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Getting ready for VAT digitisation: automation is key

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Christiaan Van Der Valk, Vice President for Strategy and Regulatory at Sovos, says technology will power real strategic success for companies required to follow continuous transaction controls (CTCs).

A growing number of governments and businesses around the world are adopting digital-first approaches for a multitude of processes, resulting in a need to move away from traditional paper-based invoicing and embrace real-time tax reporting. This trend has been largely led by Latin American countries such as Brazil, Chile and Mexico. Through adopting real-time reporting via electronic invoicing systems, they have been able to better understand their economies, reduce fraud, and close VAT gaps.

The shift to continuous transaction controls (CTCs) allows transaction data to be automatically streamed to governments, reducing the need for resource-intensive business systems and document audits for tax administrations. Through the use of rich, standardised data, tax authorities are able to compute a business’s tax liability. Businesses are generally not required to be heavily involved in this process.

With this requirement – combined with invoicing – businesses would be able to avoid filing periodic tax returns, relieving them of the burden of running VAT compliance teams and filing reports that bring no benefit. The practice, however, calls for a more comprehensive data management approach and proactive data reconciliation across different sources of government-controlled transaction data. For this reason, companies need access to a high-quality dataset in case they must challenge government-determined tax liability.

It can be problematic to have poor data quality in a VAT environment that relies heavily on legacy reporting. For example, there have been instances in which reports were inconsistent or didn’t correspond to accounting data in audits. Consequently, fines or penalties may be imposed. However, in the world of CTCs the consequences of data quality issues are of a very different magnitude. Your financial and physical supply and demand chains can practically grind to a standstill if your data isn’t approved by the tax administration – especially in nations where the tax administration ‘clears’ the invoice in real-time such as in Italy, Mexico and Brazil.

Many businesses with responsibilities in VAT jurisdictions are missing something important here. Beginning to utilise automation and other more specialised tools for producing VAT returns is a critical step toward harnessing the benefits from the mandated transition to CTCs as opposed to focusing on the challenges.

Manual is outdated

A lot of businesses are still using manual processes like spreadsheets to manage their VAT compliance, which essentially involves the time-consuming production and submission of VAT returns.

Through implementing technology like automated rules in software, companies can maximise the validity of VAT data. As well as simplifying and re-risking VAT reporting activities, the effort required to design the steps to enhance data using automated rules engines means establishing structured definitions of ‘what’s wrong with your transaction data?’ These definitions can then be used to identify the cause of quality concerns in upstream business processes and address them in order to dramatically improve CTC readiness.

For many businesses, the majority of quality concerns are down to the manual and paper-based processes used in internal workflows and trading partner relationships. Therefore, automation will play a vital role in properly preparing for CTCs.

Preparing data in this manner for VAT enforcement means that a business is paving the way for a more data-driven approach to compliance in general. Companies will increasingly be required to coordinate data being submitted to tax administrations automatically from a range of business process and accounting systems, once CTCs and other VAT digitisation initiatives become operational.

Keeping up to date with the expanding scope of information that is handed over to tax administrations in these automated data transmissions is crucial, so that companies can maintain a level of control over the image of their business operations that is constructed for the tax authorities.

As well as this, a business may benefit from this insight across data encompassing the full supply chain and transactions.  For instance, this information gathered could be turned into tactics to help with strategic planning.

Business leaders may reduce expenses, boost resilience, and improve controls by automating tax and business operations and adopting a data-driven approach to compliance, allowing for a more accurate and detailed understanding of granular reporting needs.

Organisations should prioritise the building of dashboards utilising modern analytics tools to prepare for this huge transition. It’s also important to have a well-organised evidence base with clean digital archives. Technology and the insight it brings will be the driving factor for real strategic success as economies recover from the pandemic.

Data flow is key

As tax authorities and governments work to reduce VAT gaps, greater visibility into corporate databases is at the top of their agenda. This is accomplished through the government’s digitisation of all tax reporting, in which data is delivered at regular intervals that correspond to the flow of transactions and the government’s data requirements.

It is imperative that transaction data, relevant primarily for VAT purposes (though not exclusively), be received in a transactional manner. Meanwhile, other types of information, like payment data or inventory movement, may be requested on a weekly or monthly basis, whereas broader accounting data might be requested more frequently.

