Tax governance in the age of digitalisation

Fiscal sustainability remains high on the agenda of global economies. The COVID-19 induced recession has caused unprecedented budget deficits in many countries as they implemented policies to protect workers and businesses. Singapore is no exception. In fact, to recover the COVID-19 spending, the UK has just announced an increase in the corporation tax rate from 19% to 25% with effect from April 2023, for companies with profits exceeding £250,000.

Singapore dedicated close to S$100 billion to cushion the economic impact arising from COVID-19 in 2020. In the recent Budget 2021 announcement, funds continue to be set aside for Singapore’s immediate needs and long-term priorities. An estimated overall budget deficit of close to S$76 billion will be incurred for both financial years 2020 and 2021; this will also mean that Singapore’s past reserves will be drawn down for the second consecutive year.

Against this backdrop, tax authorities worldwide are also faced with challenges surrounding the business transformation of taxpayers and the appropriate audit approach to deploy. Hence, tax authorities including Singapore are likely to focus more on tax governance as they address tax leakages to try to raise revenue, given the COVID-19 spending. Good tax governance can therefore help to minimise misstatements and act as a defence against any potential penalties.

To deal with the increasing digitalisation of business transactions, tax authorities are finding ways to increase tax audit efficiency through technology solutions and to improve the tax collection processes. In Brazil, the Nota Fiscal Eletrônica (NF-e) process transmits a certificate to the tax administration in real time once an invoice is generated or when goods are moved. Such real time approach makes tax audits in this area obsolete. Various other tax authorities have adopted the Standard Audit File for Tax (SAF-T), whereby the entire or a part of the general and sub-ledgers are transmitted to the tax authorities electronically.

According to an Organisation for Economic Co-operation and Development (OECD) forum on tax administration, Singapore is one of the leading countries in the implementation of taxpayers’ digital identity, which is referred to as the National Digital Identity (NDI). The NDI in Singapore mainly consists of SingPass for individuals, and CorpPass for businesses and other entities. SingPass allows users to transact easily with government agencies, while businesses are able to use over 200 government digital services online through CorpPass. For example, businesses can now easily file their corporate tax through CorpPass.

The tax authorities’ increased demands for greater transparency and more timely data are making companies review how they can move further upstream in their data sources and Enterprise Resource Planning (ERP) systems to capture the right or accurate data for tax filings. Classic tax audits are likely to be replaced to focus on risks and controls.

Digital transformation is changing the way businesses operate in many ways―including how finance and tax managers use technology to create and sustain a competitive advantage. Its significance extends to ERP systems such as SAP that boost business efficiency and reduce operational risks. Procurement processes have also been largely automated, resulting in cost savings and increased procurement visibility.

The digitisation of businesses is making tax reporting more complicated while, at the same time, making the world a little smaller. The global trend seems to point towards the direction of Co-operative Tax Compliance. It can be challenging for finance or tax managers to keep pace with shifts in the business practices or landscape such as changes to supply chains, the introduction of new products or services, new payment solutions and automated customer or supplier platforms. These can have significant ramifications on tax positions and hence give rise to tax risks.

Demand for back office efficiency

Tax activities, relative to other functions, have historically been more manual-intensive. However, the pressure for efficiency and agility is mounting. Potential errors of mass data collection may not be detected through classic means and may require a new approach in the recording, analysis and control of such data.

What has been changing for finance and tax managers is that they now have to go deeper into the transactions in order to identify the interface to the company’s ERP system. In the past, tax managers could delegate certain tasks and checks to the accounting department. However, with ERP-enhanced procurement processes, a procurement manager can input accounting data independent of the accounting department, or such data could be captured directly using OCR, thereby making the taxpayer reliant on data provided by its suppliers, which may not appreciate the tax significance of such descriptions. There would therefore be a need for controls and checks to pick up unusual or material financial data for further analysis, from a tax filing perspective.

Co-operative tax compliance

Against this backdrop, it is not surprising that tax authorities worldwide have been establishing Co-operative Tax Compliance programmes. This helps to promote transparency and good governance in return for greater tax certainty. It aIso increases the efficiency of tax audits and tax collection processes. International developments show that such programmes vary from a more informal exchange to a sophisticated approach in terms of concrete defined processes that are partly replacing tax audits.

In such an approach, tax authorities may request in the first instance relevant documentation to better understand the “Tone at the top” (i.e., the approach to taxes at Board level) by reviewing the Tax Strategy, Tax Risk Control System, etc. In addition, tax authorities may review the process documentation (flow charts) and Information Technology (IT) systems landscape as well as internal tax risk assessments and internal tax controls. The combination of top-down (i.e., “Tone at the top”) and bottom-up (i.e., processes and controls) approaches as well as data analytics should provide a good overview of the taxpayers’ tax profile ahead of a tax audit, which can then drill down to significant technical issues or uncertain tax positions taken. Such a gain in tax audit efficiency can help to minimise tax leakages.

Singapore has established its own Co-operative Tax Compliance programme since 2008. The Enhanced Taxpayer Relationship (ETR) Programme was introduced in 2008 by the Inland Revenue Authority of Singapore (IRAS). Under the ETR Programme, the IRAS meets regularly with senior executives of a company to address the taxpayer’s current and emerging tax issues. IRAS has also been running a specific programme for GST (Assisted Compliance Assurance Programme [ACAP]), which is a voluntary compliance initiative launched in 2011 and provides a holistic framework for businesses to proactively self-manage their GST risks across entity, supplies, purchases and reporting. In return, companies receive certain benefits in the form of step-down of GST audits and penalty waivers.

Nevertheless, we expect the above to be enhanced with guidance for a broader Tax Governance Framework to be issued following countries such as Australia, Germany and the UK which already have requirements around Tax Governance. The timing could not have been better as many multinational corporations are now commencing ERP transformation or enhancement projects (such as ERP upgrades, e.g., SAP S/4HANA, Oracle Cloud or Workday), requiring tax process analysis as part of design and implementation. Such framework would likely require MNCs to consider IRAS’ requirements to mitigate inefficiencies and additional costs post-implementation of the ERP system.

Singapore also recently joined the OECD’s International Compliance Assurance Programme (ICAP), which is a pre-audit “multilateral cooperative risk assessment and assurance process”, designed to provide MNCs with increased tax certainty in respect of their activities and transactions. Another reporting standard on tax that is set to push the demand for tax governance is the Global Reporting Initiative (GRI), referring to tax transparency in the sustainability report (GRI 207). Against this background, companies would welcome IRAS’ guidance on how to combine all these requirements in order to minimise duplication of efforts and associated costs.

Finally, with the global COVID-19 pandemic making work-from-home a permanent feature of business models, how process improvements drive value in the tax environment for both companies and tax authorities are increasingly becoming more important than ever before. Guidance on Tax Governance could encourage companies to improve the level of process standardisation, which could―as a positive effect―compensate for the lack of informal exchange in a work-from-home environment and thus, reduce inefficiencies. This will also help companies manage their tax processes from the beginning as there could be increased focus on tax governance going forward to ensure that companies are paying the right amount of taxes, given the government’s need to maintain fiscal sustainability going forward.