Firstly, an invoice isn’t a document created for tax purposes and should never be treated as such. It’s a document typically issued by a supplier to a customer to confirm the goods or services being ordered or purchased, the price of those goods or services, and to inform the customer of their obligation to make a payment.
Unfortunately, we too often see tax authorities viewing e-invoicing as a tax-centric or standalone tax process, with the commercial objective of the supplier notifying the customer of its obligation to pay as almost an afterthought.
Secondly, the shift to e-invoicing merely represents the digitalization of an invoicing process. Just as many other parts of the economy are digitizing, the traditional process of rendering an invoice for work performed (or to be performed) is being automated and digitized.
For many large companies, this will become a system-to-system process. The concept of exchanging digitized information instead of printed documents isn’t new or groundbreaking.
Finally, and perhaps most fundamentally, tax authorities should develop a roadmap for utilizing the immense amount of data collected from e-invoicing. Generally speaking, tax authorities have remained silent about how they plan to use this data. The enormous compliance costs of implementing e-invoicing cannot be justified unless the collected data is put to productive use.
Malaysian e-invoicing example is relevant again here due to its link to corporate income tax. This example contains very few exemptions or exclusions from e-invoicing. Indeed, the scope of e-invoicing in Malaysia includes areas traditionally outside the scope of a VAT, e.g. financial services. Cross-border transactions are also captured through the combined mechanisms of self billed e-invoicing (principally for imported services) and consolidated e-invoices (when the counterparty doesn’t require an e-invoice, such as in an export transaction).
We are quickly moving to an environment where B2G, B2B and B2C transactions are reported in real-time or near real-time.
OECD’s Tax Administration 3.0 report, which states:
“Paying taxes will become a more seamless experience over time, integrated into daily life and business activities as much as possible. Natural citizen and business behaviors and systems will increasingly be the starting point of taxation processes.” “Free-riding and being non-compliant will increasingly require deliberate and burdensome additional activities.”
The inexorable rise of e-invoicing, not just in the context of indirect tax compliance but across all taxes.
The growing role of systems over laws in determining indirect tax obligations
It should be clear that a key foundation for the effective deployment of AI has been established — quality data.
This should be self-evident — with measures such as e-invoicing, a further precondition for the powerful deployment of AI by the government has been met — population-wide data.
In other words, tax authorities will soon have data on virtually every transaction occurring within their economies in a readily analyzable form.
Imagine how that data could be used. Governments could track the health of their economies in real time. Fiscal and monetary policy impacts could be managed, not with a traditional lag effect, but almost instantly. Taxes can be collected, in many cases, almost at the point of sale.
Instances of non-compliance, errors or anomalies could be addressed and rectified immediately. Missing trader and carousel fraud could be eliminated. The possibilities are nearly endless
Talking about the use of AI by tax authorities, we often think about this in silos. We envision a single country’s tax authority operating its e-invoicing system and deploying AI solutions over its datasets.
But what if that data were shared between regulatory authorities within a jurisdiction or even across borders? Instances of multinational tax avoidance or evasion could then be swiftly addressed, and excessive profit shifting through transfer pricing could be met by powerful resistance. Again, the possibilities are nearly limitless.
A growing trend of increased cooperation between tax authorities and enhanced standardized data reporting tools at their disposal. Examples include the implementation of country-by country reporting (for transfer pricing purposes), DAC 7 (for platform reporting), DAC 8 (for reporting and exchange of information on crypto assets), and supplemented by measures such as Pillar 2 of BEPS 2.0 (which should reduce tax competition through the implementation of a global minimum tax).
A world in which information is exchanged freely and efficiently between tax authorities around the world and where cooperation is enhanced to combat the evils of avoidance and evasion.
AI is an irresistible force in the hands of the tax authorities.
After all, tax authorities exist to serve the community.