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Tax transformation in the time of digitization
Digital transformation means using digital technologies to improve an enterprise’s operations. As a result of the COVID-19 pandemic, digital transformation has become one of the top priorities, particularly in view of the huge increase in the significance of e-commerce and remote work.
With regard to financial and tax data closely related to business processes, transformation is of particular importance to sectors where the volume and quantity of transactions and processed data is significant.
In addition to the pandemic, the development of technologies used to process data has for a long time now been largely driven by the growing worldwide requirements of the tax and regulatory authorities, due to both the increasing scope and format of the data reported (the transition to a digitized, and in particular real-time, reporting model).
The process of digitizing tax reporting has accelerated significantly in recent years. The shortening of the period between the occurrence of an economic transaction and the duty to report it to the tax authorities has been a noticeable trend. This trend has been enabled by basing tax reporting on mandatory e-invoices which facilitate the exchange of data between a taxpayer and the tax authorities.
According to press releases, the Polish Ministry of Finance is also considering introducing a real-time reporting model in the coming years. The main outcome of this trend for taxpayers is that a transaction should be correctly identified for tax purposes as soon as it occurs. Moreover, the experience of some countries (e.g. Italy) shows that acceptance of a correct invoice by the electronic system of the tax authorities may become a condition upon which the performance of the transaction depends. Therefore, the risk of errors in this area is not only a financial risk but also becomes an operating risk which may directly affect operating activities.
Source: PwC own analysis
At the same time, the tax authorities are improving the coordination of their inspection activities based on current, detailed data received. One can see more in-depth inspections and a demand for transparency and accountability in the manner of managing tax affairs. The risk of facing severe financial consequences of criminal responsibility triggers many transformation projects relating specifically to financial and tax data.
Source: PwC own analysis
However, there are still many processes that largely require manual processing. For example, in the PwC Finance Benchmark Report 2019-20, it has been concluded that in the key financial areas, including taxes, 30-40% of the time may be eliminated by automation and behavioural changes. However, 75% of the time of the persons employed in key financial positions is still dedicated to data analysis.1
Over the past few decades, the majority of the firms have conducted similar activities with regard to large-scale capital expenditure projects on technology. Year on year, we have seen a stable growth in this area and it seems that this trend is unlikely to change in the immediate future. Gartner predicts that global IT spending will increase by 4% in 2021 compared with 2020, including expenditure on software for enterprises by more than 7%, given the increased focus on digitization, including solutions supporting remote work, and on hyper-automation.2
1. Finance Effectiveness Benchmark Report, PwC, September 2019.
2. Gartner, Press Release, 7 October 2020.
Transformation and the architecture of finance and tax systems
As part of the transformation in the area of processed tax data, it is of key importance to decide on the architecture related to the entire solution, including, in particular, the ERP system.
In the light of recent local experiences, such as the implementation of the Standard Audit File JPK_V7, the new reporting format has turned out to be quite a challenge, especially for those taxpayers who process large volumes of data and whose business is based on selling to consumers.
The implementation projects in which we participated clearly showed the challenges faced by accounting and tax teams and the IT teams which are implementing technical solutions in this respect:
Should changes and business logic be implemented directly in the ERP system?
Or should data be extracted from the ERP, billing and warehousing systems and processed using additional tools which enable creating additional logic and validation mechanisms?
An undoubted benefit of the changes implemented directly in the ERP system is having a single source of data for accounting, management and tax purposes. In the retail sector, information in the ERP system is often taken from other systems which contain data relating to sales or warehouse movements (e.g. shopping systems, cash register systems), and recorded in an aggregated form. Retail tax reporting which, as is the case of JPK V7, requires information on the products sold, in the context of implementing the solution directly in the ERP system, may result in a need to significantly expand the integration mechanisms and significantly increase the volume of data ultimately recorded in the ERP system. In addition, in the case of global systems, the change may impact processes on a global scale, and be highly ineffective and costly from the perspective of an entire group of enterprises.
Purchasing or implementing an external tool is often a solution that is quicker and easier to implement. However, it involves outsourcing a part of a process to a third party, and the need to make additional reconciliations with the ERP system data. Moreover, as shown by the projects we have carried out, outsourcing the processing function is sometimes simply necessary, as many systems are managed globally, and introducing a local change in such a system is either too expensive or technically too complex.
The digitization of tax processes is clearly accelerating and seems to be unavoidable. The digitization of tax reporting is a strong driver of transformation in enterprises in terms of the solutions used - both ERP systems as such and additional automation to support tax processes.
Looking at the current market trends and the structure of IT spending in 2021 presented by Gartner, it can be anticipated that the majority of businesses will change or significantly expand their ERP systems.
In our opinion, knowing the solutions available on the market is becoming another area of tax competence for people responsible for tax settlements and a prerequisite for making good tax management decisions.
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