Real-time tax reporting is the holy grail for tax-collecting authorities. They want as much information as possible about companies while maximising the amount of revenue they collect from them.
For governments struggling with reduced corporate tax receipts the world over, real-time tax reporting is a very attractive proposition.
What makes this process appear possible is its machine-readable form, using technology such as XBRL, (eXtensible Business Reporting Language). Developed by an international non-profit consortium of more than 600 companies and public organisations, including the American Institute of Certified Public Accountants (AICPA), this electronic communication provides major benefits in the preparation, analysis and communication of business information.
The promise of cost savings, greater efficiency and improved accuracy and reliability through a “tagging” process for information, has also been a huge incentive for regulators and other institutions to mandate companies across the world to sign up to XBRL, a business reporting language based on the family of “XML” languages.
But while nearly three-quarters of the world in terms of GDP are looking to adopt XBRL in some form, its application is proving tricky in many jurisdictions.
The adoption of XBRL by tax authorities worldwide is running at different speeds, according to Arleen Thomas, chair of the XBRL International board of directors, because of their different motivations.
Thomas, who is also the AICPA’s senior vice president, management accounting, says that adopters such as HM Revenue & Customs (HMRC) in the UK were motivated by a desire to process information faster and more efficiently.
“Other adopters – the Securities & Exchange Commission in the US and the Tokyo Stock Exchange and the Japan Financial Supervisory Agency (JFSA) in Japan – also took up XBRL. Later adopters, such as the Emirates Securities and Commodities Authority in the UAE, reflect the desire for a better, more efficient use of data,” says Thomas.
“Carrying the XBRL tag added semantic meaning to the data, based on standards such as US GAAP or UK GAAP. But other leaders in the technology, such as the Netherlands and Australia, were looking at it from a different angle. The motivation here was clearly for an administrative burden reduction,” adds Thomas.
But despite the different approaches, some form of convergence is taking place, and Thomas says we are approaching a moment of “no going back, rather like the internet and social media”.
She says that there has been significant adoption among the larger countries, as measured by GDP, while countries such as Russia and Brazil are currently in the early stages of adopting XBRL.
“It is the emerging global dominance of XBRL in institutions around the world that is driving companies to become compliant,” says Simon Purkess, a partner in KPMG’s UK audit team.
Nevertheless, there have been problems, such as those addressing HMRC’s demand for companies to send company tax returns online using iXBRL (inline XBRL).
In force since January 2010, this requires companies to send their company tax returns online using iXBRL, a viewable version similar to a PDF that you can see in a browser rather than a dedicated PDF reader.
Purkess says that it is possible to convert some documents, such as Microsoft Word, to XBRL.
Various forms of commercially available final accounts production or tax preparation software are being developed to convert other documents appropriately.
“We are working on hybrid accounts product software to achieve this,” says Purkess.
So the development of XBRL in tax reporting has not been without its difficulties.
Paul Marriott, group tax and treasury director at UK construction and regeneration group Morgan Sindall, says: “We found it very hard work producing iXBRL-tagged accounts. It’s just a really inefficient way of getting our data into HMRC’s systems.”
For Morgan Sindall, the fourth-largest building contractor in the UK, it cost £20,000 in software costs “and about the same again in consultancy”, says Marriott.
It wasn’t that the company didn’t have the information held digitally, just that the software processes were difficult to deal with. Marriott thinks the forthcoming switch to real-time reporting of payrolls in the UK will be smoother.
“That is very clear cut about what we have got to report. There are some issues around data cleansing, but it’s data we would mostly have available. I think that’s perfectly sensible – the issue might be whether HMRC makes good use of the data. It might take it a few years to start using it to full effect.”
The technology is not necessarily at fault for making real-time reporting difficult, says Richard Chadwick, an expert in real-time reporting at accountancy firm PwC.
“It is that people at every level of a business, entering expenses or revenues into the company computer system, cannot have the tax expertise required to be able to ‘tag’ every-thing correctly and immediately, thus enabling real-time analysis. You’d need everyone to be a deep technical tax expert,” he says.
“Concerns remain about the quality of data, which is impeding the process towards real-time tax reporting,” adds KPMG’s Purkess.
However, the technology is making life easier for corporates that are having to address ever more complicated tax rules worldwide.
Chris Sanger, a partner in accountancy firm Ernst & Young’s tax policy group, says: “We have an environment where tax technology can really help and we’ve had many companies wanting to centralise the finance function, which they can do through this technology. But there are potential difficulties.”
