Digitalizing tax: The next frontier

By: Daniel Alexander Laoh , Julie Ann Arreza and Sylvia Naomi Cabading

IN the modern world, data is king. Every step taken creates a data footprint, and the ability to capitalize on this is crucial —with tax authorities and businesses being no exception.

As businesses generate voluminous data, there is growing recognition that tax and finance departments require robust digital infrastructure to run effectively. Globally, regulatory authorities globally recognize that the ability to collect and analyze taxpayer data is key to bridging the tax gap.

Taxpayers, meanwhile, are expected to provide tax and financial data through more rigorous regulatory and compliance requirements. There is also a pivot to ensuring that they implement effective financial and tax governance frameworks, guaranteeing data accuracy and the rigorous enforcement of company tax policies.

The Organization for Economic Cooperation and Development's vision on tax digitalization, i.e., Tax Administration 3.0, supports the view that digital transformation has the potential to expand the tax system in an increasing number of areas.

Throughout Southeast Asia, meanwhile, governments are enhancing their tax systems with digital frameworks. As noted by the Asian Development Bank, post-pandemic tax reforms across the region have prioritized digitalization to strengthen economic recovery and improve efficiency in tax administration.

Singapore, Malaysia, and Indonesia have implemented advanced compliance systems. Beyond e-filing and payment systems, tax authorities are now exploring new technologies like big data, blockchain, biometrics, and artificial intelligence.

In 2020, Thailand launched a value-added tax (VAT) refund mobile app that allows tourists to make VAT claims. The system uses blockchain technology to record and track claims and purchases, enhancing data integrity and efficiency.

This year, Indonesia announced the Core Tax System, which enables the automation and digitalization of tax administration and provides an integrated network for more informed, data-driven decisions.

The Philippines joined the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) implementation in November 2023. The framework implements measures to tackle tax avoidance and equip governments with instruments to minimize profit shifting to low-tax jurisdictions that erode a country's tax base.

To maintain membership, the Philippines will need to implement "minimum standards" to combat harmful tax practices. Modernizing its existing tax framework from both technical and technological standpoints will be crucial. This should incentivize the Bureau of Internal Revenue to accelerate its digital transformation with more urgency.

Digital transformation is included in the Philippine Development Plan 2023-2028. The country has taken steps toward digitalization through initiatives like e-invoicing, aligning with the region's digital trends. Observing these regional advancements can help Philippine companies anticipate the future direction of tax systems.

As for Philippine companies, they need to adapt their digitalization strategies in key areas such as transfer pricing (TP) and Pillar Two rules to align with other countries in Southeast Asia.

TP involves setting prices for transactions between related parties within multinational enterprises to ensure these prices adhere to the arm's length principle (i.e., prices are set as if between unrelated parties). This aids in the fair allocation of taxable income across jurisdictions.

TP also impacts a company's profitability, operational structure, and fiscal efficiency. Technology plays a critical role in monitoring pricing and financial outcomes, structuring or restructuring business to achieve fiscal efficiencies, and meeting compliance obligations.

Meanwhile, Pillar Two rules — also known as the Global Anti-Base Erosion Model Rules (GloBE) — are transforming the tax landscape by applying a 15-percent global minimum tax across all countries where a company operates. This requires advanced data management and comprehensive analysis of tax positions.

Pillar Two forms part of BEPS 2.0, together with Pillar One, which introduces a new approach to taxing the digital economy.

Adopting a digital strategy does not require a complete redesign of a company's finance system architecture. It can focus on targeted, point-based solutions that could address immediate concerns but with a broader, overarching strategy in mind.

For Philippine companies, digital transformation in tax compliance and TP goes beyond mere automation. It involves building a strategic digital framework that enables an organization to pre-empt, pivot or keep pace with technological advancements and regulatory shifts.

Developments in TP and BEPS 2.0 necessitate rethinking the future of the finance function. Digital tools streamline complex data processes, automate calculations, and improve documentation accuracy — meeting the intensive data requirements of regulations such as the GloBE rules.

Companies need to move away from siloed, manual processes and embrace a more integrated approach across tax, finance, and operational functions. The top priority for tax transformation is ensuring the integrity of data across various use cases.

By leveraging automated data extraction and integration, companies can build a single, unified data source, reducing manual errors and enhancing the efficiency and timeliness of financial, tax and TP calculations. A tech-enabled tax and TP infrastructure facilitates data-driven strategic decision-making for businesses. It also enables data analytics to preempt potential tax issues before they reach the desks of regulatory authorities.

Embarking on a digital transformation journey requires assembling many moving parts. However, the benefits that can be realized along the way are substantial. For Philippine companies, proactive technology investment is essential to address the growing complexities of tomorrow's tax and transfer pricing frameworks.

As published in The Manila Times on 9 December 2024. Daniel Alexander Laoh is a Partner and the Transfer Pricing Leader of Deloitte Philippines. Julie Ann Arreza is a Senior Manager, and Sylvia Naomi Cabading is an Assistant Manager both in the Tax & Legal practice of Deloitte Philippines.