The growing influence of indirect tax on procurement
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The growing influence of indirect tax on procurement

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Peter Boerhof of Vertex Inc shares the results of a survey showing that businesses are increasingly turning to tax engines to eliminate errors and streamline operations.

The fragility of the global supply chain has been exposed over the past two years, with the impacts of Brexit, COVID-19, and geopolitical sanctions causing unprecedented levels of disruption. This has resulted in 83% of businesses from a spectrum of industries taking steps forward to improve supply chain agility, with the rest considering how to do so. 


While tariff wars and public health quarantines received attention for interrupting smooth international trade, the impact on indirect tax obligations s frequently overlooked when it comes to supply chain complexity. These findings, which are highlighted in recent research commissioned by Vertex, a global provider of tax technology solutions, should be a wakeup call for business leaders to start considering ways to overcome this challenge.



According to the survey commissioned by Vertex, 86% of procurement and finance professionals are struggling to track indirect tax changes due to this ever-evolving tax landscape. Not only is this hindering the ability to conduct frictionless trade, but it’s also putting businesses at risk of audit failure. 



To overcome this, nine out of ten respondents agree that the capacity to calculate indirect tax accurately and efficiently will contribute to increased supply chain agility, improve relationships with vendors, and ensure tax obligations are met. 




The impact of tax on procurement


While tax might not be top of the agenda for most procurement professionals, there are many instances where procurement and tax management cross paths. This includes master data and vendor setup, requisition and purchase orders, goods receipts, invoice verification, and posting.



Tax professionals at a global mobile technology firm told us that when it comes to procurement, “indirect taxes apply to every transaction.” Therefore, “the more the transaction volume, the more imperative it is to get indirect taxes right.”



This is particularly relevant when errors in this area can result in fines and penalties, as well as reputational issues with customers and suppliers. Even though it may be seen as a technical issue, getting indirect taxes right for a company that relies on international trade is fundamental for the success of the business as a whole.



Why is indirect taxation still a challenge?


Though most businesses recognise the challenges related to indirect tax determination, the research shows many are still looking for better ways to respond. 



Technology is the straightforward answer, particularly in procurement, where automation is widespread and where tax plays an important part. However, while automated tax determination is now near-universal, 81% of businesses are still relying on native functionality within their enterprise resource planning (ERP) systems to handle their tax requirements. This is leading to high error rates and incorrect tax payments. 



It is unsurprising that more than two-thirds of respondents are concerned that tax determination issues would be uncovered if a procure-to-pay audit were to be conducted next week. 



The report also shows that the levels of error when dealing with indirect tax are widespread, with up to 95% of executives, including 98% within the tax function, aware of mistakes directly linked to VAT payments. In addition, only one of the more than 700 in-house finance, procurement, and tax experts in the survey was confident that their firm’s error rate was 0%. 



In a nutshell, ERP native functionality has not removed errors in tax determination. In some cases, introducing advanced tax automation in the procure-to-pay process has even highlighted mistakes that were previously unidentified. 



The answer: the right automation


Adopting an integrated tax engine – a system that integrates seamlessly with the ERP and other financial systems – can help solve these challenges. 



According to the report, 13% of businesses are using a tax engine to help achieve audit success. Only 7% of these experienced a negative audit finding on their procure-to-pay during the past five years, compared to 35% of companies not using a tax engine. Additionally, respondents that are already using an integrated tax engine report significantly fewer determination errors than other businesses using system ‘add-ons’ to calculate VAT. 



Part of the benefit of using a tax engine comes from having a tool with accurate data and sophisticated processes. Partnering with the right vendor ensures the system contains accurate VAT rates and rules, determines tax liabilities in real-time, enhances record keeping, and ensures that reporting content adheres to the rules and regulations of tax administrations. 



For procurement and finance professionals, the right solution will also offer the scalability needed in times of rapid business growth, as well as improve end-to-end compliance, which in turn speeds up supply chain agility. 



Findings also show that adopting an integrated tax engine can help to future-proof businesses in a volatile and competitive market. We spoke to a senior tax professional at a manufacturing and distribution company who said that a key motivation for switching to a tax engine was “to have one source of truth for data rather than housing it in multiple places”. 



Even when businesses have more than one ERP system in procurement, utilising a tax engine within a single reporting system offers a consolidated overview which facilitates the flagging of errors.



Going forward, the influence of indirect tax will continue to rise because, for most countries, transaction taxes are a dominant form of raising income, especially as the digital economy continues to grow. All departments within the business, including procurement, must act now to ensure they are best placed to handle future changes, avoid disruption, and ensure compliance. 



Vertex can provide more helpful advice on how to improve indirect tax within the P2P process. Learn more here:



Peter Boerhof

VAT Director, Vertex Inc

Get in touch:


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