A tax engine for VAT is a solid investment for many businesses, as I explain here. Still, your stakeholders may need some convincing, which means taking a closer look at your organization’s strategic agenda, operational challenges and risk appetite, as well as current costs.
A crucial part of your business case is the calculation of the benefits, both quantitative and qualitative, that a tax engine can deliver.
Quantitative benefits fall into two categories: reduced VAT risks and increased efficiencies. To lay out the risk reductions, focus on actual outcomes of past tax audits and include consultancy costs for these audits. Keep in mind, that in future audits tax authorities may leverage technology and data analytics to test all transactions rather than a sample.
To analyze increased efficiencies, consider:
- Procure-to-pay: A tax engine can save time and increase quality on invoice processing, enabling increased VAT deduction on complex invoices, speed-up the overall process, and reduce the overall training effort needed for indirect taxes.
- Order-to-cash: By automating the VAT determination on invoices, a tax engine blocks or monitors manual manipulations of the VAT treatment, which in turn eliminates or reduces the need for training A/R and customer service departments.
- Record-to-report: Automation can save significant time and effort in the analysis of transactions and data cleansing needed for VAT return preparation. VAT automation also ensures first-time-right processing of transactions for VAT which facilitates real-time reporting and invoice clearance.
- The IT department: Implementing a tax engine reduces the efforts for embedding and testing VAT rates and rules in condition records when an ERP system is installed; maintaining VAT settings in the system; and integrating other transactional systems, such as e-commerce platforms.
- The tax department: The savings here include being able to control and monitor tax settings centrally, a reduction in the number of transactional questions that tax must deal with; reduced time and effort to stay on top of tax rules to be embedded in the systems; more time to find tax optimization opportunities; and more efficient tax and financial audits.
Qualitative benefits are more difficult to pin down, but may be less subject to debate. A tax engine for VAT enables companies to:
Avoid reputational damage: With more invoices processed and paid on time, it helps to improve relationships with vendors. Also, sales invoices are less likely to contain errors, resulting in fewer complaints from customers. And finally, a tax engine reduces the likelihood of major tax corrections and penalties that may end up in the media.
- Improve tax authority relationships: Managing VAT through a reliable tax engine will show authorities that a company is in control of its tax processes and will be less likely to receive questions and audits.
- Improve overall quality: Applying automation, ensures that every step in VAT determination is conducted properly and consistently, delivering assurance not only to the internal audit department, but to everyone involved in the end-to-end VAT process.
- Facilitate other projects: A tax engine facilitates the roll-out of projects such as touchless AP, expense management tools, e-commerce platforms, procurement systems and consolidation or new ERP systems like SAP S/4 HANA. It can also simplify outsourcing or offshoring of AP processes.
- Avoid surprises in procurement: A tax engine can make VAT costs transparent during the requisition phase, which facilitates project budgeting and cash-flow optimization.
- Meet the challenge of real-time reporting: Many tax authorities are moving towards real-time reporting or invoice clearance requirements, leaving less room for the traditional checks and corrections in the VAT reporting process. A tax engine is a must-have for first-time-right processing of VAT in both sales and purchase invoices.
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.