Tax authorities have become technologically sophisticated (see our previous article How global tax authorities are embracing technology and how tax teams can learn from them) and combined with the growing need to refill the diminishing coffers of the state, this is putting taxpayers in the crosshairs. While avoiding late filing penalties was once the objective of most Financial Institutions (“FIs”), compliance with the Foreign Account Tax Compliance Act (“FATCA”) and the Common Reporting Standard (“CRS”) has become more about filing accuracy. This has shifted the focus to data.
As many people are now acutely aware, FATCA and CRS require FIs to report the personal information of certain investors or account holders (“Customers”) that are tax resident in one or more of over 100 reporting jurisdictions. Once the FIs report the Customer information to their home tax authority (or in some cases directly to the US IRS), that tax authority exchanges the information with the tax authority where the Customer is tax resident. This enables the Customer’s tax authority to pursue the Customer where there is an indication that the taxable income may have been underreported.
According to articles in IFA Magazine and FT Adviser, HMRC made over 540 requests to overseas tax authorities last year, a 24% increase on the previous year, and gathered over £600 million from tax fraud and avoidance investigations in the last two years. A separate article by FT Adviser, which reports on statements made by the Chartered Institute of Taxation, states that last year HMRC sent a bulk mailing of letters to UK taxpayers that were identified as investors in offshore investment funds to “urge the recipient to check that they have correctly declared all interest and dividends” from these funds. All of these above articles attribute HMRC’s actions, at least in part, to information they received as a result of the exchange of information under CRS.
Positioning themselves to better monitor compliance, as well as manage the volume of information received, tax authorities all over the world have introduced new technologies. As the rules require specific actions be taken by FIs to collect, analyse, and report this information, the tax authorities are starting to use this technology to identify inaccurate or inconsistent reporting that may indicate wider non-compliance. Therefore, FIs that don’t follow the rules, or more likely, follow the rules but have challenges managing the information required to comply, should be concerned about the associated impacts on their business.
While this exercise sounds straightforward, it is far from that. The technically complex analysis to determine the scope of the obligations coupled with the need to obtain and analyse large amounts of group entity and Customer data can make the task nearly overwhelming. These challenges have forced many FIs to use “best efforts” to timely file these reports and avoid late filing penalties. However, the inability to meet a higher standard may cause backlash from Customers that should not have been reported and can result in penalties for filing inaccuracies and lead to inquiries into the FI’s policies, procedures and internal controls, which could result in even higher penalties.
As a result of the controls built into the rules, only a limited amount of non-compliance or inadequate reporting is intentional, most is the result of poor data quality. Good data is integral to compliance as it allows FIs to determine which Customers are subject to reporting and, of course, file the correct information. However, capturing the data, cleaning the data (fixing missing or inconsistent data), and then safeguarding this data, especially when everyone in the organisation needs to use it, is a massive challenge for large businesses. Not that it necessarily matters to tax authorities, but most organisations are in the same boat, not just FIs.
According to the article on ITProPortal, “Real digital transformation starts with data governance”, 82% of CEOs have a digital transformation (DX) or management initiative in place. While these DX programmes look to use advanced technology to innovate their systems and processes with tools such as robotic process automation (RPA) and cognitive technology, their initial focus is on data. According to the article, 96% of artificial intelligence (AI) and machine learning projects are hindered by poor data quality while 78% of these projects are suspended as a result of it.
As organisations focus on technological advancement, they must be careful not to get ahead of themselves; while technology is sexy, data, well…isn’t, but it needs to be prioritised. While technology should support any data initiative, the focus needs to be on the processes and controls around capturing and maintaining the right data. This is not an initiative that can be pushed to IT, this needs to be led by users of the data and subject matter experts, with the support of IT.
While this exercise will directly benefit the tax team it will also benefit the rest of the organisation through increased productivity and technology development. According to a study by Harvard Business Review only 16% of managers fully trust their data and workers spend 50% of their time searching for data, correcting errors, and seeking out confirmatory sources. In addition to the above negative impacts that bad data can have, technology can be a waste of time and money if it is not built on a foundation of reliable data. This initiative will allow organisations to introduce effective new technologies that will lead their business into the future.
To find out more about our data-focused approach to compliance using our technology-supported services contact me below.
