Article

The impact of unified commerce and digital tax authorities on fiscalization

The new way for retailers to approach transactional VAT compliance in Unified Commerce.

Meet Bob. Bob lives in Aachen, Germany, close to the Dutch border. One day, he goes on a weekend trip with friends to France. During shopping he finds a unique pair of sneakers. Unfortunately, the store doesn’t have his size in stock. However, the store can send the right size to his home within a day. Bob agrees and pays in the shop. He receives 10% discount when his brand loyalty card is scanned at the counter. Bob pays partly with a voucher that was about to expire and for the remaining amount using his credit card. 

Right after the weekend the sneakers arrive at his home. However, the sneakers are slightly damaged, so he starts an IM (instant message) conversation with customer service. They indicate that a store near his home, just across the Dutch border, has the same shoe in stock, so he could choose to swap the shoes in this store or return the shoes by mail. Bob made use of the ‘store swap’ option. A couple of hours later, Bob is the proud owner of an unique pair of sneakers. 

What Bob does not know, is that the store in France was a company owned store of the sneaker brand, the shoes were shipped from a warehouse in Belgium and the Dutch shop where he swapped the sneakers is a franchise store of the brand. Fun fact, he also did not notice that the person behind the online customer support was actually a robot.

As a transactional tax, almost every payment and physical movement of the shoebox in this scenario has an implication for VAT. With three different countries (with three different VAT rates) being part of the illustrated process, it is important for retailers to get the right VAT rate on each transaction, also if these transactions happen behind the scenes, for instance between the brand store and the franchise store. And of course, all VAT should be accounted by the right company. 

Traditionally, sales were made in a ‘brick and mortar’ store. This store delivered the shoes at that physical location at the same moment that the sale was made. VAT is accounted for and reported in the country where the store is located. But nowadays – as reflected in above scenario – the fulfillment and payments can be a complex combination of transactions. On the frontend, customers are hardly noticing that they are dealing with different companies from a legal perspective, as they all deliver the same brand experience. However, the backend of operations consist of complex logistics, invoicing and payment flows, which brings a huge challenge for brands to manage VAT accounting.

The common terminology in retail to define the management of VAT on sales is called fiscalization. Traditionally, fiscalization happened in the brick-and-mortar stores as sales exclusively took place between the walls of the store.

Bob’s story is a good example of how ‘unified commerce’ works. This unified commerce is an absolute game changer how retailers have to think about managing VAT. It is time to redefine fiscalization. 

Let’s dive a bit into what fiscalization and unified commerce entail, and provide insight what retailers should be doing already to be compliant from a VAT perspective in the complex world of unified commerce.

What is Fiscalization?

Fiscalization can best be described as a bundle of fiscal regulations designed to avoid any intended or unintended underpayment of VAT by a retailer when conducting a transaction. Fiscalization aims to control the process of calculating, capturing and presenting tax amounts of retailers, ensuring integrity, completeness and authenticity of each transaction. All for the purpose to make it easy and effective for tax authorities to check the completeness and accuracy of the accounted VAT figures. 

Fiscalization is typically formalized in VAT legislations and other applicable commercial legislation, regulatory aspects (e.g. cash register acts) and case law. In general, it covers:

  • how the cash register / point of sale (POS) should work;
  • how the related retail processes should be designed;
  • which data should be saved and how;
  • which reports for the authorities should be created; and
  • how and when reporting should be done.

This basically means it can cover anything, from correctness of VAT rates to data retention periods, the use of mandatory certified fiscal (thermal) printers, the format and order of information on a receipt, the format of data exchanged with other devices, format of customer facing display, etcetera.

Although VAT legislation in the EU is heavily standardized by the European VAT Directive, it is important to know that each country – also within the EU - has or will have its own ways to implement and apply fiscalization measures, from very limited requirements to a highly regulated and monitored environment. Some countries require specific (governmental) certified fiscal devices or printers as mandatory items to be allowed to do business (e.g. in Poland). Other countries require certification of the POS architecture per store, as it is the case in Italy. 

On the other end of the spectrum, there are countries with very limited fiscalization measures in place, for example without any formal certification processes in place (e.g. the Netherlands and Singapore). However, in these type of ‘easy-going’ countries, retailers should still comply with general VAT/GST rules around applicable rates and proper tax bookkeeping.

Fiscalization

The importance of fiscalization for governments

Fiscalization typically leads to a decrease of the so called informal (black and grey) economy. With a typical VAT rate of around 20% over the sales value of a product or service, fiscalization results in a significant increase in the tax revenue for tax authorities. It should be considered as an early adapted tool by governments to close the so called ‘VAT gap’, i.e. loss of VAT revenues, that – according to the latest official figures - still accounted for over EUR 137 billion in 2017 across the EU member states only.

