Tax Compliance Monitoring Guidelines: What, Why, and How – A Complete Guide by Loctax
What is compliance monitoring?
Tax compliance monitoring means continuously assessing whether an organization is adhering to tax regulatory requirements. The goal is to help organizations achieve consistent and solid tax compliance scores, and avoid areas of non-compliance that could result in financial, reputational or criminal implications.
Compliance monitoring involves tracking what tax obligations exist, when they are due (filing, payment, internal/external deadlines), how to execute on them (process, controls, data and tools), and who is involved (local teams, group tax, external advisors - ideally RACI-wise). Ideally compliance-relevant data and parameters are captured throughout the monitoring process, in order to unlock intelligence from them.
Tax obligations are linked to corporate income tax, indirect tax (VAT, GST, Sales & Use Tax), WHT, transfer pricing, digital service tax, property tax, plastic tax or any other industry-specific or local taxes. They are different region by region and country by country, and can be highly industry-specific.
The importance of compliance monitoring
It goes without saying that the main goal of compliance monitoring is to avoid situations of non-compliance that can trigger, as stipulated above, very adverse financial, reputational and even criminal implications. The good news is that much more can be achieved.
Let’s get started with explaining why compliance monitoring matters in this day and age:
- Compliance monitoring is directly related to tax governance. However, the meaning and importance of governance in the tax domain is not always clear. It is fairly ill-defined and full of fluff. Therefore, it sounds like a nice-to-have.
- We live however in a world full of change and risk. Also in the tax world. Budgetary deficits and geopolitical shifts drive more regulatory and business change. The tax domain is very complex, and it only gets worse. Tax is non-binary and there are 50+ shades of grey, which is reinforced by the fact that the letter is not always the same as the spirit of the tax law.
- Jurisdictions constantly look to raise more tax revenues. Tax authorities digitize at the speed of light and invest heavily in new tools and techniques (of course, AI included). Tax controversy is continuously on the rise, despite the emergence of cooperative compliance regimes in more and more countries.
- In the last decade, the amount of external tax stakeholders only increased. Before, we had the usual suspects, like the board, the statutory auditor and the tax authorities. The last years the public, customers, investors and NGOs more and more kept an eye on the tax behaviour of multinationals. Tax as part of ESG has also been gaining importance.
- A variety of regulations continuously pushes for more governance. From SOX to OECD BEPS to EU DACs and EU CSRD to potential new initiatives that are already looming. The push for tax transparency is reaching new heights, with public CBCR just being one example.
- Tax authorities shift their focus to auditing the process instead of the individually reported numbers. Tax authorities do risk analysis and profiling of companies, think about how HMRC, ATO and NL tax authorities work. Yep, they use AI for it.
- Cooperative compliance is gaining momentum. We all know what entry ticket is required for this. Strong governance, ideally represented by a tax control framework or a similar instrument.
- Tax teams operate in a context of shrinking budgets and doing more with less. Also here, you can only manage what you measure.
It’s clear: governance is key. As said, compliance monitoring is a core component of it. It should help to manage risk, ensure control, drive efficiency and support transparency and in general responsible tax behaviour. That is why compliance monitoring goes way beyond ensuring timely and accurate tax filings across jurisdictions.
The best tax teams have proactive tax leaders. They think ahead. They double down on internal and external audit readiness. They focus on building trust. Tax compliance monitoring is the answer to it all.
How to install a compliance monitor
As articulated above, the essence of tax compliance monitoring can be summarized by answering these questions:
- WHAT: compliance monitoring involves tracking what tax obligations are to be fulfilled for all the legal entities and registrations the different entities of a multinational have in the respective countries. Obligations can be about filings, payments, reportings, …;
- WHEN: for all of the obligations, it should be clear when they are due (with a split between internal and external (statutory) deadlines);
- HOW: the team should have a view on how to execute on all obligations, with a focus on process, controls, data and tools. Key words are collaboration, efficiency and automation;
- WHO: finally, tax is a people business with complex stakeholder management. Tax compliance is a team sport. That is why it should be clarified who is involved for all the different steps and tasks linked to the global obligations. RACI-based clear roles and responsibilities are a must. This can include, depending on the tax operating model, local finance and tax teams, group tax, shared service centers or external advisors.
