Digitalisation is top tax compliance priority in the Middle East

10 June 2021 4 min. read
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Tax regimes worldwide are getting stricter and more digitally advanced – pushing organisations to explore a range of new risk management tools. A new PwC report looked into how businesses in the Middle East are coping with this landscape. 

Global regulators are looking to better manage transfer pricing, offshoring and other “grey area” tax practices at multinational corporations – exemplified by new regulations such as the OECD’s Base Erosion and Profit Shifting (BEPS) framework.

In the Middle East, this is topped off with a broad-based introduction of indirect taxation across markets – “perhaps one of the largest indirect tax transformations the world has ever seen” according to PwC’s Dubai-based Middle East tax and legal services leader Mark Schofield. The Big Four accounting and advisory firm surveyed businesses in 12 countries across the Middle East, to find that many are gearing up for a sizeable compliance burden. 

Top external tax challenges for businesses in the Middle East

Over two-thirds of businesses see tax risk as their biggest external tax challenge, while indirect taxes such as VAT, customs and excise are top concerns for a similar share. BEPS and transfer pricing also feature among the list of challenges, alongside compliance with foreign tax regimes.

A lens on technology

Of note among the responses is a focus on technology. Tax regimes in the Middle East and globally are not only evolving from a regulatory viewpoint, but are also digitalising – pushing businesses to transform their own compliance processes. 

PwC Middle East’s tax digital solutions leader Jay Riche explained this digital evolution and its implications. “Middle East tax authorities are arguably amongst the most advanced in the world in terms of digitisation, already using electronic payments and online portals. The next step is e-invoicing, which is already being rolled out across the region.”

“It’s almost certain that in the near future, tax authorities will have real-time access to taxpayer data, leaving no room for error and increasing the risk of penalties still further. This is a no-mistakes environment, and organisations must make the best use of available technology in order to protect themselves.” 

Barriers to adopting digital tax systems

“Without significant investment in technology, organisations are riding a bicycle in a Formula 1 race,“ he said, driving home the point. Well over 40% of survey respondents revealed an ongoing struggle with tech-based taxation systems, and many are making the necessary investments. 

Worryingly, less than 10% actually have a digital taxation system mature enough to meet compliance needs. Around half reveal a lack of quality tax data to work with, given that most artificial intelligence and automation tools need clean, streamlined data for the best results. That said, investment remains the biggest barrier to digitalisation in tax – as with other busines functions.

Budgetary constraints put up an initial barrier, following which businesses struggle to integrate digital tax tools with other – less digitalised – parts of their organisation. Then there is the cultural resistance to new technology, even among leadership ranks, which isn’t helped by the sizeable time and money investment and security risk that comes with digitalising. 

Progress report and the way forward

The result is that most businesses are still at the initial stages of their digital tax – and integration with Enterprise Resource Planning – system, with few leaders in the market to look up to. But businesses have little choice: as tax regimes become ever more complex and digitalised, manual compliance is at risk of becoming a full-time, high-risk and highly costly affair. 

Strategic priorities

The writing is on the wall: businesses must build a better compliance mechanism, backed with advanced digital tools. Between 60% and 80% have acknowledged this as a top priority in the next three years. For many, the first step is to build an ecosystem that can support this transition.

As explained by Schofield, businesses have realised “the importance of developing productive, collaborative relationships within the business, and externally with regulators.”

“With the right investment and support from the top, the tax function can be a positive, proactive force at the centre of a successful organisation. Building that tax function of the future needs strong, decisive action now.” Setting a budget, automating, upskilling and networking are all key strategic priorities in this direction.