Most ERP systems, including SAP, Oracle, JD Edwards, and Peoplesoft, are equipped with some form or forms of such VAT functionality. However, they typically still require significant configuration and may need to be customized to deal properly with indirect taxes.
They will also need to be updated and tested to reflect new contracts and billing flows. Ownership of these tasks must be determined and communicated up front, so that the ERP system can accurately issue invoices from day one.
One of the potential actions that may be taken is optimizing the VAT functionality of the ERP system. For example, some systems and tax engines include the option of using a condition table or decision tree to determine the appropriate VAT action without human involvement.
This virtual VAT manager establishes the VAT qualification for each transaction by allocating a tax code to yield a specific VAT result.
It is essential that any process functioning or being drawn up to function will reflect such changes as new customers, flow of goods, legislation, etc. and then is entered into the system accurately and in good time. The system also must include adequate controls to ensure that transactions not within the scope of the condition table / decision tree cannot be completed without the involvement of an internal or external VAT expert.
Systems changes involve various stakeholders, are time consuming and realistically take months to complete, so they should be considered as a medium- to long-term objective.
ERP Systems and Tax Engines
In the last decade, companies have increasingly automated their business processes. The most common method is by using an Enterprise Resource Planning (ERP) system. Such a set up can be hugely complex. This is definitely the case where it relates to European based indirect tax. As manual processes are subject to human error, automation could - under circumstances - result in performance improvements and savings.
A third party tax engine might be a better solution than improving the indirect tax functionality of its own ERP systems when the organization uses multiple ERP systems. Interfacing via a bolt-on could be an alternative.
ERP systems
ERP systems such as SAP and Oracle either determine the VAT treatment (liability and VAT recovery) of businesses’ transactions automatically or this is a (semi) manual process.
|
Spreadsheets and VAT |
|
|
Spreadsheets are usually found at critical points in the audit trail |
|
|
Often designed by non-specialists with no system expertise |
|
|
One consulting report identified that 95% of the financial models contained material errors |
Multinationals run often various versions of ERP systems or legacy systems without harmonization. The ERP set-up is often per business unit and thus multiple set ups per country are possible.
This could be the root cause that
- running of system's exception reports to look for missed opportunities, under claimed VAT and potential fraudulent transactions is still a challenging exercise
- a lot of manual (re)work is often needed to file the VAT reporting and reconcile the VAT numbers due to the use of multiple spreadsheets and various data sources (divisions, different systems)
The latter is interesting as spreadsheets are usually found at critical points in the audit trail. And are designed by non-specialists with no system expertise.
More than 80% of businesses are still using spreadsheets to manage their VAT compliance in at least one jurisdiction in which they operate, despite tax authorities around the world investing in better tools. - Eight out of ten businesses still using spreadsheets for VAT compliance | International Tax Review
An ERP system is not just an accounting system but also provides information about planning and production as well as being able to produce invoices and various reports.
Some objectives to consider
|
Objectives |
|
|
Indirect tax department utilizes leading edge tools and technologies in an integrated manner fully leveraging functionality offered |
|
|
ERP and other systems ate tax enabled and tax sentized at the transaction level to support compliance, financial reporting and tax planning. |
|
| There is dedicated IT support for indirect tax | |
|
Spreadsheets are replaced by technology tools and systems |
Click to enlarge
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.
