The Differences in Tax in the Procure to Pay Process: U.S. vs. Global

Episode 2 of Tax Today: Procurement

Vertex Inc. Procurement Podcast for Businesses

Episode 2 Summary

Sales tax. Use tax. Value-added tax. In episode two of Tax Today, Kristin Schwabenbauer from Vertex Inc. talks to guests Mike Bernard and Peter Boerhof, from Vertex’s chief taxation office, about how U.S. and European organizations manage tax in their Procure-to-Pay systems. As organizations quickly find out, there are essential differences between sales and use tax as well as VAT. Navigating the granularity of various taxes, processing invoices, and managing exemptions or untaxed goods can be complex and error-prone when doing it manually.

In less than 20 minutes, this Vertex Inc. trio tackles invoice automation, accounts payable outsourcing, and touchless tax so that you can be armed with the most recent information to make your next business decision.

MS. SCHWABENBAUER:  Hi, I’m Kristin Schwabenbauer.  Welcome to Tax Today, a Vertex podcast series.  On today’s episode, we’ll be exploring differences in tax and procurement, US versus global with Mike Bernard and Peter Boerhof, both from Vertex’s chief taxation office. Thank you both for joining us again.  
MR. BOERHOF:  Yeah, thank you, Kristin.  I’m happy to be here. 
MR. BERNARD:  Thanks, Kristin. 
MS. SCHWABENBAUER:  So I know last session we discussed some of the critical issues of why indirect tax and procurement is so important and why people need to be talking about it.  So to take that a step further, what we wanted to talk about today was first some of the attributes, or what are the essential differences between sales and use tax and VAT?  So Mike, could you talk to us a little bit about that from a US perspective? 
MR. BERNARD:  Sure, Kristin.  I think there’s several differences between the US and probably the VAT system.  I’d point out three of them.  I’d say the first thing is that just the granularity of the US system is much deeper than, say, maybe you might see in the VAT system.  And what I mean by that is granularity in terms of jurisdiction.  So you would have a state, a county, a city; you might even have a local sales and use tax.  And normally in a VAT system you wouldn’t see that.  You might just see a country rate.  
The second thing is a lot of times in the US system, you can be exempt or it can be taxed differently based upon the use of that.  So if something goes into a product and you’re not the ultimate consumer of it, then obviously it doesn’t get taxed; that’s a big difference.  And then lastly, the status of who the person purchases it.  So if you have an exempt organization, a school or a nonprofit and they purchase something, then that could also be exempt from tax.  And the reason that’s all important is because when auditors come in, at least from states, one of the first things they look at is to see and look at the exemptions you claim, not always necessarily the tax you collected on the taxable items, but what you’re claiming as exempt. 
MR. BOERHOF:  Yeah, I tend to agree with that to a great extent indeed, Mike.  With respect to granularity, we typically have one or a few regs per country, although we have some specials, like, for example, Greece with their islands or Spain with specific rates for islands.  It’s way less granular than the US.  And we also have a few exemptions, but that’s mainly related to, for example, supplies to international organizations like NATO.  And if you look at the, to me, the real specific for a VAT system versus US system is that VAT is all about deduction of input VAT.  In business to business transactions, a vendor normally charges VAT on invoice, and this VAT is deducted as input VAT by the buyer.  And ultimately, for the final consumer it is not deductible and becomes a cost.  And this is really crucial and typical for a VAT system. 
MS. SCHWABENBAUER:  That’s interesting.  It makes a lot of sense when you spell it out.  So let me understand this, too, and pivot a little bit here.  With regards to how you receive the invoice, does that cause any -- with paper versus digital, I know things are getting automated from that perspective.  Does that, Mike, give us any challenges or opportunities?
MR. BERNARD:  I think it does.  Ultimately what that invoice has to do is it has to be tied back to some purchase order.  So that’s one of the controls that has to be applied to it.  And if it’s entered into, say, a system that is owned by the purchaser, then it becomes essentially a digital invoice, then there’s tools that are out there that actually kind of can review that invoice, tie it to a PO and then properly pay it or not pay it.  If it comes in as a paper invoice, there are systems out there today that can read it digitally, yet there’s still some human review of those invoices.  So it does kind of determine which way it comes in as to how quickly it can be processed.  But ultimately the idea is to make that review of it more and more digital.  And Peter, I don’t know what you’re seeing or what your experiences are. 
