Why is Indirect Tax in Procure-to-Pay So Critical?

Episode 1 of Tax Today: Procurement

Vertex Inc. Procurement Podcast for Businesses

Episode 1 Summary

Tax touches everything. That’s especially true in the procurement process. Tax determination is a critical issue for procurement and tax teams because without a correct invoice, teams are left doing the manual work to fix the mistakes made. In an effort to make the purchasing process frictionless, companies are turning towards tax automation.

In the very first episode of Tax Today, Vertex’s Kristin Schwabenbauer is joined by Mike Bernard and Peter Boerhof to talk about the partnership between tax and procurement, the similarities and differences between global systems, and the importance of automating tax. Within less than 20 minutes, listeners will have a better understanding of critical issues for procurement and tax teams, VAT liabilities within the purchasing process, KPIs to identify while planning, and more.

Hi. I’m Kristen Schwabenbauer. Through my years as global partner lead for procurement, I’ve been fortunate to have many informative conversations with experts in tax, IT, and procurement. Conversations focused on shaping tax and procurement. Conversations rich with fresh approaches, diverse experiences, and unique viewpoints.

On Tax Today, a Vertex Podcast Series, we’ll aim to capture and share conversations like this. Helping you crack the code on indirect tax and procurement and improve your organization’s P2P process.

On today’s episode, we’ll be exploring why is indirect tax and procure to pay so critical, with Mike Bernard as well as Peter Boerhof from Vertex. Mike Bernard is Vertex’s chief tax officer of transaction tax, providing insight around tax department operations, indirect tax, tax risk management, emerging tax trends and tax policy.

Peter Boerhof is Vertex’s VAT director in our chief taxation office. In his role, he provides insight and thought leadership regarding the impact of tax regulations, policy, enforcement and emerging technology trends in global tax.

So, thank you, both, for joining us. Mike, if I may, let’s start off with a question for you. What’s been your professional experience with working with procurement? What are the critical issues to a partnership with procurement in tax?

MR. BERNARD: Yeah, Kristin. Thank you for being here today, and glad to be on the podcast series with both you and Peter. I guess what I would say is it’s one thing you really kind of have to understand I think with any partnership is to understand what are the important issues to the other party that you’re actually partnering with. And with procurement, one of the things -- there are several of them, but I’ll point out a couple of them. I’d say first of all what procurement is trying to do is they’re trying to provide services and goods to the company at a cost effective -- in a cost effective manner. And most important I think for them is that they have strategic partnerships, supply chains that continue to -- where they receive their goods and their services timely. So, that’s number one.

The second thing is that they want to provide a level of service that customers within the company can actually appreciate and things arrive on time. And then, the third thing is they also are normally dealing with a procurement system or that is either homegrown or it’s very tailored to an industry. So, you have to understand that they have particular expertise in that manner.

But one of the things that is on the backend of all of this that they may not be as familiar with is actually the calculation of taxes. And so, when they’re actually procuring these things, one of the things that’s not always first in line of sight for them is this idea that they have to get the taxes right. Obviously, that is something of concern to the tax department. And what we’ve seen lately in the most recent years is this idea of governance, both at the corporate level and at the finance and functional levels is that if you’re going to actually procure goods, that the ultimate taxes that you pay on those actually has to be correct. And so, what you see more and more now is you see both procurement groups and tax departments working together to achieve that.

I know my colleague Peter has some thoughts around that as well. So, Peter, maybe you could share some of those things.

MR. BOERHOF: Yeah. Thanks, Mike. And thanks, Kristin. I’m happy to be here as well. And I indeed do have some encounters with the procurement department as well from a VAT perspective. And that mainly has to do with global contracts. In global contracts and a central sourcing entity you run the risk that the procurement department takes the easy approach and builds a contract based upon a one on one relationship between a local vendor and the local procurement entity. And if you start global contracting, you have to deal with the place of supply for VAT.

And, for example, if you deal with global IT or telecoms contracts that cover often both surfaces and supplies of goods, it is very likely that if you take the simple approach that you encounter VAT liabilities for the central sourcing entity abroad. And I’ve also encountered similar kind of issues when you try to contract legal surfaces centrally. Some countries consider legal surfaces as to be taxable within that country. And if you have to have multiple contractual relationships, you can cover that. But otherwise, you can run into VAT liabilities abroad that you do not want.