It has also started to reap rewards for tax authorities, which are now getting a clearer picture of how much tax companies are paying compared to how much they should be paying.
Bivek Sharma, a partner at KPMG and a tax technology expert, says that HMRC has identified issues with transfer pricing and VAT through its XBRL automation.
“It’s helping them narrow down their search a lot quicker. Things like ‘Do these numbers reconcile?’ and ‘Do they match?’ can be done a lot quicker.”
But what are the limitations of using XBRL as a means to develop real-time tax reporting?
Sharma adds that other countries go a lot deeper in getting hold of information as soon as possible.
In Brazil, China and Armenia, systems exist that tell the government every time an invoice is raised.
“The government can track what companies have been buying and selling,” says Sharma.
The issue raises arguments about how far governments can use tax-collecting agencies to pry into companies’ affairs.
James Frederickson, professor of accounting at Melbourne Business School, says this approach raises a whole host of ethical and legal issues.
“It would allow tax officials to potentially match up accounts from different companies, say a supplier and procurer,” he says.
“The technology would allow you to look at both companies’ sets of statements at the same time, which would then allow the tax authorities to better assess the appropriateness of how the companies accounted for certain items.”
There are also concerns about translating the opportunities available through the use of XBRL into a fully fledged real-time reporting process.
Bill Dodwell, a tax policy expert at accountancy firm Deloitte, suggests that the idea of reporting corporation tax in real-time would be too mind-boggling to be conceivable.
“When can you report a profit? [When you record turnover], you don’t know if you have got a profit. You want the auditors to agree with the numbers. You have tax, depreciation and group relief to consider. The current law says you have to get the return in 12 months after the year end. It would be a nightmare even to get that to six months. It would be impossible, even for supermarkets with up-to-the minute sales information, to do in-year reporting.”
KPMG’s Purkess is in agreement that the days of real-time reporting are a long way off.
“Even with an efficient system in place it will still take days or weeks to send out this information. It will take a few years before we see real-time tax reporting in its truest sense.”
Benefits and uses for business
The XBRL International (XII), the international standards organisation that develops and maintains the XBRL specification, claims the benefits are: All types of organisations can use XBRL to save costs and improve efficiency in handling business and financial information. Because XBRL is extensible and flexible, it can be adapted to a wide variety of different requirements.
All participants in the financial information supply chain can benefit, whether they are preparers, transmitters or users of business data.
Data collection and reporting
By using XBRL, companies and other producers of financial data and business reports can automate the processes of data collection.
For example, data from different company divisions with different accounting systems can be assembled quickly, cheaply and efficiently if the sources of information have been upgraded to using XBRL.
Once data is gathered in XBRL, different types of reports using varying subsets of the data can be produced with minimum effort.
A company finance division, for example, could quickly and reliably generate internal management reports, financial statements for publication, tax and other regulatory filings, as well as credit reports for lenders.
Not only can data handling be automated, removing time-consuming, error-prone processes, but the data can be checked by software for accuracy.
Small businesses can benefit alongside large ones by standardising and simplifying their assembly and filing of information to the authorities.
Data consumption and analysis
Users of data that is received electronically in XBRL can automate its handling, cutting out time-consuming and costly collation and re-entry of information. Software can also validate the data, highlighting errors and gaps that can immediately be addressed.
It can also help in analysing, selecting and processing the data for re-use.
Human effort can switch to higher, more value-added aspects of analysis, review, reporting and decision-making. In this way, investment analysts can save effort, greatly simplify the selection and comparison of data and deepen their company analysis.
Lenders can save costs and speed up their dealings with borrowers. Regulators and government departments can assemble, validate and review data much more efficiently and usefully than they have been able to do up to now.
XBRL use by specific industry sectors
- Regulators and government
- Stock exchanges
- Investment analysts
- Banks, loans and credit
- Financial data companies
- Software companies
Alex Hawkes is a financial writer for the Mail on Sunday
Illustration: Cristian Turdera
- Business ethics 
- Career talk 
- Corporate finance 
- Law and regulation 
- Management accounting 
- Networking and social 
- Professional development 
- Reporting and Governance 
- Risk management 
- Strategic management-economics 
- Studying CIMA 
- Sustainability 
- Technology 
- Studying Exam E1 
- Studying Exam E2 
- Studying Exam E3 
- Studying Exam F1 
- Studying Exam F2 
- Studying Exam F3 
- Studying Exam P1 
- Studying Exam P2 
- Studying Exam P3 
- Studying Exam T4 
- Studying Exam C02 
- Studying Exam C03