As already indicated, the regulations that govern fiscalization are heavily focused on physical cash registers that are placed in brick-and-mortar stores. Although evolving, it is not aligned and keeping up with the extremely fast developing sales channels and payment methods that are deployed by retailers. 

The game changer in retail is “Unified Commerce”. So, what does that mean and what impact does Unified Commerce have on fiscalization?

Unified Commerce in a nutshell

Unified Commerce is the practice of a retailer that provides flexibility, continuity, and consistency across both online and offline channels to deliver a superior customer experience. From the customers perspective, it makes no difference in buying products either online or offline, it should all create the same level of experience. 

The need for Unified Commerce is created by customer buying behavior. With the uprise of internet and social media, customers have quick access to multiple channels (online and offline) to search, compare and buy products. Consumers use much more ‘touchpoints’ across different sales channels before deciding which product (and where) they will buy. Buying decisions are not made only on price and store location any more, but will depend on, for instance, on-demand product availability, shipping flexibility, personalized experienced, 24/7 customer support and availability of cross-channel shopping baskets.

It became business critical for retailers to start so called multichannel selling. But only selling offline and online in a separated way is not enough. In order to engage as much customers as possible, retailers have to offer a superior level of customer experience and create frictionless uniformity across channels. Customers want to shop whenever, wherever and however they want. It’s the retailers job to facilitate this in the best way possible.

Unified Commerce – driven by technology

Many retailers use a spaghetti of business applications to sell and manage the different channels they use. Often, they use a different system for each application, like point of sale (POS), e-commerce platform, order management, customer relationship management and ERP. As you might expect, it will take a maze of integrations to let all these applications communicate with each other. Practice showed that this is not effective and the spaghetti is unable to deliver the required effectiveness and customer experience. Any infrastructure is only as bad as its weakest application.

According to New Black, a Dutch based tech company that developed a single cloud-based platform for all Unified Commerce activities, it is critical to consolidate all sales channels and back-office activities in a harmonized process. All sales channels, both online and offline, should ideally run on a single platform, supported by fully integrated, real-time backend processes in the domains of  - for instance - inventory management, order fulfillment and product information. Furthermore, considering the fast development in the industry, retailers should build the platform in such way that it is scalable and adaptive to change.

With this bit of context about Unified Commerce, let’s circle back to the link with fiscalization.

Change is happening… harmonization is required

As illustrated in Bob’s story, businesses are becoming more complex, operating globally across multiple jurisdictions. For retail, Unified Commerce channels such as ‘ship-from-store’ and ‘endless-aisle’ require much more effort or advanced tooling to achieve proper fiscalization compared to the traditional situation where only transactions were conducted in physical brick and mortar stores. Also, the backend processes relating order fulfillment, for instance inter-store stock transfers, and the use of brand-wide loyalty schemes will create significant complexity from a fiscalization perspective.

While retailers are aiming to unify their processes and simplify their IT architecture, there is no ‘one size fits all’ for fiscalization, yet. As previously indicated, governmental regulations on fiscalization requirements remain different per country. In the EU this is also facilitated by the autonomy granted to member states by the EU VAT Directive to implement country specific VAT requirements and processes to a certain extent.

Retailers should therefore remain aware of the fact that every sales channel and payment method can be influenced by a different (fiscal) law in each individual country. Until cross border harmonization of fiscalization is reached, fiscalization requirements will keep having impact on the feasibility for retailers to achieve the simplest IT architecture as possible. 

It is worth to mention that the tax landscape is changing.  On the one hand, this changing landscape provided more room for innovation to uniformize tax related processes within retail. An example is that a couple of countries are accepting software based (online/mobile) cash registers in stores instead of only accepting the use physical devices for fiscalization purposes.

On the other hand, tax policy makers are also not sitting still, and – for instance - are searching for ways to increase tax collection by harmonizing the global standards for tax reporting. This brings additional requirements into place in relation to the speed and amount of VAT relevant data disclosed to the tax authorities. 

With the increase of disclosed data towards tax authorities, non-compliance is not an option any more as the smallest flaws will become visible to tax authorities. Retailers should consider this also in the light of potential reputational damage.

Let’s have a closer look how tax authorities globally are adapting digital tools to increase tax collection.

 ‘Every advantage has its disadvantage’

– Johan Cruyff

Evolution of the digital tax authorities

Tax authorities are increasingly embracing the value of digital tools in the transactional tax area. This is fueled by the pressure to increase government revenues, the fight against tax fraud (as mentioned VAT losses in the EU alone are estimated at around 137 billion EUR) and the public and political pressure towards companies to provide transparency in their tax contribution. 

