We are at an important inflection point for indirect tax. Soon, the status-quo indirect tax set-up for multinationals will not be enough to ensure compliance.
As businesses have been rapidly digitizing over the last few years, tax authorities have also been busy making drastic changes. To ensure they are capturing more of the VAT rightly owed to them, they are shifting to real-time tax reporting requirements, and more e-invoicing mandates are coming into force every year.
Unfortunately, for many companies, indirect tax requirements are often an afterthought in their transformation efforts and processes, leaving companies to find patchwork solutions to ensure they remain compliant. This not only raises the risk of non-compliance, but can also be a more expensive way of operating.
Here are some key areas where it is important be proactive and get ahead of the changes coming into force.
What are 4 things that can go wrong when indirect tax is an afterthought, and not considered throughout your digital transformation?
1. Your ERP probably isn’t enough. Even the latest cloud-based ERPs are generally not fit-for-purpose when it comes to complex cross-border VAT transactions.
While ERPs are often impressive operational and financial engines that power an organization globally, they are generally not built with VAT in mind. Even latest versions like SAP S/4 HANA are not really equipped to handle the complex VAT flows of large organizations. While the VAT landscape and business models have changed dramatically in the last 30 years, the tax functionality of many ERPs hasn’t kept up, which is particularly risky with increasing demands around e-filing and e-audits.
As companies move to migrate to the latest version or to consolidate ERPs, it’s an opportune time to loop in indirect tax and see where you may need additional functionality and technical ability. Many organizations require additional solutions or tax engines to ensure compliance, enhance tax process efficiencies and future proof the business.
2. You may not be able to launch into new markets. Agile businesses will want to be able to take advantage of opportunities they identify at home and abroad, but if your systems aren’t able to support you to be indirect-tax compliant in the given jurisdictions, you’ll be held back.
Every year, more countries are bringing in new digital reporting requirements and enforce taxation where the consumer is located. And multinational companies are moving towards standardized global processes, often with (outsourced) shared services, as well as standardized technology platforms, to ensure they meet the compliance requirements in all countries they operate in.
3. You may fall short of e-commerce requirements. Companies want and need to be able to deliver a unified customer experience through a variety of channels, but the VAT regulations to support e-commerce transactions, particularly cross-border transactions, can be a challenge.
If your business wants to sell online, you must make sure you are tax compliant with all cross-border e-commerce requirements across your selling platforms, including online marketplaces.
4. Bad data can infect your processes without the right controls. Beyond just the legal requirements, getting indirect tax right and embedding good quality controls at the intersection of sales, procurement and finance has benefits for the whole organization. When teams neglect detailed information in finance, sales or procurement that affects indirect tax, it can have a negative impact on the organization because of unnecessary tax costs or even reputational damage.
When indirect tax considerations aren’t incorporated into processes early on, it leads to pain points further down the line, beyond the fines and audits. Getting it right will not only help you avoid fines, and the four consequences discussed above, it can help your company remain more agile and launch into new markets and remain competitive.
It can be daunting for tax professionals to try to drive improvements to so many processes beyond their typical sphere of influence, but it can be done.
What you can focus on is bringing in control, preferably in a preventative and automated way, to improve the quality of processes upstream
So, what does it look like when indirect tax isn’t an afterthought, and is, instead, considered in the initial stages of business and finance processes?
- AP and Procurement teams don’t need to be tax experts, but they should have an understanding of why the tax-relevant data is required. There should be some training available for any teams in finance or procurement who are processing tax-relevant data, and ideally some pre-recorded training, so tax teams aren’t over-burdened with training for every new-starter.
- Data quality and data hygiene move up the corporate agenda and ideally become easier with the right technology in place. To maintain data quality, controls over master data should be in place so the tax-relevant fields cannot be edited without the correct checks or workflow.
- Automate processes as much as possible to squeeze out human errors and elevate people’s workload from routine data processing to quality controls, analysis and planning
- Open and regular communication channels exist among finance, sales, procurement, IT and tax. Tax shouldn’t be brought in to solve issues at the point of failure. In an ideal set-up, communication about any major developments happens early, concerns are raised as they arise, and solutions are embedded in the end-to-end indirect tax process, where needed across departments.
- Tax leaders have tooling for detailed insight into transactions in ERP systems globally. The tax team should be brought in early when designing or migrating an ERP to ensure indirect tax capability gaps are minimized.
- Indirect tax teams are aware of business developments that might have tax implications.
- Correct tax determination takes place at the point of transaction, with indirect tax SMEs brought in to manage occasional exceptions.
In many cases, there is a big gap between where companies are now and where the ideal set-up is. Vertex have produced a number of resources to help you on this journey to bring indirect tax to the attention of your business stakeholders, including:
The changing role of the tax function by Peter Boerhof, VAT Director, Vertex;
The key drivers of tax reforms by Prof. Dr. Jeffery Owens, Director, Centre for Tax Policy and Administration, OECD;
The opportunities and challenges of implementing a tax engine, Andrea Spandau, Head of Functional Excellence, Siemens;