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Singapore Budget 2018: Time to consider tech for tax compliance
FINANCE Minister Heng Swee Keat is widely expected to announce the government's plans to shore up its war chest to fund future spending needs on Budget Day, and there is little doubt that taxes would take centre stage.
Our crystal ball tells us that sweeping changes to our 23-year old Goods and Services Tax (GST) regime would be afoot. Apart from speaking (or not) on a possible rate hike, an "e-commerce tax" on cross-border online transactions could also be introduced under the auspices of an expanded GST system. It is timely for businesses to take a long hard look at their existing tax compliance processes and turn to technology to manage the complexity associated with changes to these processes.
TAX COMPLIANCE COSTS TO RISE
While it is uncertain whether the proposed changes would come into effect in the short run, one thing is almost certain - tax compliance costs will go up when businesses implement changes to existing processes and systems to cater for tax changes.
For most companies, tax compliance generally involves the manual extraction of data from the accounting systems and preparing tax returns via the humble spreadsheet; a process that typically takes days or even weeks to complete, depending on the size and/or complexity of the business.
According to a recent survey on Paying Taxes conducted by the World Bank and PwC, the case study business in Singapore spends an average of about 60 hours a year to comply with its tax obligations; about half that time goes into managing GST compliance, an obligation which GST-registered businesses have to fulfil as part of their role as tax-collecting agents on behalf of the government.
This means about two full weeks in a year are expended on an activity that is not for revenue generating, but comes with additional costs in the form of penalties if there are errors in the returns.
Why has tax compliance largely remained a manual process in this digital age? The short answer is inertia. As long as the "pain" of tax compliance does not exceed a certain threshold, businesses are likely to accept it as the norm and write it off as a cost of doing business.
Despite recent government initiatives to support productivity and automation in the forms of generous grants and incentives (the Productivity and Innovation Credit Scheme comes to mind), this typically goes towards the product end of the business, with back-office functions such as tax compliance relegated to the lower rungs of the to-do list and the budget for process improvements.
After all, it is the product end of the business that is visible to the customers and what counts for top-line growth.
With the expected e-commence tax and (likely) GST rate hike, coupled with the recently legislated "customer accounting" GST rule (under which the GST-registered customer will take responsibility of declaring and paying GST on certain prescribed goods effective Jan 1, 2019), businesses are facing a slew of tax changes as they progressively come into operation within the next few years.
Rather than kicking the proverbial can down the road, it is now the time to pause and re-evaluate if the tax compliance function (of the future) can best be served by the current manual processes.
After all, the introduction of more (and complex) rules in a manual workflow environment inevitably increases the possibility of mistakes and any increase in the GST rate would mean that errors in the GST returns would become more costly than before.
The adoption of technology for tax compliance has to be the answer, particularly for a transaction-based tax like GST. There are automated tax reporting solutions such as PwC's Comply First Time which cuts out manual and repetitive tasks in the process by automatically performing the necessary data extraction, computations and checks, with the final output delivered on a single platform to the computer screen within a matter of minutes.
Such integrated compliance solutions possess powerful data analytics capabilities to help identify anomalies, potential risk areas and provides real insights into the business by utilising data sitting in the systems for management, audit and tax reporting purposes. The adoption of such solutions would free up time spent by the finance department on number-crunching for more value-added activities such as tax risk management.
More importantly, the adoption of automated solutions and tools lowers the risk of mistakes and gives management the peace of mind it needs.
The ideal state of play involves robotic process automation (RPA), where software/robots are deployed to process upstream business transactions such as accounts receivables and payables, which then flow into automated tax reporting solutions. These applications are endless and can even extend to other areas of the business where manual workflows are prevalent.
Banks are increasing turning to RPA to streamline their business processes in pursuit of productivity with the deployment of technology to take over manual and repetitive tasks, with little doubt that the technology would be extended to its tax compliance process. We foresee such a "digital workforce" working in lockstep with your employees becoming the new norm in the years to come.
Tax authorities globally have started to embrace digitisation, with the United Kingdom set to revolutionise tax administration through its "Making Tax Digital" project - one which would require VAT-registered businesses to keep records digitally and provide VAT return information electronically to the authorities via compatible software from April 1, 2019.
THE END OF THE SPREADSHEET
If that succeeds, it would spell the end of spreadsheets and manual compliance processes, which are both time-consuming and susceptible to error. The spread of real-time reporting for VAT elsewhere in Europe and in parts of Asia would also speed up the advancement of tax digitisation.
There will be a time in the future where the humble (and beloved) spreadsheet finally takes its resting place among the typewriters and analogue televisions. Another look into our crystal ball tells us that this may not be too far away, and we will all be there to see it happen.
- The writers are from PwC Singapore. Koh Soo How is Asia-Pacific Indirect Tax leader and Lin Weijie, senior manager of Indirect Tax