What is a Tax Engine and Why Should You Add a Tax Engine to Your ERP System?

Discover how to improve tax accuracy, reduce risk, and enable business growth through a tax engine.

Handling VAT exclusively with your native ERP leaves your tax team spending too much of its time manually researching rates and rules, and constantly updating the ERP—ultimately putting your organisation at risk for audit penalties, tax operation inefficiencies, and inaccurate tax calculations.

In this post, we'll discover how these challenges can be easily addressed with a tax engine for VAT automation. 

What is a Tax Engine and How Does It Work?

A tax engine is a 3rd party system that integrates with the ERP system and replaces the native VAT functionality in the ERP system. It eliminates the need for in-house tax research and ERP updates, and improves VAT determination accuracy.

  • Provides the VAT calculation for every AP/AR transaction in real time
  • Maintains the latest tax rules, rates, & taxability logic for the ERP system
  • Allows tax staff to easily create custom tax rules based on business

The Changing VAT Landscape

As VAT complexity increases, it’s demanding more of tax departments across Europe. You’re balancing the need to reduce VAT risk while also enabling business growth into new product lines, new channels, and new markets.

The Need to Automate

While every individual VAT calculation must be accurate, local governments and in-house Governance & Risk are turning their focus to the foundational systems and processes that underpin VAT determination and introducing automation to improve accuracy and control. The manual process of tax research and updating ERP systems can be a significant cause of VAT inaccuracy, and a prime target for automation. Maintaining up-to-date rules and rates is just part of the challenge, though. Even with updated tax content, your native ERP system functionality will not completely support your VAT determination needs.

VAT automation is crucial because of the immediate risk from manual and non-standardised processes. The favoured solution seems to be greater use of tax engines across the enterprise to ensure, as far as possible, that basic data are correct and correctly categorised.

International Tax Review
Tax and Technology Forum
2019

Challenges in Native ERP VAT Management

TAX ACCURACY

  • ERP tax determination is not granular enough for complex transactions and tax-complex countries.
  • VAT registration and place of supply determination is limited in ERP systems.
  • Some ERP systems have a limited number of tax codes which limits the ability to add new requirements.
  • VAT processes often leave transaction-level tax decisions in the hands of non-tax personnel in AP/AR who lack deep VAT expertise

AUDIT RISK

  • Siloed tax management in multiple ERP systems across an organisation creates a lack of standardised VAT treatment across business units.
  • Tax reporting in ERP systems uses summary data, while tax engines provide transaction-level detail for improved VAT planning and audit support.
  • A tax engine provides an output that explains why a particular tax calculation was determined.

TAX OPERATIONS

  • Maintaining tax content in an ERP system requires resources dedicated to constant tax research across all jurisdictions where you do business.
  • IT resources are required to continually update the tax content in the ERP system (i.e., changing tax determination rules, tax rates, system configurations, mappings, and tax codes).
  • VAT reporting from the ERP system is not easily generated by the tax department and typically requires IT resources.

Why Add a Tax Engine?

To address these challenges, many successful multinationals have found that adding a tax engine to their ERP systems significantly improves tax accuracy and overall tax department agility. The tax engine replaces the native VAT functionality in the ERP system, eliminating the need for in-house research and ERP updates. A robust tax engine not only maintains tax content outside the ERP system, but it ensures accuracy on even the most complex transactions.

A tax engine:

  • Maintains up-to-date tax rules and rates outside the ERP system, eliminating manual research and ERP updates.
  • Calculates VAT for even the most complex transactions and jurisdictions, regardless of the limitations of the ERP native functionality.
  • Centralises VAT management across multiple ERP systems for more consistent tax determination across the business.
  • Allows tax professionals to be in full control of rapidly building/adjusting logic for their required outcomes, if desired.

What Other Benefits Can a Tax Engine Provide?

A tax engine provides additional benefits beyond VAT determination accuracy and reduced manual processes.

  • Supports the data and reporting required for VAT compliance.
  • Improves tax management visibility by creating a tax system of record with transaction-level detail.
  • Supports expansion into new markets by providing VAT content for multiple countries, including the highly complex U.S. sales and use tax
  • Provides scalability to support additional business applications outside the ERP, including procurement, e-commerce, and retail POS systems.