Innovation is creating new demands - and new tools, writes Jay Nibbe.
Entrepreneurs, including many of EY's Entrepreneur Of The Year finalists, are disrupting traditional models, often with new technologies, to develop their businesses and drive growth. But for an entrepreneur, there is nothing worse than discovering the ultimate cost of doing business will erode your profit margin and return, or that your business is not operationally organised to handle its growing complexity.
Tax is one area where this can occur.
Entrepreneurs need to think about how they respond to, and apply, the implications of technological disruption on products and services, as well as the tax implications of digital change on business operations. Companies must understand the complex questions around taxation in a digital world, such as 3D printing of goods in the supply chain or digital customer platforms that replace the physical "sale".
As tax increasingly becomes central to core business decision-making, entrepreneurs must consult with tax professionals who can think digitally and are more regularly being included in key business conversations, even within small businesses and start-ups.
Ultimately, entrepreneurs must ask how technology can be leveraged to help build a more effective tax function and meet the requirements of real-time data mining, collection and analysis.
Digital is the mega-trend of disruption, accelerated by new technologies. It is enabling real-time access, on-the-spot analytics and assisting with the expectation of instantaneous visibility. Responding to this, the tax reporting complexity is evolving and must be monitored across a number of fronts.
New regulatory requirements - such as transparency measures under the G20/OECD Base Erosion and Profit Shifting (BEPS) project - are underpinning this evolution, and governments are starting to combine data with technological innovation to make tax systems more efficient. As they become increasingly sophisticated, authorities can tap non-traditional data sources, such as information gathered during tax investigations, to reduce the cost of compliance for many individuals or companies while also increasing collections for government. This is a tremendous improvement on the current environment.
Tax authorities in many countries are taking advantage of digitisation to introduce new e-invoicing requirements into national legislation to help collect indirect taxes, such as GST and VAT. Others are going a step further and asking companies to provide electronic audit files directly from their ERP systems.
As digital tax within governments and big data analytics become a reality, more information will be required directly from financial systems rather than being synthesised from traditional tax function processes. The tax function must be able to meet the demands of governments' digital tax administration as regulatory change and transparency requirements further intensify.
New technologies, such as blockchain, artificial intelligence and robotic process automation, are driving the most transformative developments in tax, introducing a new era of access into transactional data that can help businesses unlock value, manage risk, improve efficiency and provide business insights.
Entrepreneurs are evaluating supply chains and global trade flows, and leveraging analytics in various other areas of the business to anticipate tax risks. Visualisation platforms are one tool, allowing businesses to highlight outliers and unlock value to establish a sustainable competitive advantage.
Amid all the disruptive forces impacting the business world, the burden of global tax compliance and reporting, and its associated technology systems requirements and investment needs, can hold back entrepreneurs. This impact should be considered by tax authorities and governments, perhaps with some agreed upon recommended threshold level of activity, to help ensure that emerging and disrupting organisations can thrive before the burden of international tax compliance arrives.
Simplified and streamlined tax administration processes, for example, can ease administrative burdens on young entrepreneurs. It can also improve cashflow and decrease the compliance costs associated with paying taxes.
Governments, corporates and entrepreneurs need to work together to create an ecosystem that helps entrepreneurs launch and grow their enterprises. Entrepreneurs also need more of a voice in defining tax regulation because they often lack the lobbying resources to make meaningful impact on policy change.
By listening to entrepreneurs through forums and other feedback mechanisms, governments can do more to ensure entrepreneurs are not overlooked. In this way, governments can also minimise the impact of unintended consequences on entrepreneurs from new tax rules.
Tax regulation is undoubtedly a key lever for improving a country's business environment. This, in turn, impacts entrepreneurial prospects but policies must be designed to support early-stage and established entrepreneurial ventures. For example, mechanisms that reduce indirect taxes can give early-stage businesses a boost, while targeted tax and business incentives are highly important to help young entrepreneurs scale, such as encouraging investment in start-ups by offering tax benefits.
While technological disruption is creating new demands on the modern tax function, digital innovation, including the development of online hubs, can help entrepreneurs navigate complex regulations, share experiences and seek out help that will ultimately help their businesses grow more quickly.
What's clear is that technological disruption and global tax reform - including the OECD's BEPS project - aren't impacting only big business. It is important for all stakeholders to work together to avoid further uncertainty that could be costly and burdensome for business, particularly start-ups and those at a grassroots level.
Entrepreneurs need to be empowered to make the right decisions at the right time and ensure that tax issues do not end up dominating their business trajectory.
Jay Nibbe is EY'S global vice-chairman - tax. The views reflected in this article are those of the author and do not necessarily reflect the views of the global EY organisation or its member firms.