How to Use Regulatory Compliance Mandates to Drive Digital Transformation
With increased globalization of businesses and its subsequent complexities-such as computation, assessment, and reporting of taxes — governments across the world are introducing tax systems that mandate filing of transactional or real-time, business data that is more granular than periodic and aggregated reporting.
Governments now rely on technology-driven processes that not only enable businesses to file such data electronically but also allow governments to analyze such data and make appropriate assessments. And the benefits for governments are many!
Brazil, the first country to introduce electronic invoicing in 2008, saw its indirect tax revenues grow by $58B. Mexico saw an increase of 34% in tax revenues. Add to this, the ability to gain valuable insights into transactional data in real time and to incorporate measures to plug tax evasion!
However, for businesses, such mandates come at a huge cost and have a potential for disruption. The initial cost of adapting to such mandates is significantly high. Indian businesses are estimated to have spent more than $5B in preparing for the GST regime in 2017, thereby impacting up to 2% of their margins. Australian businesses alone spend more than $9B, every year, just in terms of person hours for ensuring compliance!
It should be noted that if the cost of compliance is high, the price of noncompliance could bring businesses to a standstill. India and Brazil have laws that mandate compliance even before goods are dispatched. In many countries, the penalties for noncompliance could be more than the invoice value, to the extent that, in a survey, 45% of CFOs say that compliance is the biggest growth challenge confronting businesses.
Does this mean that businesses should just grit their teeth and spend money to ensure compliance or are there ways by which they could transform their businesses by leveraging compliance as a business opportunity? It appears that they indeed have options to transform these mandates into opportunities! What can you, as a business, do to tap these opportunities? Let us explore further!
Invest in central ERP systems that cover all your geographies
By investing in a central ERP system that provides standardized business processes and capabilities to meet legal mandates, businesses can move away from ad-hoc or bespoke solutions that provide compliance for one specific country or a set of countries. ERP systems that provide both transactional and periodic tax reporting capabilities across multiple countries would definitely score over bespoke, unconnected solutions that turn out to be difficult to manage — functionally as well as contractually.
Optimize your electronic data interchange (EDI) investments
With e-invoicing mandates being adapted or planned by more than 40 countries, it is possible for businesses to harmonize their multiple EDI protocols to government mandated ones. We already see this trend in Europe, with the introduction of PEPPOL (Pan European Public Procurement Online), which is a set of interoperable networks for public procurement. By adapting such protocols not just for legal compliance but also for B2B exchanges, businesses can simplify the number of EDI protocols they use, and consequently the number of EDI vendors they need to work with. This could result in significant savings in your EDI investments.
Optimize your processes to leverage investments in compliance
By complying with the e-invoicing mandate of a country, you could also automate the inbound invoice processing. In Europe, it is estimated that the cost of manual processing of an invoice could be between €5 and €15. Note that further costs such as workflow handling and archiving are not added. By automating the processing of invoices, these costs could be substantially reduced, and a much more reliable electronic audit trail could be established .Another worthwhile approach would be to consider a shared services model that could provide greater efficiencies by standardizing your compliance-handling processes. Most businesses that have implemented the shared services model have reported reduced costs and increased efficiencies in managing compliance.
· Relook at business processes. Sweeping legal mandates might involve more than just tweaking your software or training your employees. It could also involve reexamining your business processes. Such mandates would also open up avenues for process optimization. India’s GST reform in 2017 did away with multiple tax regimes. Before GST, businesses used to locate their distribution warehouses, across state borders, to leverage lower tax rates, even though they would not be optimal from the point of view of supply chain logistics. With the advent of GST, as these locational advantages vanished, business could indeed replan their warehouses from the perspective of supply chain logistics — driving cost efficiencies while delivering superior value to customers.
Keeping your global business locally compliant is very challenging, but it is important to know that in these challenges lie several opportunities to transform your business.