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Wealth Management

SECURING THE EVIDENCE FOR VAT AND TAX

Filippa Jörnstedt, Senior Regulatory Counsel at Sovos

 

Businesses are almost entirely digital in their nature. With sophisticated technology now in the reach of most, the measurement and reporting of business transactions have transitioned from slow, manual processes to being automated, allowing finance teams room to breathe. However, alongside the positives of these advancements, there also comes a responsibility to understand the wide-ranging requirements of governments worldwide when it comes to financial transparency.

Recently, we’ve witnessed a shift towards more continuous transactional controls and reporting schemes carried out in real-time, as governments look to reduce their VAT gaps and discrepancies in their economies. Historically, the pressure was on businesses to report their own transaction data, but with the new formats being used, governments are beginning to take matters into their own hands. This makes logical sense, as there is far more complex real-time data being submitted by businesses that governments have access to.

Filippa Jörnstedt

The figurative stick that is VAT control reform is often introduced together with a carrot: removing the need to collate and submit periodic reports, such as VAT returns, to the tax authorities. Ideally, this means less pressure on businesses.  That is, until a problem surfaces, such as data being interpreted in the wrong way, or a dispute arising about the timing of a transaction. Often, these problems originate from reporting being mishandled or through the clearance of transaction data, so keeping a rigorously organised and in-depth record of financial information is imperative for businesses to avoid these problems. Aside from this, it allows them to substantiate any government reports and fix any issues. The difficult aspect, though, is how to build these archives in this way.

 

Digital paper trails

In previous iterations, financial employees were responsible for collating and archiving paper invoices, receipts and other data to provide evidence of their business activity. So, the process of archiving isn’t new, but it needs to reflect the digital times we find ourselves operating in. Simply put, this isn’t a manual task anymore, but many businesses have seemingly just moved to e-archiving without too much thought to just how crucial it is to get right. Modern tax authorities are asking for specific details behind each transaction, paying particularly close attention to time and date, so the archive cannot simply be moved to a digital filing drawer.

Looking at a recent example, India’s reporting requirements now involve invoice data to be sent to the authorities in real-time, for pre-approval and registration onto a state-operated platform.  The invoice will only be considered valid following the generation of a unique Invoice Reference Number by the same platform.

Looking at this from an audit perspective, if a business is later questioned on a transaction then they need to be able to quickly find the correct evidence of that particular transaction, as well as any government response message in relation to that transaction, or risk major fines. Alongside India, also countries closer to home such as Poland and Finland are shifting the way they operate with invoicing and reporting, following Italy’s successful system change last year.

And this is a clear trend; audits into business activity are only going to become more precise and closer to real-time as further governments see the benefits of adopting these methods of tax control. Real-time reporting and mandatory e-invoicing makes sense more widely as these systems have proven to be very effective at reducing VAT gaps, with evidence of this going back decades in areas of Latin America.

 

An authority shift

As outlined, with further countries adopting real-time reporting or variations of this, the tax authority is becoming more central to processes as they receive and gather details on VAT owed by businesses. Reporting in this way makes sense, but pressure on finance teams to keep incredibly detailed data-trails is more important than ever. Tax authorities are increasingly building rich data records of their own as they are receiving more and more granular data in real-time. As a result, the source-of-truth no longer primarily lies with the taxpayer’s financial records, but instead with the tax authority’s ledgers.

To keep pace with this, businesses can no longer simply file away invoices digitally, but also need to record as much data as possible to corroborate the authorities’ records of their transactions. By doing so, they are building an evidence base to be able to dispute any queries or wrong decisions to safeguard their activity. Keeping this front of mind will make the process of addressing any problems far easier than relying on old, less-detailed archives.

Throughout the EU, there are many variations in archiving laws that need to be adhered to. German requirements are set out in their GoBD principles, but in Italy the regulations are far more technical and detailed, reflecting their tax setup. This Italian model asks businesses to provide a documented description of their archives, an overview of its process, but also a delegation plan to show assigned responsibility for those processes. This isn’t an easy set of requirements, especially with laws frequently changing.

The whole aspect of archiving has long been important, but now the stakes are higher; it’s not simply a box-ticking exercise. A complacent, old-school approach to both invoice and transaction data archiving could now result in severe repercussions for businesses. A robust digital strategy is vital.

 

Managing archives to reflect the new normal

Digitalisation does have the benefit of taking some of the pressure off businesses, but this switch in data authority from the business to the tax authority doesn’t mean less work. Regardless of where information is stored, e-invoices must be now kept centrally and be available at any time for those that may need them. Storing these individually, including specific supporting transaction data will mean faster access to relevant evidence for any issues that may arise. Fortunately, technology is now available to do much of the heavy lifting.

To keep up with continually shifting regulation and, importantly, keep compliant with it, businesses must examine how they manage their transaction data and how to ensure their VAT evidence locker is fully stocked. Because legislation may change, but compliance is always compulsory.