A tax compliance monitor acts as a control center that connects the dots between the WHAT, WHEN, HOW and WHO. It helps to operationalize the processes, supercharge collaboration and automate what’s possible, including deadline management and workload distribution.
If we cut compliance monitoring in its smallest components, one can think of listing obligations per entity (or registration) per country as a first step (WHAT). Next, we can add to this the deadlines and ideally some sort of backplanning to make it happen (WHEN). Subsequently we blueprint the different steps and tasks (HOW) and link them to the responsible stakeholders (WHO). I can imagine that now scary thoughts of spreadsheets are crossing your mind.
Why spreadsheet trackers are not enough
As such spreadsheets are the logical starting point. There is value in taking an Excel-based approach. It is definitely better than having no monitoring in place. But… There are massive limitations to the use of spreadsheets when it comes to tax compliance monitoring. Below is a list of the most important shortcomings:
- Spreadsheets are generic. They are not domain-specific and thus not verticalized for tax. Sure, you can format your sheet yourself. But it will be massive waste of time. And a very significant pain in order to safeguard that nobody messes up the formatting;
- Role-based access and collaboration are a nightmare in spreadsheets. We all know that. It is inconvenient but also poses security risks;
- Spreadsheets are not linked to structured workflows that standardize and automate tax processes across domains. In other words, they are typically fairly passive. They don’t supercharge collaboration, nor do they automatically manage workload distribution;
- Spreadsheets lead to fragmented data sets per tax domain / obligation, hindering scalability and insights. Ideally all data gets consolidated into a unified platform, facilitating intelligent insights through tailored reports, dashboards, and risk assessments.
- Spreadsheets often suffer from versioning issues and lack standardized processes. We all have heard “what is the latest version” questions. Teams get distracted by naming conventions. It is both version control and version history that make spreadsheets suboptimal.
- Spreadsheets are prone to formula errors and limited analytical capabilities. Spreadsheets pose inherent risks related to limited data oversight, suboptimal compliance tracking and the absence of audit trails.
- Spreadsheets struggle with document handling. How to ensure that from your Excel based tracker the relevant documents can be stored, like returns, working papers, or assessment notices? Let alone that organic and intelligent data-gathering from these documents can be facilitated by spreadsheets.
Specialized tax compliance monitoring tools or control centers address all of the above shortcomings. On top of that, they can link compliance monitoring to other tax operations like business support, tax risk management or controversy management, in order to cover the entire tax lifecycle.
Workflow engines are an important cornerstone of tax compliance monitoring. They are the only way forward for operationalizing processes, and automating deadline management and workload distribution. All of this happens with guaranteed audit trails, and by ensuring the right controls and reviews. Best-in-class engines include intelligent document processing as a catalyst for document and data capturing.
Tax leaders need to identify the right KPIs when configuring their tax compliance monitoring. These KPIs can be different based on the maturity of the company’s tax operations, the industry, or the company-wide objectives and strategy.
Streamlining Tax Compliance Monitoring with Loctax
This is where Loctax makes a significant impact.
The Loctax Control Platform serves as a central hub for tax compliance, offering comprehensive visibility into obligations across all jurisdictions and entities. It automates deadline tracking, sends timely reminders, and facilitates efficient workload distribution, ensuring no task is overlooked.
Standardised workflows within Loctax bring structure to complex tax environments, promoting consistency and reducing manual efforts. Role-based task assignments clarify responsibilities, mitigating key-person dependencies and enhancing accountability.
Document management is streamlined through intelligent processing, capturing and storing all relevant tax documentation in a secure, centralised location. This approach reduces administrative burdens and bolsters confidence in compliance processes.
Built-in audit trails and leadership-ready reporting tools provide transparency and facilitate internal and external reviews. With Loctax, demonstrating governance and control becomes an integral part of daily operations, supporting proactive and responsible tax management in an increasingly complex landscape.