The introduction of CTCs should not be viewed as an IT formality, but as the first step in tax administrations gaining easy, timely and effective access to source data. The digitisation of tax will enable administrations to access data on a regular basis, as well as at a granular level.

As companies transition from manual data entry into this new world of automated data exchange, they should concentrate on why this change is important rather than how it is happening. The real prize here is not getting the ‘plumbing’ to work according to government specifications; focusing on this ‘how’ question means that companies may be missing out on a potentially critical business enabler, but equally they may be inadvertently setting themselves up for much higher levels of compliance risk.

With the introduction of CTCs and various forms of detailed digital reporting, companies should be prepared to be exposed to much more stringent audits. The reason for this is that data quality or consistency issues will gradually become more transparent to tax administration teams, which will increasingly be enabled to respond to even the smallest inconsistencies that may previously have gone under the radar with surgical precision.

The higher level of visibility allows tax authorities to cross-check more company data, its trading partners and third parties’ data. These abilities will be vastly improved as more governments complement CTC requirements with mandates for SAF-T and similar electronic auditing requirements. Through thorough analysis of this growing mass of real-time and historic data, a firm’s operations can be fully understood.

Successfully adapting to CTCs means investing in the journey rather than the destination. As everything becomes more digitised, organisations must stay on top of these changes and maintain the same level of data insights as tax authorities do. There will be a growing need for this as more countries introduce CTC regimes (both France and Germany are on the horizon).

Adapting business tools to deliver better data insights is essential to facilitating tax digitisation, both to satisfy global tax authorities and to achieve a competitive advantage in the market. In short, companies should remain fully alert and prepared to ensure a smooth transition and successful outcome of CTCs, which are the logical next step on the road to business transparency.

The domino effect of CTCs

The willingness of autonomous governments to accept digital tax reporting will determine how widespread its implementation becomes. Following more than a decade of success with these methods in Latin America, governments all over Europe, for example, have made major moves toward introducing CTCs. In doing so, there is a great deal of preparation that international companies need to do which can take a considerable amount of time and resources.

In all jurisdictions with indirect tax systems, moving toward increasingly digitised tax controls is the only path. With real-time data, governments can better understand and analyse their country’s economic health, while also enhancing fiscal controls and reducing fraud. It’s just a matter of time until these digital programmes become standard practice on a global level, as countries all across the world begin to recognise their success in reducing fraud, increasing efficiency and closing VAT gaps.

Finance

The penny has dropped – the finance sector needs Data Governance-as-a-Service

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By Michael Queenan, Co-Founder and CEO at Nephos Technologies

 

In our data-driven world, the amount of data is growing exponentially and it’s predicted that the amount generated each second in the financial industry will grow 700% this year. Leaders of financial services organisations have realised two things since the start of the pandemic – that data on their customers and services is their greatest asset and that they must embrace technology to make intelligent business decisions to grow successfully and outperform competitors.

Since the financial sector holds arguably the most valuable and sensitive information, organisations must do more than just store this data. They need to ensure its security, integrity, and governance so that it’s useful in improving the brand’s customer experience, innovating products and services or predicting future trends to improve risk management.

Yet without a robust data governance model – a strong set of rules and processes for what data means, and how it is categorised, owned, accessed, stored, and used – data is worthless. Only when an effective data governance model has been established, will data meet regulations and be secure. Data leaders must shift gear in their data processes to avoid hefty compliance penalties and unlock potential value from their data assets.

 

The data governance challenges faced by financial sector organisations

The barriers for achieving ‘good governance’ are many and varied. Ignorance of the benefits of data governance is a major hurdle for developing a governance strategy. Many financial firms have invested – at significant cost – in data governance tools, but struggle to deliver the benefits they are looking for. Many don’t have the right skills and resources to maximise or set the right metrics to measure the business value. Some are compromised by unoptimised gaps in their approach.

With many different elements to master, data governance is complex – from identifying the right tools to managing the challenges presented by encryption, all whilst ensuring that data quality is sustained and data is managed responsibly.  The negative impact of misplaced investment in ineffective data governance strategies can be significant, for the short and long-term.

 

Why data governance matters

With the acceleration of digital adoption in the financial services industry, it has become crucial to deliver seamless, intelligent customer experiences. Data governance is the key to managing data flow, ensuring compliance, and scaling up. Proof that data governance matters is evident in the Master Data Management Market growth prediction, from $16.7 billion in 2022 to $34.5 billion by 2027.