 

Wealth Management

ONLINE STOCK BROKERS ARE BENEFITING IN 2020

2020 has changed our lives in dramatic ways. Thanks to COVID-19, many of us now work from home. Rather than go to the doctor’s office, some have embraced telehealth apps. And instead of seeing brokers in the flesh, many have opted to sign up for online brokerages.

Before COVID forced us into quarantine, we were hesitant to do their investing online. But, with in-person meetings no longer possible, we’ve finally seen how convenient it is. This trend has been a boon for online stock brokerages. Questtrade added 50,000 new accounts in Q1 2020. Robinhood, a popular American trading app, saw three million new members join in the first four months of 2020.

Is online trading here to stay? Is it in the best interest of investors to engage with these services without first consulting a professional? We’ll examine these issues in today’s article.

 

Business Has Been Booming For Online Brokerages

As lockdowns forced millions of Americans into their homes, boredom quickly set in. Sports leagues around the world had suspended play, so that was out. While some theatre chains streamed movies online, new releases were few and far between. And land-based casinos were locked up tight.

At first, we watched every show in our Netflix queue. We even stumbled across the spectacle that was “Tiger King.” And then, in April, a little gift landed in the bank account of hundreds of millions of Americans.

It was the federal Coronavirus benefit. Approved by Congress in March 2020, the IRS began to send checks worth as much as $1,200 to eligible Americans. As of June 2020, the government has sent more than 159 million checks.

For some, this massive injection of capital went straight to rent, bills, and other necessities. But, for those lucky enough to have a stable income, this windfall became seed money for the stock market. At first glance, putting capital into the S&P or the Dow Jones during the COVID crash seemed suicidal.

But, as losses slowed, the media played up the massive correction as the best buying opportunity since the Great Recession. Treasury Secretary Steve Mnuchin concurred, saying the Coronavirus selloff would be short-lived.

And so, millions of Americans, many of whom had nothing but time, plunged their $1,200 extra dollars into the stock market. With in-person brokerages shuttered, people flocked en masse to services like Questtrade and Robinhood.

 

Robinhood: A Major Factor In The COVID Crash Recovery?

As we already mentioned, more than three million new investors have signed up with Robinhood since the pandemic started. This app, which got its start back in 2013, has long had a cult following among Millennials for making investing cheaper and more straightforward.
Then, the COVID crisis introduced millions more to this stock trading app. At first, Robinhood creaked and groaned under the strain. In early March, when COVID-related market swings began, the app crashed several times.

As the company adjusted to the new loads, though, their user base surged. By the end of March, they had ten million users. Then, as stocks sat 40% off their all-time highs, these new app users began scooping up the “bargains.”

To be sure, some stocks got oversold during panic selling in March. However, given the new realities of our COVID-infected world, these novice investors made some “curious” picks. Consider the case of Delta Air Lines (DAL). Of all industries affected by COVID, the virus has hammered travel the worst.

Now, few Robinhood users held DAL before March 2020. Yet, after Delta’s stock lost more than half its value, Robinhooders bought up hundreds of thousands of shares. DAL has since rallied 50% to around $30/share since hitting its 52-week low. Even though, for the foreseeable future, international travel won’t be a thing.

We see a similar trend emerging with publicly-traded travel/travel-adjacent companies like Boeing, Hertz, and MGM. Despite the bleak future these companies face, Robinhood investors are piling in. Perhaps they think things will go back to normal soon, pushing prices 2-3x higher, thereby making them piles of cash.

But, if any of these companies go bankrupt, they’ll be in for a rude awakening.

 

Will Interest In Online Trading Endure Post-COVID?

Currently, new Robinhooders and other novice investors have heavily chummed the market’s waters. In a way, they are like children who have yet to learn that stove elements are hot. In other words, they’ll have to get burned badly to learn their lesson.
In particular, most don’t realize that bankruptcy proceedings seldom favor retail investors. On the other side, these shareholders get next-to-nothing – if anything at all. As of June 2020, this reckoning hasn’t happened yet. Stocks are currently trading around 10% below their post-COVID high, but well above 52-week lows.

When the next big plunge does happen, though, loads of over-leveraged Robinhooders/newbies will get flushed. If anything, we’re deeply concerned – according to a recent Yahoo Finance report, 20-year-old Alexander Kearns got cleaned out on a bad trade he made earlier this month.

His account briefly showed him $700,000 in the red, which later reset to zero. It appears he thought he owed that amount, so he committed suicide shortly thereafter.

While not everyone will react as severely to busting their account, the coming crash will greatly reduce investment post-COVID. The current class of inexperienced investors do little (if any) research. They treat markets like a poker game. As any experienced card player knows, the money always flows to the sharks in the long run.

In our view, a small percentage of these new investors will stick around. They are the ones doing extensive research, making smart bets, and learning from their mistakes. The rest will slink away after torching thousands of dollars in life savings.

 

Prepare For Stormy Seas

If you are new to equities investing, batten down the hatches. The current market frenzy won’t last forever, as it is pumping cash into stocks with poor long-term prospects. When it all comes crashing down, many of the neophyte investors posting on /r/wallstreetbets will mysteriously vanish.

