What is Tax Analytics? Why is Tax Department betting high on it?

The global taxation landscape has entered a new era of data-driven ecosystems. Corporates, banks, and governments are already focusing on a taxation model that pivots on data and analytics for minimizing risk exposure while maximizing the visibility of tax-related data at the same time. As a result, the process of revenue collection by governments and tax filing by corporates has undergone a sea-change in the last few years. For example, addressing Base Erosion and Profit Shifting (BEPS) has become a priority for many governments around the globe.

Under BEPS Action 13, all large multinational enterprises (MNEs) are required to prepare a country-by-country (CbC) report with aggregate data on the global allocation of income, profit, taxes paid and economic activity among tax jurisdictions in which it operates.

When this CbC report is shared with tax administrations in the respective jurisdictions, it would be used for improving risk assessments and value creation. As such, the shift towards Tax Analytics (and banking analytics) can be termed as a game-changer in the realm of taxation.

At its core, Tax Analytics is the new role of data analytics in taxation. It leverages the power of new data analytics technologies like visualization, integration, data fabric, etc., on massive sets of tax data. It then uses the technical knowledge of taxation to generate key insights and deeper understanding to improve business performance and drive strategy through smarter and real-time decisions related to the tax department.

As per Deloitte, the role of taxation can be elevated with data analytics, as tax data analytics is both a powerful investigative tool and, through visualization, a graphic medium for communicating findings and discoveries.

While CbC report is one of the several examples that clearly depicts the emerging role of data-driven insights and analytics in banking and taxation, there are many more reasons why tax analytics will be critical. For governments, it would be about securing revenues by closing the gaps in the process. For corporates, it would serve as a necessary platform to realign taxation with the economic activities of the broader organization. IRS came out with a data stating that there has been an increase in data volume by 100X times from 2007 to 2017 and the number of users has increased by more than 23X.

Tax departments are now expected to provide a strategic viewpoint and add more value than ever. As such, the deployment of data analytics software has become both pragmatic and necessary for operational efficiency, and organizations around the globe are ready to make the decisive shift.

As per Allied Market Research, the total value of the business analytics software market in 2023 is estimated to reach $57 million, with the Asia-Pacific region set to experience the highest growth at a CAGR of 12.10%

Traditionally, the process of tax data-gathering has focused on hindsight. This traditional approach is all set to change with Tax Analytics, as it will help move taxation from mere hindsight to insight and foresight, shifting from ‘what needs to be done' to 'what needs to be known’. By fully understanding what lies ahead using the insights, the tax departments can utilize the information to improve the key areas of tax audits and compliance.

The Tax department in India has started using data analytics in the last few years to find outliers in any industry. The insights using the advanced tool have enabled it to identify the gap from industry-based average taxes, which is now being used to determine targets for further scrutiny.

In the past, the direct tax and the indirect tax departments operated independently and would not share data. However, the government’s big data push has meant that both departments have been sharing data with each other. As -per industry trackers, this has led to deeper analysis and more tax notices and scrutiny.

Most of the leading IT vendors are providing a tax analytics solution that can play a vital role in meeting the growing expectations of your organization. NSEIT also provides a leading-edge solution to simplify tax computation that fully leverages the power of analytics. Some of the leading organizations in the BFSI sector are effectively using the solution that has enabled them to make tax data drive the strategy and serve as a catalyst for success and growth.