Meet Alex Baulf, Senior Director of Global Indirect Tax at Avalara

This is a period of unprecedented change for indirect tax in terms of new legislation, new rules, and whole new VAT regimes in countries and regions that didn’t previously have VAT. It doesn’t really matter where a business is based: Businesses can have a VAT obligation anywhere in the world. It’s almost just a click away.

One of the big trends we’re seeing at the moment is the move to digital reporting and e-invoicing. That’s a huge shift both in terms of how VAT is reported to tax authorities, and how tax authorities audit businesses to ensure they’re in compliance. We’re moving away from a manually produced summary VAT return and from having an auditor come out in person to review a few bank statements and sample invoices, look at a couple of sample returns, and then maybe raise an assessment.

What we’re seeing now is businesses being forced to submit transaction-level details directly to the tax authority, in close to real time or real time. Tax authorities no longer need to do sampling because they already have the whole data set; they know every single transaction, every invoice that’s been raised by a business to a customer, as well as every invoice the business received. The game has really changed.

Italy was one of the first countries to enter into this e-invoicing rail back in 2019. In the last six months, a dozen European countries have announced they’re introducing either mandatory e-invoicing for business-to-business (B2B) or business-to-government (B2G) transactions, or pilot programs where people can voluntarily use the platforms, raise invoices, and share that data with the tax authorities. Ultimately, these countries will make the voluntary programs mandatory, maybe in as soon as 12 or 18 months. France and Spain will have mandatory e-invoicing by July 2024, and Germany has suggested they’ll be introducing something similar in the same time frame. With Italy, that’s the big four economies in Europe, and the rest will follow. We’re seeing more e-invoicing mandates in Eastern Europe, too: Poland, Slovakia, Romania, and Hungary have recently launched e-invoicing systems. So, that's a huge change.

The other big change we’re seeing is how countries tax ecommerce and supplies of digital services — everything from SaaS cloud solutions all the way to apps and any other digital content sold online to individuals. Close to 100 countries around the globe now (or soon will) tax digital content supplied by a nonresident business, a foreign vendor. You don’t need to have any presence or any people in that country; just having a customer there is enough to force a foreign digital service provider to register, charge, and remit tax in that country. Often the thresholds are very low, or there’s no threshold at all.

A similar theme is the taxing of low-value imports. The EU started requiring businesses to collect VAT on commercial imports (on remote sales to European consumers), removing the historic VAT exemption for low-value goods on July 1, 2021. To facilitate the collection, declaration, and payment of the VAT due, the EU simultaneously launched the Import One-Stop Shop (IOSS), which allows tax to be charged at the point of sale and for the goods to enter the EU without any additional tax levied at the border. By the end of last year, 7,500 businesses globally had registered for a single, pan-European VAT return through IOSS. It’s a very streamlined process, for compliance.

We’re seeing this model spread across the globe. In addition to the EU, Switzerland and Norway have similar rules within Europe, as do Australia and New Zealand. Singapore and Malaysia will be introducing similar rules next year, and we’re seeing countries in Africa, like Nigeria, do the same.

Whenever there’s a new digital reporting requirement, it’s new for the tax authority too. It’s not just businesses that are on a finance transformation and digital journey — it’s also the tax authorities themselves.

Tax authorities are upscaling their own people to be more savvy with data, to be able to use data analytics and take a more risk-based approach for audit. They’re also investing in systems — big data centers — so they can receive data, analyze it, and run exception reports and data analytics.

Some tax authorities are starting to use AI (artificial intelligence) to pinpoint irregularities, inconsistencies, and fraud. A good example of this is in Latin America. Brazil was one of the first countries to introduce e-invoicing and the digitalization of tax compliance, a decade ago. Today, tax authorities in Latin America are working to create a data center and a center of excellence for AI that will be used to interrogate taxpayer data. 

This sort of use of technology and analytics by tax authorities will continue at a fast pace. We’re starting to see some tax authorities actually match data off between vendors and customers, because VAT is different from sales tax insofar as most businesses can recover the VAT they incur on their purchases. (That’s why it’s a tax on the value added: It’s a tax on your sales minus the tax on your purchases.)

Tax authorities will look at the unique invoice numbers and VAT registration numbers, and they won’t allow VAT credits (recovery of that VAT) if the VAT hasn’t also been reported on the sales side by the vendor (supplier). This reduces the chance for fraud but also puts a huge emphasis on businesses to input and share the right data. Now, making an error at the AP invoice entry stage in a system can cause a transaction to be flagged and challenged by a tax authority and prevent the VAT from being refunded in a timely manner.

Businesses therefore need to ensure everything is correct — from the currency conversion to the customer’s VAT number and the invoice amount — and able to be shared with the tax authorities.

This is unprecedented. It’s often not just one new digital requirement businesses need to face; it’s a lot of them. A lot of businesses in the mid-market, enterprise level, that have a presence or a registration all over the world are basically playing whack-a-mole. They have to suddenly meet all these new requirements. 

Historically, businesses were tactical. When a new requirement came in, they’d figure out a way to meet it. Maybe that was a small, sticking plaster approach, maybe getting some local software from a local vendor in that country, maybe even outsourcing the compliance headache to a third vendor in that country, or doing digital reporting or e-invoicing in parallel to the normal business-as-usual process.

Now, everyone is moving to digital reporting and e-invoicing. And there are so many countries that playing whack-a-mole doesn’t really work.

