VAT compliance doesn’t come for free, however you choose to approach it. But is there a solid business case for investing in a tax engine to automate it? My answer is an emphatic “yes.” And, if you’d ask me to make my case in a single word, I’d say: “control.”
VAT may be one of your most substantial monetary flows. For some companies, the aggregate of input and output can be as much as 30% of total revenue. Tax authorities are increasingly imposing stringent reporting obligations, such as real-time reporting, SAF-T, and invoice clearance, which require first-time-right processing for VAT. In an invoice clearance model, for example, while there may be room for modifications, tax authorities will see the corrections, which could easily result in additional questions or an audit of the control framework.
A tax engine for VAT helps companies to stay in control by enabling:
Connect to systems and reduce human error: One of the big challenges in VAT is that the relevant data and processes are scattered across various departments, including procurement and accounts payable. A single tax engine can be connected not only to multiple ERPs, but also other financial systems for procurement, expenses or e-commerce. Automating the VAT determination in the order-to-cash and procure-to-pay processes can help to forestall errors. There’s less human intervention in processing tax because the requirements are set centrally, and the tax engine can flag or block non-compliant transactions.
Keep VAT systems and knowledge structure up to date: VAT rates and rules are constantly changing. With home-grown solutions in ERP, or a tax add-on to a standard ERP, resources need to be secured for tax research, and for entering the changes into all financial systems. With a tax engine, the rates and rules are embedded and maintained in the software or cloud solution by the software vendor and automatically updated.
Scale easily: With a tax engine, it’s relatively easy to add jurisdictions, regions or newly acquired companies by extending a license or implementing an API into the ERP of the acquired business. It’s much harder to do with an in-house-developed VAT system. With a VAT add-on to an ERP system, adding an acquired company requires either embedding the new company into an ERP system or embedding the add-on in the acquired company’s systems.
These are decisive advantages for companies that want to compete in a global arena where reporting requirements are constantly changing and moving closer to real-time. In another post, I’ll explain how to sell the idea of a VAT tax engine to stakeholders with a detailed look at the qualitative and quantitative benefits.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.