It seems crass to admit it, but periods of crisis drive innovation. While the jet engine, large-scale penicillin manufacturing and programmable computing would all have been developed in time, the Second World War massively accelerated the process, with the exigencies of war bringing us unimaginable dividends during the peace that followed.
We’re already seeing the same with COVID-19, and not just in the development of new vaccine techniques. The pandemic has brought medical misery, of course, but it has touched almost every aspect of our lives, including bringing global trade to a virtual standstill. And this has placed a new focus on a once-humble and neglected business function: accounts payable (AP).
With revenues plummeting during lockdown and the seizing up of the international supply chain, enterprises are discovering just how crucial a role AP plays in business continuity, cash flow management, forecasting, budgeting and more. Whisper it quietly, but the coronavirus will bring a business dividend driven by the need to unlock greater insight and agility. And this will confer other significant benefits to some pressing questions that predate the pandemic – including in the vexed area of international regulatory compliance.
Taxing times on the horizon
Compliance is a challenge that predated the pandemic. Champions of globalization have long dreamed of a single, standardized taxation regime for the whole planet. But even if that prospect remains far in the future, the last few years have seen a move for greater transparency and regulatory insight into cross-border taxation, which could form the foundation of future, global standardization.
National Continuous Transaction Control (CTC) systems are being developed to counter the perennial – and hitherto hard-to-combat – problem of corporate tax avoidance. This isn’t just an issue for countries with a historically lax approach to tax enforcement; in 2018, the OECD revealed that almost half of potential VAT is never collected, with the treasuries of EU member states losing an astonishing $167 billion. That’s well over the entire budget for the European Union.
With the last year’s lockdowns and furloughs limiting national tax revenues still further, there is a new imperative for countries to ensure they have the means to maximize the money brought in through taxation while clamping down on avoidance. And, CTC systems appear highly promising; in Brazil, they have helped authorities to harvest an additional $58 billion, while in Mexico, collection has increased by a third.
The most popular form of CTC in the world today is clearance e-invoicing, where electronic invoices are cleared directly with a tax authority or its appointed agents before, or as part of, the issuance process.
The benefits of CTC are obvious, but it places a heavy burden on businesses, requiring them to prove the validity of every invoice the moment it’s generated. And this in turn requires superhuman efforts from accounts payable and the IT teams that support them. Global standardization is still far on the horizon, and, for now, many countries have their own set of requirements for sending and receiving invoices, different formats and content fields, varying exemptions, and a range of security requirements and non-compliance penalties.
Adapting existing tools and systems to meet the new requirements can be particularly challenging. In fact, this is a common issue among global organizations that must accommodate the shift to mandatory e-invoicing in different markets. Technology can provide a fix, but it requires businesses to undertake a fairly fundamental re-thinking of their approach. It’s not a case of simply grafting a clever application onto their existing tech stack.
Quite often businesses’ legacy ERP or accounts systems aren’t flexible or robust enough to meet the new requirements. Overcoming these problems can often mean painful workarounds and an increase in manual intervention that negates any of the benefits they should be obtaining by transitioning to digital invoicing. In the worst cases, companies that fail to accommodate the changes are finding themselves liable to substantial fines.
Crisis drives progress
Let’s be clear, the transition to digital invoicing would have happened even without COVID-19. Forecasts predicted that by 2025, 75% of all B2B invoices globally will be digitally exchanged in real-time, and the current crisis means we’re likely to get to the tipping point all the faster.
This can only benefit compliance. As global businesses come to terms with this complex new layer of country-by-country regulation, the ones that manage the challenge best are the ones that deploy digitized systems that enable them to scale with speed and full compliance.
There is growing acceptance that taking a more proactive stance to these changes can unlock a number of operational benefits for accounts payable such as greater accuracy and reduced exceptions and errors from manual processing. Software as a Service companies have made great strides in providing embedded tax compliance monitoring and change management capabilities to adapt to new and changing CTC requirements.
Forward-thinking organizations also recognize that the benefits of digitization extend far beyond AP’s traditional bailiwick of managing invoices and payments. Schaeffler Technologies is one business that has managed to stay on top of the complex and constantly-changing compliance landscape by moving to a fully digitized environment.
“Staying compliant is all about having high quality data, and when you’re relying on manual input you multiply the opportunities for error,” explains Shaeffler’s Michael Hofmann. “But it’s just as important that we can foresee and prepare activities accordingly so we fully comply with all local requirements.
“By receiving data electronically, we ensure 100% reliability of our data while giving us the agility to respond quickly to changes in validation rules. To take just one example, if we receive invalid documents from our supplier with incorrect tax, they will be automatically declined before they are received. Digitizing processes is like a financial firewall, protecting us from error, reducing the costs of processing transactions and ensuring we are always fully compliant.”
Even in their most fevered dreams, business continuity practitioners could not have imagined such a colossal, far-reaching and long-lasting catastrophe as COVID-19. It would be inhuman to suggest that millions of deaths around the world are a price worth paying for the increased drive towards digitalization; at the same time, it would be myopic not to see that this crisis is also an opportunity to respond to future disruption with dynamism and agility.
This column does not necessarily reflect the opinion of FinLedger’s editorial department and its owners. To contact the editor responsible for this story: [email protected]