So, one of the things that I advise is if you start contracting globally, establish a close relationship between your procurement department and your indirect tax department or your global indirect tax manager to have these draft contracts reviewed before signing and establish a list of countries that are potentially difficult from a tax perspective.

MS. SCHWABENBAUER: That’s great. That’s really interesting. I think both of you brought up some very key points from both the U.S. perspective, as well as globally. So, Peter, how does this look from a VAT perspective in the UE business. I think you touched upon it, but relative to AP and Accounts Payable and invoicing, are there differences between the U.S. priorities and VAT systems and all of that to get the correct tax treatment? And is that considered a KPI?

MR. BOERHOF: Yeah, I would like Mike to relate on the U.S. aspects, but if you look at the EU, there is for sure a number of challenges, I would say. And I just touched upon let’s say the contracting phase of procurement and you’re now more in the purchasing or operational phase of procurement. And what you typically see in 90, 95 percent of the EU businesses is that VAT is not considered to be an issue in purchasing because most transactions are closed exclusive of VAT.

So, purchase orders and the like are often not covering VAT. And of course, there are specific scenarios like banks, insurance companies, healthcare, governments for which VAT is a cost. So they should include it in their purchasing process. But in most businesses, VAT mainly becomes visible at the invoicing stage. So, indeed where the accounts payable department is also coming into play. And often, the accounts payable process is manual and AP clerks need to assign a tax code or a tax deductibility in order to properly account for the VAT on the vendor invoice and be able to include it in the VAT return. And they also have to assess whether the invoice that’s the company has received from the vendor is indeed a legally valid invoice.

But, unfortunately, AP departments are often on a volume target. And quality of correct VAT processing is sometimes not the number one priority. And especially if also the AP function is outsources and sometimes even to an offshore location. There is a risk that the quality drops due to a lack of, let’s say, knowledge or retained knowledge of both the VAT rules in a specific jurisdiction but also the business knowledge. And this could indeed partly be resolved by including VAT specific KPIs in the contract with the service provider or the AP department.

MS. SCHWABENBAUER: Oh, wow. That makes a lot of sense. It does. Mike, do you have any perspective from the U.S. standpoint?

MR. BERNARD: Sure. I mean, I think a lot of the issues that Peter pointed out just there are the same in the U.S. I think one thing that I would -- there would be two things I would say is one thing that procurement departments want to do is they want to basically have as much of a frictionless purchase and supply chain as they can have. And going back to what I said about the governance model is at the end of the day, and Peter touched upon this with accounts payable, is that at some point a correct invoice has to be issued and paid. And if the invoice isn’t correct, then it has to be reworked. And so, that’s a manual process.

And so, what we’re trying to do in all of this when we talk about having a tax solution for procurement is to have something that can handle the volumes that Peter was talking about, that can do it frictionless and that can actually do it correctly. And so that the rework of actually AP having to rework an invoice or procurement having to rework it or having to call the tax department to help them rework all these invoices, that’s really a suboptimal solution. And so, what you see more and more in companies today is because they have -- they believe their technology tools that solve a lot of these things, and they do, is that you have to really kind of put in place the best technology tools available to help you automate these things and actually produce and move goods along within your own environment as easily as possible and as correctly as possible.

And I will say one other thing -- Peter is right, is that there is a great deal of outsourcing that goes on sometimes between procurement and AP. And so when we talked about partnerships earlier, Kristin, you also have to be mindful that those are some of those vendors you have to work closely with in order to get correct tax determinations.

MS. SCHWABENBAUER: You know what, that makes perfect sense, and that’s what I’ve been saying over the past couple of years is especially with an evolution.

So, if you look at it from a systems standpoint, there’s been this revolution, if you will, or you have your procurement transformations, quote, unquote, as everyone is calling them. And they’re looking for all these efficiencies and they want to be able to analyze everything and make sure that they’ve got best practices in place so that -- because to handle the volumes. Because your processing company could be processing hundreds of thousands of invoices a year.

So, and with that came an evolution of partnerships and systems and things like that from your basic ERPs offering, you know, your SAPs and Oracles offering functionality to purchase to your Coupasand your Aribasand your trade shifts and everything else. So, I think that’s definitely been an evolution.