Don’t be a statistic. Do your homework, stay within your bankroll, and keep learning. Invest wisely – 2020 still has plenty of tricks up its sleeve!

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Finance

TOP TECHNOLOGY TRENDS FINANCIAL INSTITUTIONS SHOULD INVEST IN TO BRIDGE THE GAP IN REMOTE WORK

Chirag Shah, Senior Vice President, Fintech & Innovation Lead, Publicis Sapient

 

More than ever before, technology is critical to the success of financial institutions. Over recent years, we’ve started to see fintech and incumbent tech compete, as there has been increased demand from consumers. With everyone having to operate remotely due to COVID-19, the customer needs, and therefore, the companies’ urgency to act quickly, have been accelerated.

Banks and financial institutions must show their ability to develop new customer friendly innovations that can help connect data and high-end digital delivery. Here are some innovative technology trends that will help navigate the disruption.

 

Cybersecurity

Since the onset of the pandemic, cyberattacks have rapidly increased. People are extensively utilizing online platforms for their professional and personal needs. Often times they are using their personal devices, rapidly shifting transaction patterns and with limited control on access privileges it has put an enormous stress on security controls.

Given the distributed nature of work is something we will continue to face in the near term, organizations will need to focus on security measures across infrastructure, product and people. There are several recommendations to get in front of cyber-attacks:

  • Building robust resilient products
  • Instituting stronger access privileges across application, data and network stacks
  • Patching hardware and software with the latest security updates
  • Building cloud native products which have inherent tighter security controls

 

Resiliency

Since March, we have been forced to accelerate the pace for innovation around technology themes such as application modernization and rationalization. Companies have to transform digitally so they can scale up digital products and services and they need to migrate legacy technologies onto modern platforms.

Critical financial service platforms such as brokerage trading, commercial lending, customer analytics and call-center operations are being modernized with latest technologies that are virtual, scalable and federated. The impact around how these components react and work with each other in the scenarios of highly volatile environments is unknown. Recent troubles have shined a light on the vulnerability of critical platforms and the necessity for new tools and processes that ensure they will stay competitive. Ensuring modern distributed applications work, with mainframe like reliability and cloud like scalability, is Resiliency.

 

Low Code No Code Platforms 

Digitization driven by recent events will need enough acceleration to support customer’s behavioral transformation. Low Code No Code platforms will thus emerge as a winner as it enables a rapid turnaround in designing and building applications with minimal hand coding and delivering value in an agile and reliable manner.

According to Gartner, “by 2024, three-quarters of large enterprises will be using at least four low-code development tools for both IT application development and citizen development initiatives. By 2024, low-code application development will be responsible for more than 65% of application development activity.”

 

Data’s new defined purpose

Democratization of data will be a key initiative within every financial service client particularly if they want to restructure their products and make them digitally available to customer; increased customer activities across digital channels has created massive datasets.

Gathering critical information sets relevant to the business and customers will democratize data. Three strategies which will help financial service organizations be more data-driven:

  • Proliferations across these massive data sets produced by customers and other channels will define new rules and expectations to create a customer 360 view.
  • Adopting and implementing the new Data privacy, Data governance and Data practices.
  • Data driven decision making through visual analytics and data story telling.

We are now starting to see that alternate data sources are being leveraged, in the Investment Research processes, in order to track retail sales.

 

Artificial Intelligence

Banks are starting to invest more in leveraging AI models to help prevent credit loss. Post COVID-19, banks are unable to identify who is creditworthy. Credit reports are unable to accurately reflect where borrowers have deferred making payments to lenders across multiple months. AI can be leveraged to better service banks to identify potentially delinquent clientele. Based on customer profile, banks will have to react appropriately:

  • New customer acquisition – Suppress marketing to increased risk customers, as pre-approved customers may have lost their buying power, which isn’t reflected in the credit reports
  • Pre-delinquent customers – Early warning and early intervention to identify struggling customers
  • Post-delinquent customers – Identify and suggest hardship programs to help reduce risk for customers that might have lost their jobs or being furloughed

Remote working has proved challenging for front office workers and their typical access to information flow. Chatbot usage is rapidly increasing as they use natural language processing to connect into multiple underlying systems in order to provide a one stop shop for all information to the investment professional (IP) leveraging collaboration tools like Symphony. This allows data sharing with other IPs and access to data from multiple systems at their fingertips.

Additionally, call centers are utilizing AI/chatbots to help augment the inbound calls to see if a virtual assistant is able to answer straight forward customer queries.

Banks and financial institutions no longer have the luxury of staying complacent with the legacy tech, or waiting to see what trends prove to be most effective before investing. Financial institutions need to be taking action, embracing the changes they have faced already, and the ones they have yet to encounter and they should be bullish in investing in technology that will help them disrupt competitor business models, in order to help them stay afloat during these unprecedented times.

 

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