A, B or C?
More tax and procurement leaders will be taking a high-stakes multiple-choice quiz in the coming months. Selecting the wrong answer can be costly – resulting in as much as $6 million in wasted transaction tax costs for every $1 billion in spend, according to “Cornerstones of Cost Management,” a book by Don Hansen and Maryann Mowen.
Procurement activities and indirect tax processes intersect at numerous junctions, including the requisition and purchase order, receipt of goods/services, invoice verification and posting of that invoice to the general ledger. As a result, procurement teams must address several important indirect tax considerations, including:
- Ensuring the accuracy of master data;
- Managing tax variances;
- Posting correct tax amounts to ERP systems;
- Fulfilling all reporting requirements; and, in many cases,
- Selecting the most effective tax automation solution.
This selection is where the multiple-choice quiz comes into play. Most organizations have three options for managing the indirect tax requirements that accompany procurement transactions. Each option has unique pros and cons:
Choice A: No Procurement Taxation
One option is to do nothing – simply pay tax as charged and let the invoices pass through the procurement and payables solution. While this solution has advantages in the form of reduced systems and systems-integration costs, it comes with significant risks, including tax calculation errors, tax over and under payments and tax compliance problems.
Choice B: Procurement/Native Tax Calculations
This option involves using the native configurations in procurement systems, which contain basic functionality (some tax tables and tax logic) for calculating taxes. The upside of this solution is that it eliminates any need to integrate with more robust tax technology from a third party. The downside is that a procurement solution’s baseline tax management functionality is most effective when an organization’s indirect tax compliance requirements are straightforward – and remain that way. Any changes in tax rules or rates, compliance complexity, tax jurisdictions and/or the type of procurement transactions that occur require reconfigurations to the procurement system.
Choice C: Procurement/Third Party Tax Engine
This option provides the most accurate solution for validating vendor-charged taxes and accruing use taxes. It also provides the opportunity to avoid tax over-payments by pushing any tax discrepancies back to the vendor prior to payment. Taxes also are included in budgeting and approval processes in the procurement system. While the integration of procurement systems with a third-party tax engine comes with implementation costs, it provides the most accuracy in evaluating taxes during the procurement process while also providing the flexibility to easily manage business and regulatory changes.
That’s a decidedly succinct rundown of possible answers to a high-stakes choice that is becoming even more important as tax compliance complexity intensifies. For a more thorough examination of crucial considerations and leading practices related to automating procurement tax processes, check out the recent KPMG-Vertex webcast on the topic.
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.