Tax compliance: Fatalism meets technical deficits and a shortage of skilled workers

In an international study in summer 2023, tax software provider Vertex Inc. asked managing directors and executives how their company deals with the requirements of indirect tax regulations and the associated risks. The survey covered 580 companies from the DACH, Benelux, Nordics, UK and US regions with annual sales of between 50 and 500 million US dollars and 500 million US dollars or more.

Sales and value-added taxes: tax compliance as a complex challenge

One thing is clear: determining indirect taxes - which affects virtually all business transactions - is a complex challenge for companies: in the DACH region, half of those surveyed stated that they had had to deal with complaints from the tax authorities, and for a quarter this was very often the case. Internal audits brought errors to light for 67 percent, and a good third were confronted with them frequently. This puts the DACH region slightly ahead of the international average, where compliance violations in VAT determination were uncovered by authorities in 62 percent of companies and by internal audits in 75 percent. Financial consequences due to non-compliance with indirect tax regulations were suffered by 56 percent of DACH companies, compared to an international average of 75 percent.

When it comes to tax regulations, the majority shows courage to leave gaps

These figures also match their own assessment. Less than a third (29%) of managers from DACH see their company as a "champion" with future-proof structures for managing indirect taxes. 39% consider themselves to be "calculators" - reasonably well positioned, but with a certain willingness to take risks when it comes to indirect tax determination. 13% classify themselves as "risk takers" - according to the motto: "I can't fear what I don't understand". A full 19 percent state that they are "laggards" - their business activities are impaired overall by shortcomings in indirect tax determination.

Regulatory real-time reporting forces modernization

"In many cases, heterogeneous system landscapes have grown in companies, and with them a wide variety of processes, which means that indirect taxes are determined and checked partly manually and partly with self-made functions in the ERP systems. This takes time and is prone to errors, especially in international business," explains Maximilian Borgmann, Director Sales & Value Engineering at Vertex Inc. "At the same time, tax authorities around the world are demanding more and more real-time reporting - keyword EU VAT reform and eInvoicing. This is forcing companies to digitize their finance and tax functions with appropriate compliance management. In this context, it is essential to automate and standardize indirect tax determination as much as possible." 

Deficiencies in indirect taxes also associated with personal risks

In general, two thirds of managers surveyed - across all regions - are aware that their organization is taking risks when it comes to indirect taxes. Given their current level of indirect tax compliance in the company, a full 84 percent see themselves exposed to personal risks. At the same time, 31 percent of managers from DACH consider these personal risks to be significant. "This also has consequences for recruiting - attractive employers for the much sought-after tax experts in the future will primarily be those companies that are characterized by solid tax compliance management and do not expose their employees to unnecessary risks," comments Borgmann.

Fines, prosecution and personal professional consequences are also the aspects that are most feared when indirect tax regulations are breached. If there is an overall lack of internal management of indirect taxes, this also affects business development. For example, 40 percent of the DACH companies surveyed stated that they are unable to do business in certain regions for this reason.

Incorrect tax determination due to lack of expertise and technical support 

The reason for the difficulties in complying with indirect tax regulations is a combination of many, almost equally important factors in all of the regions surveyed. In DACH, for example, a lack of skills (41%) and a lack of technological support (36%) and data quality (35%) are combined with constant changes to tax regulations (33%) and insufficient digitalization within the company (33%).

The driving factors for improving the often risk-oriented situation with regard to indirect tax compliance are of a technical and strategic nature. In DACH, it is mostly a modernization of corporate systems. This applies above all to large companies. In second place is the growing number of tax regulations worldwide. The goal of creating a holistic approach to financial compliance is the third most important driver. This is closely followed by the growing online and digital business, which brings with it additional challenges in indirect tax determination.

Real-time reporting obligations put an end to indirect tax negligence 

"Tax authorities around the world are upgrading digitally, requiring electronic invoicing and real-time reporting of transaction data. 'Courage to leave gaps' is no longer an option; manual tax processes or retrospective corrections will soon no longer be possible," explains Borgmann. "What's more, the general digitalization of the finance function is in full swing. As a result, routine activities in the tax department will and must be automated and standardized to the maximum extent possible. This gives tax specialists more room to focus on controls and strategic planning, which benefits the company's overall results."

Source: Vertex

VAT in Switzerland: new rates apply from 1.1.2024

The above study focuses on the situation in the EU. However, there were also changes in Switzerland at the beginning of the year. The increase in value added tax came into force on January 1, 2024. The standard rate is now 8.1% (previously 7.7%), while the reduced rate is now 2.6% instead of 2.5%. The special rate for accommodation is now 3.8% instead of 3.7%. This means that companies are faced with the challenge of having to cover these additional tax costs on the one hand, while also having to adapt their systems (e.g. updates to ERP and accounting software) in order to avoid legal consequences on the other. For SMEs in particular, this may be associated with personnel and resource problems. 

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