The OECD’s Standard Audit File for Tax (SAF-T) is gaining ground and started a massive transformation in countries like Poland, where e.g. the traditional VAT return is no longer existent but replaced by an extensive transactional data file in line with SAF-T standards. 

As another example, Spain introduced the Immediate Supply of Information (SII) system that requires taxpayers report all VAT transactional data related within 4 days after the transaction is accounted for. Similar to Poland, the level of detail about the individual transaction is comprehensive.

Maybe even more impactful for retailers doing business in Italy is that this country introduced a requirement for taxpayers to submit mandatory e-invoices for a wide range of transactions through the so called Sistema di Intercambio (SdI) platform from 2019 onwards. This basically is a communication of comprehensive data about each individual transaction to the Italian tax authorities on a real-time basis. Although SdI is generally limited to transactions to businesses and government, it also applies when a private individual asks for an e-invoice.

More countries will follow rapidly as they, among others, fear tax fraud and evasion might spread to their jurisdictions if they lag behind. This is fueled by the success stories of countries that already adapted such measures. For example, it is estimated that the introduction of SdI in Italy accelerated the decrease of the VAT Gap by factor three. We are talking about billions of EURO’s in additional annual tax revenues here.

The regulatory change and need for increased transparency is, therefore, a global trend that we see this spreading like an oil stain, leading to an accelerated move from traditional to digital tax authorities. 

Fiscalization redefined

Time to circle back to fiscalization. 

As said, the traditional point of view on fiscalization is that it only affects physical cash registers. Every country has its own approach to implement mandatory requirements around the functional and technical features of cash registers.

We also know that sales channels and payment methods are evolving quickly and Unified Commerce will quickly be the new normal in retail, if not already the case. This increases the amount of VAT taxable events in retail exponentially.

Furthermore, we know that tax authorities are modernizing and digitalizing the way VAT is collected. The era that retailers could afford to make mistakes in VAT accounting and reporting is disappearing in a rapid pace.

Fiscalization should be considered as a topic that has a much wider reach than only the cash registers, but should be covering the whole range of sales channels and supporting backend activities. 

Especially the role in e-commerce within the Unified Commerce landscape will be one to keep a close eye on. Not only is e-commerce an important area of growth for most retailers, fueled by the COVID-19 impact, but also will the VAT rules within e-commerce rules change drastically in 2021. 

Connecting all those processes does also mean that it is important for retail companies to connect (inhouse) tax specialists and finance staff to the business development, (digital) technology teams and marketing teams that are engaged with the deployment and development of Unified Commerce. Fiscalization is not something that is done overnight. In order to minimize business disruption and avoid any adverse tax effects, tax knowledgeable resources need to be included in every unified commerce initiative at an early stage of the project.

Coming back to the description of fiscalization: 

“Fiscalization can best be described as a bundle of fiscal regulations designed to avoid any intended or unintended underpayment of VAT by a retailer when conducting a transaction.”

The description is still valid, but the context of transaction evolved dramatically due to the uprise of Unified Commerce. Reasons enough to emphasize that the practical impact of fiscalization has been redefined.

Deloitte and Fiscalization

What’s most needed in the global tax environment is also most elusive: Confidence. Deloitte helps clients anticipate change to see through uncertainty and to decide on your future path. Together, we identify the possibilities. From best practices to innovative tools, from advisory on (local) regulation to strategy, from people to disruptive technology, we help you connect all the critical pieces for success. In a market noisy with promises, we commit to the impact that matters to the retail industry. In the midst of uncertainty, we help retailers see opportunities and lead with confidence.

Deloitte Tax is one of the founders of an ecosystem of like-minded partners, amongst others Adyen, New Black and Scandit, navigating retailers to thrive and excel in this new age of customer-centricity. This is an active network of partners that offers retailers a one-stop-shop for all technology and expertise they need to build and expand their Unified Commerce capabilities.

In the field of global fiscalization Deloitte applies innovative and agile methodologies to translate the challenges of modern retailing in the (local) fiscal context and the technological approaches of fiscalization. We are committed to providing retailers with the perspective and support they need to lead confidently and excel in Unified Commerce.

Ecosystem

Back to Bob

By the end of this article, Bob is still happy with his sneakers. If the sneaker brand has set up proper fiscalization processes, they will also be happy with the sale. Otherwise, they will have some work to do in tracing all logistics and payment flows to determine all VAT relevant events.  In the best event, depending on internal processes of the brand, there are five events that should be reported in a VAT return. 

Having full control over the full picture of transactions and corresponding VAT consequences will prevent retailers to overpay or underpay taxes. This article demonstrates that the road to transactional VAT compliance or fiscalization might be a bumpy one, but necessary to take. Being in control of fiscalization keeps the tax authorities happy and the brand safe.

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