Ideas & Debate

Investing in suitable technology the key to easing cost of tax compliance

tax

A band entertains taxpayers during a past Kenya Revenue Authority sensitisation programme: Tax is one of the most significant ‘expense’ items for an organisation. PHOTO | FILE

Technology-enabled solutions are fast replacing manual processes. We have witnessed the move from electronic mail to the use of WhatsApp and automatic transmission cars to self-driving vehicles.

The first self-driven truck just transported 50,000 cans of Budweiser beer covering a distance of 241km in the US.

This same technology revolution is catching up with tax business. With the turning of big data to meaningful tax information, thus creating a key competitive advantage for organisations.

So what is big data? Big data is a large volume of data, either structured or unstructured data, in an organisation.

The former is information that is organised, readily available in form of a database and it’s searchable. An example of this is data stored in the business system or knowledge base.

But the unstructured type is often in text or multimedia format. An example of this is data collected via email or video.

The synthesising and search for meaningful information from both structured and unstructured data is like looking for a needle in a haystack. However, once achieved it could become the ace card for an organization.

As an organisation invests in technology-enabled solutions to either identify the market trends or boost market value, it is imperative that the tax function keeps up with the organisation’s technology advancement trends and seeks ways to automate and improve their processes.

Tax departments should look into investing in efficient ways to monitor and track business transactions that have tax implications.

Top executives should consider data and content management, compliance reporting and tax analytics capabilities while investing in a business system.

By performing tax analytics, an organisation can sweep through large sets of data and perform scenario based analysis. Analytics moves you from ‘what do I need to do?’ to ‘what do I need to know?’

Tax is usually one of the most significant ‘expense’ item for an organisation, taking into account both direct and indirect taxes. The amount can spiral out of control due to non-compliance and overpayment.

In an effort to manage and maintain the tax expense, companies should ensure they are compliant with the current tax laws, thus avoiding the high penalties and interest that accrue due to non-compliance.

Identifying anomalies

The use of data analytics is one of the most effective ways of detecting non-compliance; such as identifying anomalies in the application of tax rates, identifying transactions that would be questionable from an arm’s length perspective, and identifying inconsistency in tax numbers arising from certain transactions.

Multinationals should also consider the use analytics in readiness for the implementation of Base Erosion and Profit Shifting (BEPS) especially as regards to country by country reporting.

This is by running scenarios using prior data to identify any inconsistencies which need to be corrected before the full adoption of the country by country reporting.

Earlier this year, the Kenya Revenue Authority (KRA) sought to engage a consultant to advise on expansion of taxpayer base and identification of revenue enhancement.

In addition, the tax authority has also invested in development and implementation of data warehouse and a risk management system. The data warehouse will be a central repository of data gathered from the KRA database and other third party institutions.

Third party data will be sourced from, among others, the land registry, company registry, power and water utility providers, National Registry Bureau, custom systems, and other National and County government institutions.

The KRA will leverage on this data to carry out analysis to both identify potential additional taxpayers, taxpayer’s income streams and also assist in tax audits. You recall that the KRA was seeking access to Mpesa records in order to monitor and query taxpayers’ transactions.

With such information KRA could identify the effectiveness of past tax policies, inform future tax policies, tax administration and enforcement measures.

Tax authorities in the US and Australia have used analytics to identify high risk businesses through risk profiling.

The Australia Tax Office (ATO) has a risk differentiation framework that determines the intensity of their assessment depending on the taxpayer rating, that is low, medium, key or high risk.

The ultimate goal of any entity is to be rated as low risk and to possibly keep the tax authority away from their door steps.

Minimising exposures

In the US, the Internal Revenue Service requires public companies to use Extensible Business Reporting Language (XBRL) so that they can provide financial reporting data from their business systems directly to IRS.

It would not then come as a surprise if the KRA were to put up such huge investments and impose additional reporting requirements on taxpayers.

Tax compliance and reporting should be an integral part of consideration when implementing a business system. In addition, it is important for organisations to invest in appropriate solutions that will enable them to manage their tax data.

The system should incorporate the following tax aspects: tax sensitisation of the accounting system, data management, and data analytics.

A good tax system provides a high performing finance and tax function that is geared towards lowering the tax compliance cost and minimising exposures.

The writer is manager, Deloitte East Africa.