With the continuing digitalisation of the finance function, the processes around indirect tax are under scrutiny. The EU’s VAT reform and the switch to SAP S/4HANA are the current external drivers that have highlighted the critical need for action; automation is needed to ensure real-time tax determination with reliable tax compliance. Investing in a tax engine is a solution to achieving this, but what benefits do they bring to ensure a return on investment?
International tax regulations are automatically updated
For multinational companies, research into the varying tax rules and regulations by in-house experts is enormously time consuming.
ERP and e-commerce systems do not typically provide guidance for global VAT rates or input tax deduction rules. The myriad of tax rules and regulations have to be continuously researched by tax departments and every time there is a change in a jurisdiction a company operates in, the tax department must research and understand this change. This carries with it a risk of error and any major legislative event usually requires costly tax consulting and costly development configuration to IT software to ensure that all ERP and e-commerce systems are updated in a timely manner.
Tax engines, on the other hand, ensure that updates are applied and completed automatically, while ensuring end-to-end application for all connected systems. In addition, tax engines are much more flexible than native functions in traditional ERP and other financial systems. For example, detailed terms can be created to tackle unique sales tax requests or non-standard sales transactions. A specialised tax engine provides an intuitive framework for customisable rules that can be created, tested, and maintained by tax teams.
Automated tax engines can ease the pressure on tax departments
When using native indirect tax features in enterprise systems to calculate indirect tax costs, tax departments must enter each legal change on an individual basis and assign it to records in their system. Global VAT rates, place of delivery, VAT coding, and deductibility are not covered in an ERP system.
Without a tax engine, each regulatory and VAT rate change must be updated manually in every transaction system. This takes a significant amount of time for the tax department to input and requires consistent collaboration between the tax and IT teams. An automated tax engine can alleviate this and free these departments to focus on other strategic priorities for their business.
Tax engines can automate rules-based decision making
By integrating a tax engine with procurement, ERP, and e-commerce systems, manual processes are automated for a reliable and repeatable accounts payable process. As a result, user confidence is replaced by system certainty.
For example, using a tax engine ensures that during the purchase process there is a real-time calculation of the cost of goods sold, including applicable VAT rates, local rules, and company-specific deductibility. This allows those who manage the budgets of their organisation to understand the impact of purchases when they raise a purchase requisition.
A tax engine replaces the human-driven decisions with rules-based automation that increases accuracy and reduces risk. This also ensures consistency and standardisation of tax treatment when the accounts payable function is in a different region.
Tax engines offer correct calculations instantly – instead of later corrections with repercussions
Government authorities are increasingly demanding real-time reporting. As a result, tax departments are losing their month-end review time buffer to correct any errors in their indirect tax returns before submitting to the relevant authorities. Accurately determining indirect tax rates from the outset is a great first step to streamlining and improving tax compliance.
Days and weeks can pass between data submission to tax authorities and the month-end process to review transaction errors. Through real-time reporting, this allows tax administrations more leeway to investigate individual transaction enquiries that could turn into full-scale tax audits. Therefore, it is important to ensure that indirect tax calculations are correct on the first try and an automated tax engine can help to achieve this.
Centralised and scalable – instead of growing complexity
Integrated tax engines are operated and maintained by indirect tax professionals rather than IT teams, which means that calculations and tax reporting are managed by the appropriate department, removing unnecessary complexity in an organisation’s operations. In addition, multinational companies which trade in the US typically already use a tax engine to manage more than 10,000 tax codes for the correct determination of sales and use tax.
If the same tax engines are used for VAT and sales tax in other geographies across the globe, it will allow for improved centralised visibility, control, and management reporting. This will allow tax departments to maximise the return on investment, while reducing the cost of determining global indirect taxes across the enterprise.
In general, a centralised tax engine lowers the total cost of ownership over time compared to indirect tax management with native ERP functionality which needs to be maintained and kept up to date based on legislative changes as well as internal requirements.
When a certified third-party solution is compared to an approach developed in-house, it is clear that investing in a tax engine can help to drive a profitable return on investment.