Data governance is a comprehensive methodology for ensuring the quality and security of the company’s data. The various benefits of an effective data governance strategy include minimised risk, coherent policies, metrics and processes, and better implementation of compliance and enhanced data value. However, for financial services, there are significant advantages as a result of the following:

  • Data governance saves the company money by increasing efficiency. Precious time can be saved by having good quality data and a single source of truth, with less duplication of data, and less time needed to correct data errors.
  • Good data governance gives the business confidence in having accurate and trustworthy data, the holy grail for delivering outperforming customer experiences.
  • A data-driven culture can also be introduced to your business through good data governance. With the ability to gather critical customer and market insights that can guide the direction of your business, data governance allows financial institutions to drive innovation and gain competitive advantage.

 

Bridging the governance gap with Data Governance-as-a-Service (DGaaS)

Increasingly organisations are turning to the ‘as-a-Service’ model to bridge the gaps in their data governance capabilities, as well as ensure critical alignment between objectives and results. This dedicated approach aims to minimise the risk of investments and delivers the strategy and proven technologies required to ensure data governance success.

DGaaS can be applied across each major component required to deliver good data governance. First, it uses software tools to scan all data within a typically complex financial services data infrastructure in its data discovery and classification phase. Without this detailed insight, organisations can’t always identify their data assets, any data mishandling and the level of risk generated.

The next part of the process is creation and documentation. This means organisations can drive their governance objectives through to execution, while removing the operational and recruitment overheads, which means they can purely focus on value created from data. In doing so, organisations can convert the raw outputs from the toolsets into meaningful business outputs.

With a holistic approach, DGaaS allows financial services organisations to focus on the transformational potential of data while critically staying compliant.

 

Reaping the benefits

Data is a vital asset to enable financial sector organisations to build the right capabilities to deliver their services and remain competitive. With a robust data governance model, financial firms can assess risk, predict trends, and seize market opportunities based on data-driven insights. Only data-driven processes, built on high quality and effectively governed data, will enable them to build outstanding customer experiences. It’s essential that leaders realise data governance is a fundamental discipline, not a luxury, and establish an effective model to formalise processes and responsibilities before their data lets them down.

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Financial Stability Board Gives Full Support to Wide LEI Use in Global Payments

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Clare Rowley, Head of Business Operations at the Global Legal Entity Identifier Foundation

The strongest recommendation yet by the Financial Stability Board (FSB) that the LEI should be used more widely in payments will catalyze increased global LEI adoption. The most immediate intention is in facilitating cross-border payments. GLEIF explains why this makes it the perfect time for financial institutions to become Validation Agents within the Global LEI System.

The Financial Stability Board (FSB) has put its full weight behind a landmark recommendation that the LEI should be widely adopted across the global payments ecosystem. In July 2022, the FSB published a report encouraging global standards-setting bodies and international organizations with authority in the financial, banking, and payments space to drive forward LEI references in their work. The report also recommends guidance and further outreach on the use of the LEI as a standardized identifier for sanctions lists and as the primary means of identification for legal entity customers or beneficiaries, with specific reference to customer due diligence and wire transfers.

A primary near-term goal of the FSB’s most recent report, published as part of the G20 Roadmap for Enhancing Cross-Border Payments, is to stimulate LEI to use initially in cross-border payment transactions. By helping to make these transactions faster, cheaper, more transparent, and more inclusive, while maintaining their safety and security, the LEI has been deemed by the FSB to support the goals of the G20 roadmap.

As a result, banks and financial institutions will now be compelled to move quickly to incorporate the LEI as an integral component of their cross-border payments infrastructure, since there are huge benefits in doing so. In addition to supporting lower costs and enhanced transaction speed and transparency, the LEI can also facilitate straight-through processing (STP) and sanctions screening, while easing compliance with Know-Your-Customer (KYC) due diligence.

Additionally, the report recommends that standards bodies (e.g., BCBS, CPMI, IOSCO, FATF) and international organizations (IMF, OECD, World Bank) should consider how the LEI may be used as a standardized identifier for sanctions lists or as the primary means of identification of legal entity customers or beneficiaries. This demonstrates the broader ecosystem needed to support cross-border payments evolution – an ecosystem based on a single global identifier for legal entities that can be used to facilitate compliance checks across various resources.