The challenge is true. It’s there. As they face it, businesses are trying to take a more holistic approach and find a strategic solution through technology. They’re also hiring people with different skill sets, people with data science as a background or tax technology as a focus area.

Unlike the local tactical approach we saw before, the software, technology, and processes businesses are putting in place today are more scalable and global in nature. Businesses want single platforms and solutions that can meet tax requirements across a whole region or across the globe. That means they’ll be on the front foot as more and more countries bring in new requirements. It may be new in that country, but the business has probably seen something very similar somewhere else and can roll out the same software, solution, and process to meet it.

They struggle. Some countries set thresholds for when you have to submit additional digital records or move to mandatory e-invoicing, but often there’s merely a delay: Countries set new obligations for large businesses first; requirements for smaller businesses follow.

So, again, it’s a big pain point. Smaller ecommerce businesses don’t have the same resources as larger businesses, particularly in IT. They don’t have the same in-house tax knowledge. They’re looking for solutions that are easy to implement and scale and actually connect to their own infrastructure: For example, if they’re working with marketplaces, they want integrations into their marketplaces. If they’re using cloud software, they want e-invoicing and tax compliance software to interact with that software.

Actually, we’ve seen that ecommerce businesses and SMBs (small and midsize businesses) have adopted the cloud first. They’re migrating to the cloud and adopting digitalization ahead of their larger counterparts, and they’re reaping the rewards. And that’s good, because new obligations are on the horizon. India just announced that a new tier of businesses will have to adopt mandatory e-invoicing from April 1, 2022 — so about 180,000 small and midsize businesses in India have less than 30 days to find a new e-invoicing solution.

France is implementing mandatory e-invoicing and digital reporting for large businesses from July 2024 and for SMBs starting in 2026. About 99% of all businesses in France are SMB, and 50% of all invoicing flows are also SMB, so millions of businesses will need to learn about quite complex requirements, find a solution, implement it, and train their people. That can become a barrier to trade.

A lot of U.S. businesses are really struggling with the concept of VAT because it’s foreign to them; it’s very different from sales tax. They’re selling in all these different markets and have VAT/GST registration requirements just because they have customers in a country. And if they enter a country, maybe with people, with presence, they may suddenly be forced to meet even more stringent reporting requirements: e-invoicing, digital reporting, the way the VAT return must be submitted.

We saw lots of U.S. businesses register for IOSS so they could have a streamlined way of selling to European consumers. The feedback we’ve heard is great because they no longer have to worry about unhappy customers having to physically pay tax at the border. Also, if customers return goods, VAT that historically was lost can now be credited and refunded through the return.

But I think a lot of U.S. businesses still aren’t aware of their tax requirements outside the U.S., and noncompliance can lead to two main issues: 

1. It can be a barrier to trade, affecting customer experience and the brand

2. It can disrupt an exit event (e.g., a merger, sale, or quest for funding)

The first point is fairly obvious: Bad experiences can lead to unhappy customers.

The second point may never come to pass, but it can be devastating if foreign VAT/GST liability is uncovered out of due diligence when a company seeks funding or is a candidate for an acquisition or merger. The outstanding VAT plus interest and penalties will cause a huge chunk of liability or theoretical liability to be knocked off the value of that company for its sales price or valuation for funding. 

It’s better for U.S. businesses to be on the front foot and start managing global VAT requirements than be ignorant and have that tax bite the business down the line. 

The U.S. is probably the only major economy in the world without a VAT system. When I talked about this 10 years ago, when I was based for a time in the U.S., I could point to a few other economies that didn’t have one yet: Saudi Arabia, the UAE. But over the last few years they’ve implemented a VAT system. Now, apart from Hong Kong, I think the U.S. is the only major country without a VAT system. It will be interesting to see if that goes on the agenda.

I appreciate the complexities in the U.S.: the state system, the federal system, who has the right to tax and dictate how businesses are run. But you only have to look across the border to Canada to see that it’s possible to have a dual system. In Canada, tax is collected at a federal level (GST) and provincial level (PST), and they’ve actually been able to harmonize it in several of the provinces with HST. If the U.S. were to adopt a value-added tax, it would have to be a very U.S. local version of VAT. Maybe that’s to come.

The U.S. is also starting to look at digital reporting and e-invoicing. Massachusetts has mentioned digital reporting and maybe getting credit card companies involved as well, getting financial processors involved in collecting and remitting the tax.

There’s also a federal e-invoicing pilot program looking to spread the use of e-invoicing across the U.S. This would make doing business across the U.S. more efficient, not just from a tax perspective, but also from a doing-business perspective. It could also reduce overall costs and  be better for the environment (less paper invoices). 

Outside of the U.S., we’ll continue to see the spread of e-invoicing and digital reporting requirements across the globe, as well as taxation of ecommerce and digital services for foreign vendors. Countries that haven’t implemented those rules will do so, probably in the next five years.

The world will get a lot smaller. Tax authorities will get a lot closer to businesses because they have the data and the technology to get the real insights. Their approach will continue to evolve. It will be data driven, more sophisticated, and more targeted. That puts the pressure back on businesses to ensure they’re complying, charging the right amount of tax at the right time, and submitting the right data to the tax authority. 

Alex Baulf is on a mission to educate U.S. businesses about their growing global tax obligations and help businesses based outside of the U.S. understand sales and use tax. Businesses selling internationally tend to have more indirect tax requirements in more countries today than ever before. Fortunately, technology has kept pace with tax changes. Avalara helps businesses to meet new compliance obligations with new solutions.