MR. BOERHOF:  Yeah, it’s about the same.  I would say that the key benefit from, let’s say moving to digital invoicing is efficiency.  And tax, actually, I believe is still a bottleneck in this overall process.  Both paper and digital require quite often still manual assignment of tax codes in the ERP system in order to have it processed correctly.  And yeah, for many the difference will not be that big, because if you have a paper invoice, quite often those invoices scanned and OCR is applied.  
And effectively, the clerk, whether it’s a digital invoice or a paper invoice, will always look on the screen to kind of an image of this invoice either scanned or rendered.  I have of course also seen scenarios where businesses have tried or wanted to implement a system where the allocation of tax codes indeed was actually based on the owe information.  This is actually also quite tricky, because a vendor may decide to deviate from a PO and not with respect to products or dates of delivery, but he may decide to deliver a specific product not from a local stock point, but, for example, from a stock point abroad, and then the invoice looks completely different. 
MS. SCHWABENBAUER:  Yeah, that’s a challenge, that really is.  And what you’re saying really makes sense, Peter, and Mike as well.  As procurement professionals are trying to really automate and get best practices in and gain efficiencies, tax has got to be a bottleneck.  And never mind does it bring down the process and you’re still having AP really hand-hold these invoices to get them processed, but who knows if you’re accurately calculating the right tax or charge the right tax which affects everything.  
So I’m not even sure in some of these processes are folks thinking about tax, or are they just accepting that, oh, your supplier is charging everything correctly.  And I think that’s where some of that confusion is really in where the learning is possible here; where we really need to elevate tax.  So Mike, as far as this is concerned, are you seeing any trends here?  I’m kind of picking up on some, but are you seeing any trends to where we might be going with all of this? 
MR. BERNARD:  I think, first of all, there was the idea of applying tax to AP invoices.  That idea, if you step back about fifteen years ago, at least in the US for a lot of global companies here, there was a rush to kind of outsource that function into service centers.  And so these would have been third parties who actually pay the invoices.  They might have to apply the tax, they may not have to, but ultimately the invoice gets paid.  And the reason that outsourcing occurred is that a lot of companies thought that there was higher value added activities that company employees could be engaged in.  And what we saw a lot of was we saw a lot of management reporting; we saw a lot of people even outsourcing statutory reporting.  So these functions kind of left the company, and then eventually what happened was we saw that a lot for the payment processors that turnover was high; it was difficult to get the data out for audits.  And there was some competency lost in that whole process.  
So eventually what we saw is a lot of those functions came back or in-sourced into companies.  And one of the big reasons was is that the experience got better, and obviously the tools and the automation became much more stronger than it, say, had been in the previous ten years.  So they learned a lot by outsourcing, but then bringing it back in was a very beneficial thing for companies.  I’m sure, Peter, you’ve seen some things; maybe not as stark as those differences.  But I’m assuming you’ve seen some of those things as well. 
MR. BOERHOF:  Yeah, completely agree, Mike.  And although we’re almost, say, lagging behind a bit in this process, it’s always kind of waves that you see.  And centralizing of AP and other finance functions in shared service centers is already quite common for a few years here in Europe and the EU as well. And also outsourcing of AP activities to third-parties is, I would say almost a trend nowadays amongst others for labor arbitration purposes.  
So it’s not unrealistic to have an outsourced AP department in a location like, for example, India.  And then one of the key challenges is that the function is actually quite remote from your day to day business activities and also from your VAT regulations.  And then the usage of the goods, how they are used in your business is less known by the AP processors.  And also what are exactly the correct invoice requirements and the correct rates is sometimes a challenge. 