With this in mind, banks and financial institutions who may soon need to ensure their legal entity clients possess an LEI to engage in certain payment transactions, cross-border or other, should feel motivated to leverage the benefits of becoming a Validation Agent within the Global LEI System. The advantages are two-fold: enhanced customer service, through a simpler, faster, and more convenient LEI issuance process for customers; and huge efficiencies in client onboarding and lifecycle management for the bank or financial institution. It really is a win-win scenario.

 

The wider impact of LEI adoption in cross-border payments

While the FSB’s report is intended to promote LEI use in cross-border transactions, both the strength and far-reaching scope of its recommendations are likely to be a catalyst for the LEI to be more broadly implemented across many other payment scenarios too. After all, if banks and financial institutions need to equip customers with an LEI to participate in cross-border transactions, then it’s a logical next step for participants in the payments ecosystem to leverage and optimize those LEIs to drive efficiencies across their other payment operations, and to bring enhanced transparency and trust benefits for customers.

There is already a healthy pipeline of active consultations and commitments by financial regulators aimed at recommending or mandating LEI use more broadly within the global payments space.

  • Last year, the European Commission (EC) officially recognized the value of the LEI as a unique mechanism capable of supporting transparency in AML and countering the financing of terrorism (CFT) efforts. It issued two legislative proposals that call for the LEI to be used in certain customer identification and verification scenarios where available.
  • The EC also launched a separate initiative last year to identify obstacles to the creation of efficient pan-European instant payments solutions. As part of its consultation strategy, the EC issued a survey for the purpose of exploring the potential for the LEI to support the screening of instant payment transactions against sanction and watch lists.
  • The Bank of England (BoE) affirmed its position to support wider uptake of the LEI and will introduce the LEI into ISO 20022 standard for CHAPS payment messages on an ‘optional to send’ basis in February 2023. While the BoE encourages all CHAPS Direct Participants to start using LEIs as early as possible, it will not become mandatory until spring 2024, at which time the BoE will begin mandating LEIs to be used in certain circumstances, with a vision to widen out the requirement to all participants over time. In particular, the BoE will mandate the use of the LEI where the payment involves a transfer of funds between financial institutions. The BoE will also monitor the use of the LEI for all transactions, with a view to assessing whether the mandatory requirement to include LEI data should be extended to all CHAPS payments.
  • In order to further the use of LEI in cross-border transactions and facilitate cross-border trade and investment, the Chinese Cross-border Interbank Payment System (CIPS) designed an innovative product “CIPS Connector”, which provides an integrated “one-step” service for a variety of cross-border RMB transactions between banks and enterprises. Every CIPS Connector user is assigned with an LEI, which is used for activating the tool as well as a mandatory business element in their business transaction.
  • In January 2021, and in a move that was the first of its kind, the Reserve Bank of India issued a mandate for the LEI in all payment transactions totaling ₹ 50 crore and more undertaken by entities for Real-Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT).

 

Why the LEI in payments?

The LEI is considered an important tool in payments as it is designed for identifying unique parties to each transaction. It meets a fundamental requirement in payment processing – precise identification of the payer and payee. No other current identifier in payments offers this. International Bank Account Numbers (IBANs) for example are used for uniquely identifying payer/payee accounts, while Business Identifier Codes (BICs) are used for routing the payments to the relevant divisions/sub-divisions of financial institutions.

Today’s highly digitized payment networks require faster, cheaper, and more secure transactions. When the LEI is added as a data attribute in the payment messages, any originator or beneficiary legal entity can be instantly and automatically identified.

 

Become a Validation Agent

When viewed collectively, these developments show that LEI advocacy has never been stronger in the payments space. This signals that the LEI could be the widely implemented trust tool of choice for payments in the near future. With that in mind, GLEIF urges banks, and financial institutions to consider taking a proactive approach to supporting voluntary customer adoption of the LEI and getting ahead of recommendations or mandates in the payments space.

Becoming a Validation Agent in the Global LEI System is now the obvious choice. In addition to easing the process of LEI implementation further down the line by making LEI issuance more convenient and accessible for customers, becoming a Validation Agent can deliver some significant advantages for financial institutions themselves. By utilizing ‘business-as-usual’ onboarding processes to obtain LEIs for clients, financial institutions can improve customer experience, facilitate digital transformation, and reduce client lifecycle management costs.

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