and multiple information requests from the MTA to clarify information or the authority initiating tax audits.

Contacts

Teresa Rodriguez+52 55 5283 1300 [email protected]

Rocio Mejia+52 55 5283 8672 [email protected]

Luis Beltran Farias+52 55 5283 1300 [email protected]


Insight




The change in the Brazilian tax environment

The change in the Brazilian tax environmentThe Brazilian Tax Authority (BTA) has long sought a solution for accessing taxpayer transactional data to confirm that all taxes have been paid according to Brazil’s famously complex and burdensome tax laws. The authority decided that the only way to achieve this goal was to engage in a thoroughly disruptive process that reshapes its dealings with taxpayers: fewer personal interactions, more objective and data-driven connections.

The process started with the BTA demanding that taxpayers invoice customers electronically (thus allowing the tax authority to know about and access every transaction between taxpayers). It culminated with the BTA requiring taxpayers to submit their tax and accounting books electronically in a standardized file format, thus allowing it to create the indexes needed to cross-reference the data generated by the taxpaying community.

These game-changing activities, however, would prove effective only after the BTA acknowledged that dealing with large quantities of data required a different type of tax auditor: an auditor equipped, among other things, to deal with large data sets, data crossing and matching, statistics and trend analysis and — most important — logic and programming. The technology that was finally available to the BTA would effectively be useless if no tax auditors were able to handle it properly.

Spotlight on Brazil: an innovator in the tax fieldNot only are indirect tax managers and directors faced with increasingly complex operations where the tax laws in most jurisdictions are not equipped to deal with, they are also challenged to operate in a full-scrutiny corporate environment where tax and accounting books and related commercial documents are regularly sent to tax authorities electronically.

This is a new era where tax authorities are no longer required to seek out data on commercial operations and related structures. Instead, the data flows from taxpayers to tax authorities in a constant, regular and standardized fashion.

Imagine what it means to access 100% commercial and tax data from any company, its suppliers and its customers. Surely this is where any tax authority would want to be! A decade ago, most tax authorities could only dream of being in this information “sweet spot.” Today, this is achievable in a few parts of the world. And it looks likely to be a reality in many other jurisdictions in a matter of two to five years.

In the global tax community, Brazil is widely seen as an innovator in the field of tax technology. This role started with the administration of personal income tax more than 10 years ago. It passed onto e-invoicing in 2008, touching the various Brazilian indirect tax books and returns and it reached the corporate income tax return in 2015. Accounting books and registers must also be filed and sent electronically to the Brazilian tax authorities in a regular and standardized fashion.

Mexico and Portugal have followed Brazil’s lead. Soon, many other jurisdictions will join the e-group of countries that are turning to digital to interact more effectively with taxpayers.

Based on this rationale, the authority engaged its auditors in the following journey:

• Tax auditors underwent training in logic, statistics and data analytics.

• The general tax auditor profile was adapted to the new needs, and the candidate profile for new recruits was altered accordingly.

After a few years of using these techniques, the BTA has verified that the project has been a success:

• Higher revenue: tax assessments increased 125% in total value.

• Increase in tax assessments per auditor: the tax assessment average per tax auditor rose 266%.

• Higher average assessment amount: the average tax assessment amount increased more than 100%.

• Headcount reduction: a lower number of tax auditors are auditing a larger number of taxpayers.

• Audit efficiency: targeted audits decreased the time needed to carry out an audit, significantly increasing tax authority efficiency.

• Corruption levels during audits declined.


Insight

Experience shows that attempting to fix problems on a “go-and-find” basis is fairly inefficient because it relies significantly on chance and on the knowledge and involvement of specific senior employees, such as managers who know the history of the company and its transactions. Rather, dealing effectively with large sets of data requires ability, method and technique as well as management of the corresponding technology tools.

One important lesson learned from the change in the Brazilian tax environment is that dealing with large quantities of data requires having the relevant technology systems and tools, as well as professional resources familiar with data logic and programming; data crossing and matching; and statistics and trend analysis.

By securing such assets, corporate indirect tax departments can not only facilitate indirect tax compliance around the company’s operations but also use the corporate data to learn more about its operations. And learning more about its operations will allow the indirect tax function to be more strategic and — most relevantly — in a better position to actively participate in the business decision-making process. In our view, this is where indirect tax practitioners should aim to be.

One of the key upsides of the tax technology changes that companies are starting to face is the tools that technology potentially provides for indirect tax departments.

Along with discussions about compliance, companies will want to make the most of the data that these processes create. Key questions in Brazil may include:

• Why is the company paying duties when importing from a free-trade status country?

• Why is the company not benefiting from rate reductions available for machinery and equipment purchases?

• Why has the company paid taxes at different rates for the same stock items (SKU)?

• Should the company open a distribution center in a given state or province to reduce its effective rate of value-added tax?

Answering these types of questions will allow the indirect tax department to become a valuable strategic enabler of more informed decisions. And that is the future of any successful indirect tax department.