MS. SCHWABENBAUER:  That makes a lot of sense.  I can see where that would just make it near next to impossible.  If you outsource, you are really giving up all control.  And how do you get it right?  How do you get that information back?  It makes a lot of sense, and I think that feeds into some of the trends we’re seeing with the best of breeds procurement providers growing and expanding because people are starting to bring that back potentially in-house.  And, as I’ve always said, tax touches everything.  Everyone purchases globally for the most part; your midsize to large companies, you’re going to purchase globally so you’re going to face these challenges.  If you’re in business, whether you have to deal with VAT on the customer side or sales tax on the US side, it’s just more complicated.  And everyone purchases for their business, whether your sales are taxable or not, so that makes a lot of sense.  
And it seems to me that, what I’m saying is that you can’t have touch-less AP without touch-less tax.  You really need to have tax right alongside the touch-less AP.  And that seems to be something that I think people are starting to really wake up to.  So Mike, that brings me to our final question.  Does that trigger a desire to further automate tax? 
MR. BERNARD:  It really does.  I mean, what we’ve seen in some of our customers is, for example, we had a customer that won one of our technology and achievement awards last year, where they actually took royalties that were -- these were software licenses that were deployed upon different places in the US and globally and actually automated that system because in a lot of places software can be purchased without paying any sales tax.  It may be subject to certain VAT rules as well.  
But I think what we’re starting to see, particularly in the procurement space, is those kinds of achievements.  And I think in AP it’s the same thing, because when you actually pay the invoice, that has to be automated as well, simply because of the volumes and simply because, what Peter had mentioned earlier about, there still is a manual process involved there.  So one of the things that -- and as we mentioned in the first webcast was the idea of governance, and that there’s an expectation that invoices, procurement, tax, all of these functions are actually going to be working together, to not just buy goods and services and to pay the bills, but that along with that, the tax is a key component to this entire process, and that there’s an expectation from a governance perspective, from a board perspective, to actually get these things right.  So all these functions have to really work together.  And it really speaks to having an automated tax engine that can take a lot of these transactions and bump up against them.  And I’m sure, Peter, you may have seen some other things in your world as well. 
MR. BOERHOF:  Yeah, I would say it’s not even other things, Mike.  It’s pretty like what you said.  A requirement to get things right at first instance already is one of the things that’s also becoming increasingly crucial in EU and Europe as well, but also in LATAM and APAC.  And that has to do with, let’s say, the data intensity of your communication with the tax administrations in, for example, real-time reporting.  And in the AP process, the manual tax coding is, in my view, one of the key blockers for a real touch-less AP.  And also manual tax coding is one of the key headaches of many VAT managers.  So I would definitely say that if you want to go that route or are forced to go that route because of reporting requirements, I would say it’s ineffable to also include automation of tax in this process.  So I think we’re aligned in this respect. 
MR. BERNARD:  Sounds like it. 
MS. SCHWABENBAUER:  Yeah, that makes a lot of sense.  Essentially get rid of the cheat sheets, get rid of asking tax to help you every single time, no manual tax coding, and try to process to automate as much of this as possible so that you can let tax own tax.  I think that automation really is key for this.  
So instead of burdening your AP clerks or your AP professions with having to manage all of this, let the tax folks ultimately make the decisions and they have control over things, which is a lot of what we have seen 20-25 years ago with sales tax for the US.  You didn’t want your sales reps making those decisions, right?  You want your tax people making those decisions.  And in order to do that, automation is absolutely key. That’ll do it for today’s show.  I’d like to thank Mike and Peter for joining me, and thanks to our listeners.  Make sure you tune in for our next episode when we’ll be discussing indirect tax and procurement landscape, opportunities and challenges in the US with Tiffany O’Neil.   
 

About the Series

Still haven’t cracked the code on indirect tax and procurement? Let us help. On Tax Today, a Vertex podcast series, host Kristin Schwabenbauer holds enlightening discussions with tax, IT, and procurement specialists focused on shaping tax in the procure-to-pay process. Tune in every week for words of wisdom to help you transform tax.

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