But one thing that really resonates that you’re both saying is that those KPIs. So, everyone is looking for those KPIs in your purchasing process. But you need to have tax participate and partner right in line with those KPI’s too. You need to have those tax KPIs in your purchasing process. Because if you don’t, you’re really missing out. You’re missing out from an efficiency standpoint. Your employees could be doing other work. There are so many inefficiencies that could be happening and errors because there’s a lot of risk to this, too, if you don’t get it right and don’t get it right the first time. So, I’m enjoying seeing it now and part of this podcast series is really meant to help to elevate that for folks to say, hey, how do we put this in place? And if you’re going to do a procurement transformation, then tax needs to be a part of that. And tax needs to own tax. So, that’s exciting. It makes a lot of sense to me what you’re both saying.

MR. BOERHOF: Yeah, you’re right about KPI’s and working together with the tax department. And if you take let’s say a simple approach, you could say, okay, we just impose VAT or tax KPIs to your AP department.

And you just test, well, okay, how many invoices have you processed and how many of those invoices are indeed correct from a VAT point of view? So, if you need to assign a tax code, how many times did you do this correctly and how many times did you do that incorrectly? That sounds like a relatively simple solution. But it’s actually it’s not that easy because the accounts payable department is almost at the end of the overall procurement process. And in this whole process as with most tax processes, and also with tax automation it’s really the data is key and that’s both master data and transactional data. And a lot of this data is actually not created by the AP department.

So, if in the contracting or buying phase incorrect or incomplete data is entered into a system, you cannot expect that AP is able to process an invoice flawlessly. And it’s the same actually with automation because for automation also data is crucial. And many non-compliant transactions are caused by incorrect data. So it’s important that you include that in your assessment.

But if you have a good process for managing your transactional and master data, I believe it’s actually possible to squeeze out a lot of the manual errors by automating your VAT determination. And if you properly configure this, you can already during the PO creation create transactions and if they are non-compliant, it’s very easy to either block them or have them flagged because of tax issues.

And also in the AP processing, actually in the invoice processing, you can to a great extent automate the assignment of tax codes, and that leaves more time for AP clerks to deal with the more complex scenarios and the more complex invoices.
MS. SCHWABENBAUER: Agreed. That makes a lot of sense. Mike, you and I have had some pretty extensive conversations regarding that. I’d like to get your thoughts on that as well.

MR. BERNARD: Sure. I mean, I think sometimes when we think about procurement and tax and particularly the tax department is -- there’s the question that really kind of comes about is like where do you start. And because the procurement group really does buy a wide range of supplies and services. And so, I would say one place where you might want to start thinking about is think about the use tax liabilities that you’ve had over the years where things have just not been correctly rated for tax purposes. And really start focusing on the goods that are, say, high volume and maybe and significant dollars within the procurement group.

And it goes back to a little bit about what Peter said is a lot of times if your purchases are described properly and you have an automated solution, a tax engine around that, then you can actually have those things mapped properly and they can actually get a proper solution. And so, and then you don’t have to post up reserves for financial statement purposes. There’s not a lot of reworking of invoices. There’s just a lot of great benefits that come from all of that.

And so, I guess my point here is that while the journey may seem rather significant and large, I think as long as you can kind of break it down into pieces as to where improvements can be made, and it can be made anywhere in the rating. It can be made anywhere in terms of how things are described in the data. It should be always tailored towards the priorities of high dollar, high volume transactions. And if you can kind of start piecing those things together, I know in the podcast series we’re going to talk about a lot of other things, but that’s always just a great place to start.

MS. SCHWABENBAUER: That’s fabulous. That makes a lot of sense. I think I heard a client say a couple of months ago, tax touches everything and that’s especially true in the procurement process. And all companies across the globe are purchasing globally. And they have these complexities -- they all have some type of indirect tax that they need to adhere to and remit and everything else no matter what the process is. They might not have to deal with, as we put it in the U.S., the sales tax. But you always have your consumer use tax and on the supplier side. So, it’s all really important.

That will do it for today’s show. I’d like to thank my guests, Mike and Peter, for joining me. And thanks to our listeners. Make sure to tune in for our next episode when we’ll discuss differences in tax and procurement, U.S. versus global.

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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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