The indirect tax function: what can we learn from the Brazilian experience?In a world where governments increasingly rely on consumption taxes to secure revenues instead of depending solely on direct taxes, which hinge on positive macroeconomics, understanding and controlling the indirect tax effects of a given commercial operation or structure are crucial to the success of companies in all sectors.

Active indirect tax departments can help companies gain competitive advantages, benefit from tax opportunities, avoid financial inefficiencies (such as negative cash flow issues) and avoid fines and penalties relating to unidentified indirect tax errors.

The indirect tax departments of Brazilian companies are spending a great deal of time revisiting their internal processes and controls. Whenever they come across a noncompliant procedure, they stop it and fix the past transactions before the tax authorities identify the weakness. Even though that is an important measure in a full-scrutiny environment, should it be the company’s first or only priority?

Contact

Sergio Fontenelle+55 11 2573 3169 [email protected]


Insight


China VAT compliance: converting challenges into opportunities

Using technology to monitor taxpayersIn China, taxpayers are liable to comply with the country’s stringent policy on value-added tax (VAT), including the Golden Tax System (GTS). The tax authority uses the GTS to keep track of taxpayers’ VAT positions and source data movements using technology and digital platforms in a static control environment.

Golden Tax System operationThe GTS is a VAT invoice management system that captures the data (associated with the supply made by taxpayers) that would be shown on VAT invoices. It aims to strengthen anti-counterfeiting measures and internal control procedures, to prevent fraud and to give the tax authority some level of audit control by providing accurate and complete invoice data for examination and inspection.

The common name used for a VAT invoice in China is fapiao; two types of fapiaos exist — “special” and “normal.”

In the GTS, the taxpayer and the tax authority terminals connect directly. The taxpayer terminal is used to process special and normal fapiaos, while the tax authority terminal is used to receive data to control the fapiaos prepared by the taxpayer.

VAT input invoice

Invoice list

Return preparationApproximately 10 returns/appendices in total

Accounting records

Finacial statements GTS data

• VAT invoice issuance and preservation

• Input VAT verification

Yes

No

Bank payment

Output > InputVAT to be creditedin the next period

VAT filing at tax bureau

The simplified VAT filing process in China

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Case study


Want to know more?Our recent articles detail the challenges and opportunities that taxpayers face in managing China VAT compliance and describe how VAT reporting puts companies to the test.

The four principles of the GTSUsing four key principles, the GTS tracks the entire VAT control process from start to finish, including: purchasing, issuing and printing fapiaos; verifying VAT input; communicating fapiao information; filing the VAT return; and providing the audit trail for VAT evaluation or inspection.

• Anti-counterfeiting An authorized printing provider encrypts invoice information into a series code printed on the fapiao. Each fapiao carries unique identification information that is not easily duplicated or replicated.

• Verification A taxpayer may scan all its special fapiaos (purchases) using a high-speed scanner. The information flows directly into the GTS, and the tax authority terminal captures it at the same time. Alternatively, the taxpayer can submit its invoice information directly to the tax authority using a memory stick or other storage medium. Only verified VAT invoices give rise to an entitlement for input tax credit.

• Invoice sourcing control A taxpayer must purchase blank fapiaos from the tax authority. The format is encrypted with a unique serial number. The taxpayer can issue fapiaos only after receiving the digital information provided by the tax authority on a tax filing disk or integrated circuit (IC) card, the golden tax disk or golden card). This is a secured method enforced by the tax authority.

• Tax sourcing control The GTS controls invoice printing and the tax source using a “black box” that contains a microcontroller and high-capacity data storage. Each time a fapiao is printed, the information, as well as the usage record in the “black box,” is updated and it becomes a read-only file. During the filing period, the taxpayer must extract the information from the database and transmit it to the tax authority on a tax filing disk and IC card. The GTS is then locked, and no fapiaos can be issued after the monthly cutoff date for the taxable period. The tax authority thus has direct access to the taxpayer’s invoice and tax source information.

Buy invoicePick up the IC card and tax filling disk and buy invoices from the tax authority

Copy invoiceInsert IC card and tax filling disk, which will be recognized by the invoice-issuing system

Issue invoiceIssue and print invoices from the system

Transmit the tax Copy the tax in the system

Report tax onlinePerform tax reporting with IC card/tax filling disk online, and free up the IC card memory

Verify input VATVerify input VAT in the system and check the results

The VAT invoicing procedures in the GTS

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Case study


http://taxinsights.ey.com/archive/archive-articles/vat-reporting-in-china-puts-companies-to-the-test.aspx

http://taxinsights.ey.com/archive/archive-articles/vat-reporting-in-china-puts-companies-to-the-test.aspx

Manage VAT reporting process and submission

E-auditing management Applicable for selected VAT payers. VAT control system is a VAT management system developed by the SAT that uses digital code and electronic storage technology to strengthen the VAT invoice management and to achieve monitoring of the tax sources of VAT payers.

Invoice issuance management

Invoice verification management Special rule for class a credit rating taxpayer with effect from �1 March 2016.

