Tax compliance is a critical element of any organization’s financial operations. We can also say for individuals who are eligible to pay taxes in the country. Compliance relates to the extent to which a taxpayer meets their tax obligations. Generally, a taxpayer’s obligation encompasses issues such as registration in the system, timely filing or lodgement of requisite taxation information. Tax obligations also consider reporting of complete and accurate information which involves good record-keeping and the payment of taxation obligations on time.
If a taxpayer fails to meet any of those obligations, then they may be considered to be non-compliant. Indeed, good record-keeping is at the heart of tax compliance. That said, the manual process of gathering, consolidating, and validating all the data necessary to meet different compliance obligations is not only cumbersome but also time-consuming and error-prone. For this reason, it only makes sense that tax compliance processes must also shift from the old ways to modern systems at a time digital transformation is permeating every aspect of business operations.
An application of a range of tax software tools can help businesses to manage their tax audits and ensure compliance with tax laws and regulations. Indeed, tax software tools can automatically synchronize entries based on prevailing regulations and ensure compliance. These include automated tax reporting and filing, real-time tax calculations and reporting, and detailed analytics and reporting capabilities to help business owners to understand and manage their tax obligations smoothly. Companies can configure tax codes (registration numbers) and rules to their business needs and integrate them seamlessly with digital applications.
Indeed, to help businesses to integrate tax tools into their operations begins with conducting a thorough analysis of their tax requirements and business processes. The process involves identifying any potential issues or areas of concern and developing strategies to mitigate any risk. From then on, a customized implementation plan can be designed for them based on their unique needs.
In another perspective, data mining with a robust computer software and integrated database structures can also be used to streamline tax compliance. Data mining involves exploring and analyzing by automatic means large quantities of data to discover meaningful patterns. Data mining software can be used to distinguish the characteristics of taxpayers that have been compliant from those that are non-compliant. The software can analyze thousands of characteristics simultaneously and find patterns in the data that can be used to provide new criteria for identifying non-compliance. It is an example of how a digital application can be used to improve human auditing experience.
Tax Software Statistics
A survey conducted by the (OECD) Organization for Economic Cooperation and Development (2021) revealed that digital tax administration has recently been transformed with the application of artificial intelligence (AI), the Internet of Things (IoT), cloud computing and blockchain technology. The survey also showed that in 2020, digital contacts in tax administration increased by 30% while 1.3 billion contacts used online taxpayer accounts. Apart from that, 30 million contacts engaged with chatbots in the same period.
In a related development, the Journal of Accountancy (2022) points out that “when it comes to the adoption of tax software, 78% of users prefer having the platform in their own network rather than cloud-based with only 22% use tax software from the vendor’s server. Among the top benefits identified by tax software users are the comprehensiveness in the number of forms (54.2%), ease of use (50.3%), and accuracy (49.9%). On the other hand, major pain points include price (54.7%), tax research (33.1%), and lack of support service (14.8%)”.
Tax software tools in addition to ensuring efficiency and timeliness, can help businesses to contain compliance costs and eliminate unexpected cash-flow issues. Tax software tools are configured to accommodate any form of amendment to tax laws and regulations and adherence to those changes thereby prevent penalties and fees.
Other Benefits of Tax Compliance
Ensures Business Continuity: Failure to comply with tax laws and regulations can lead to the disruption of normal business operations. We have witnessed instances where business premises were closed (temporarily) for non-compliance and attracted negative media reports. Tax compliance ensures business continuity and can have a significant impact on the organization’s overall performance and growth.
Improves accuracy of financial reporting: It is important to gather all relevant tax information and ensure it is up to date because tax compliance requires accurate financial reporting, which can provide valuable insights into a company’s financial performance. Indeed, improving accuracy of financial reporting is also at the backdrop of sufficient data. In this regard and for audit purposes, it is important to maintain detailed records of all communications, documents, and other relevant information. This can help ensure that you have a clear understanding of the audit process. As a result, any decisions or outcomes can help to prepare for future audits or other tax-related activities. The goal of a tax audit is to ensure that you follow all applicable tax laws and regulations. To achieve this, it is important to work proactively to identify and address any areas of non-compliance, and to implement appropriate measures to prevent future issues.
Builds trust with stakeholders: Compliance with tax laws can help build trust with stakeholders, including customers, investors, and employees. This trust can contribute to the organization’s long-term performance and sustainability. To sustain the trust with stakeholders, it is very necessary that business owners maintain open and regular communication with their auditors and tax officers. This involves providing requested information in a timely manner, responding to questions or concerns, and working collaboratively to resolve any issues that arise.
Despite technology can easily streamline tax compliance and ensure convenience to both the tax-payer and the state, non-compliance cases will still persist due to economic and behavoural factors.
Economic/Behavioural Factors
Concerning the economic factors, for example, if a business owner has a tax liability that can easily be paid, they may be willing to comply. However, if the tax liability is huge and they consider it as a financial burden or threat to their businesses’ survival, a business owner may avoid paying it at all or try to manipulate the data reported in order to incur a smaller (but incorrect) tax liability. With regard to the behavioural factors, people are less likely to comply or honour their tax obligations due to real or perceived inequities (a situation in which a taxpayer believes ‘the system’ is unfair or has personal experiences of ‘unfair’ treatment). In other words, lack of transparency and social injustice can hinder tax compliance.
Conclusion
The use of technology in tax has evolved to a stage where various digital applications and tools are available for organizations and other businesses. There are software tools for compliance tracking and litigation management. Indeed, there are data reconciliation software and tax provisioning and tax audit report tools as well which businesses can explore to streamline their tax obligations.
BERNARD BEMPONG
Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.
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