The purchase order (PO) and the vendor invoice are the VAT relevant data sources used to determine the VAT treatment of incoming invoices. However, the vendor invoice data is in general not available in SAP. In order to automate the VAT determination, it is essential that external information is added in an easy and intelligent way.
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Replace emotion and second-guessingIn practice, many of the incoming invoices are still processed manually. AP clerks, who are not VAT experts, have to select the correct tax codes and thus determine the VAT treatment and reporting.
In order to manage this process, detective controls should be executed to check whether this is done correctly. This is labor-intensive and poses a major area for VAT errors, such as failing to deduct the correct input VAT in the VAT return. It will therefore be an area of investigation during a tax audit.
Be operationally efficientWhen an incorrect VAT result is caused by the incorrect data in the PO, the remediation takes place via updating the PO with correct data and re-processing the related transactions (goods receipt, etc).
Such a process causes workforce inefficiencies due to the hidden factory. Definition of ‘hidden factory’ or ‘hidden operation’ : the rework and cover-ups, the hours and days of wasted time in a company of people who constantly correct mistakes (unnecessary rework).
The objective is to make the hidden factory visible (measure/calculate ROI) and as a result, return precious time and money to the business.
The AP clerk often fully relies on the purchase order and is unaware that this purchase order might no longer reflect the actual situation. For example, if the vendor decided to execute the transaction differently from what had been initially agreed upon – the vendor decides to deliver from another country as locally the goods were not in stock. That causes a gap between data in SAP and the formal invoice (i.e. incorrect use of goods supplier partner function). That gap has to be closed.
Additional complexity arises when the purchase orders relate to services and not to materials or when the VAT is not fully deductible.
Written by Richard Cornelisse
Richard advises multinational businesses in improving the efficiency and effectiveness of their Indirect Tax Function and Tax Control Framework.
He started his career as a manager at Arthur Andersen and then became an EY partner where he led the indirect tax performance team for Netherlands and Belgium. Currently, he is a managing director of SAP Tax Consultancy Firm.
Richard has over 20 years of experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service center migration, and post-merger integration work.