Manage invoicing process (supply and purchase)

E-invoicing management Implemented on �31 December 2015. Only applicable for issuance of normal e-fapiao.

Golden Tax System

Current development in optimizing GTS operationsIt may be challenging for Chinese taxpayers to manage their fapiaos in a relatively tight control environment. To do so, they need to establish processes supported by robust technology platforms that enable them to comply with their VAT requirements. In recent years, the tax authority has developed enhancements tosome aspects of the GTS:

• Continuous enhancement of the GTS by phases The tax authority has upgraded the GTS by allowing data interface from the taxpayer’s VAT management system (VMS) to the GTS central server. This function allows taxpayers to operate invoice control (information recording, issuing and verifying) centrally, e.g., from a group headquarters, central hub or shared services center). The local team can then just focus on managing printing of the fapiaos based on information generated by the primary team.

• E-invoicing for normal fapiaos Another upgrade developed by the tax authority is the introduction of an electronic ordinary VAT invoice system so that taxpayers can issue electronic normal fapiaos. This feature is also available as a smartphone application. This development helps taxpayers by reducing operating costs and staff resources, and by facilitating the management and use of invoices by consumers. By reducing fraud, it also contributes to a healthy and fair tax collection environment.

The VAT management platform

• Cancellation of verification for special fapiaos To further optimize taxpayer services and improve high-profile tax management, effective 1 March 2016, taxpayers with a Class A credit rating are not required to verify VAT special invoices. The methodology also allows taxpayers to check fapiao information on tax deduction or export rebates using their local fapiao inquiry platform through the GTS.

13

Case study


How EY can helpWe can help clients in all sectors improve their VAT management in connection with:• VAT compliance periodic reporting• VAT compliance risk framework• VAT compliance solution implementation• VAT compliance health check• VAT invoice centralization• Business tax to VAT implementation, readiness

and conversion, as well as post-implementation support

Contacts

Daphne Cheok+86 21 2228 3305 [email protected]

Kenneth Leung+86 10 5815 3808 [email protected]

Stephane Rinkin+86 21 2228 8888 [email protected]

The relationship between VAT invoice management and e-auditingThe GTS platform provides a way for the tax authority to keep track of taxpayers’ VAT positions and tax source data directly. The tax authority has invested heavily in having an efficient and secure system for e-auditing using real-time monitoring. The tax authority expects taxpayers to submit accurate VAT returns and match the data from their accounting records to the information recorded in the GTS.

In reality, however, this may be challenging for many taxpayers, mainly because they may lack a strategy on technology-enabled VAT management framework. Discrepancies or errors detected by the GTS could trigger a red alert on the tax authority control platform, and this would usually develop into formal inquiries and, sometimes, tax audits.

In conclusion, taxpayers are expected to meet the change requirement enforced by the tax authority. The key questions are: how well will taxpayers manage and prepare themselves to comply? And will their controls need to change as the new technology evolves?

14

Case study





Contacts

Global Director of Indirect Tax

Gijsbert Bulk+31 88 40 71175 [email protected]

Americas

Jeffrey N. SavianoNew York +1 212 773 0780 Boston +1 617 375 3702 [email protected]

Robert S. Smith+1 949 437 0533 [email protected]

Asia Pacific

Adrian Ball+65 6309 8787 [email protected]

Europe, Middle East, India and Africa (EMEIA)

Kevin MacAuley+44 20 7951 5728 [email protected]

Global Trade

William M. Methenitis+1 214 969 8585 [email protected]

Neil Byrne+353 1 221 2370 [email protected]

Excerpt from Managing indirect taxes in the digital age. Read the full report and access interactive content at ey.com/indirectdigital .








http://ey.com/indirectdigital

http://www.ey.com/indirectdigital

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

About EY’s Indirect Tax servicesIndirect taxes, ranging from value-added tax (VAT) and customs duties to environmental levies, affect the supply chain and the financial system. They pose unique challenges to multinational tax functions since they must be managed accurately and in real time. These often invisible taxes can have significant impacts — on cash flow, absolute costs and risk exposures.

Thanks to our network of dedicated Indirect Tax professionals, who share knowledge and ideas, we can provide seamless, consistent service throughout the world and help you deal effectively with cross-border issues. These include advising on the VAT treatment of new and complex transactions and supplies, and helping resolve classification or other disputes and issues with the authorities.

We provide assistance in identifying risk areas and sustainable planning opportunities for indirect taxes throughout the tax life cycle. We can provide you with effective processes to help improve your day-to-day reporting for indirect tax, reducing attribution errors and costs, and making certain indirect taxes are handled correctly.

We can support full or partial VAT compliance outsourcing, help identify the right partial exemption method and review accounting systems. Our customs and international trade teams can help you manage customs declarations, audit and review product classifications, and evaluate import and export documentation. Our globally integrated teams can give you the perspective and support you need to manage indirect taxes effectively.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.


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Indirect digital VAT/GST compliance and tax administration ... · questions. I believe that the profession will reorganize itself by having indirect tax teams which specialize in:

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