Determining the VAT liability and VAT recovery of businesses’ transactions (the system’s indirect tax functionality) can be automated within Enterprise Resource Planning (ERP) systems such SAP and Oracle, or by way of a manual processes. Multinationals run often various versions of ERP systems without harmonization. The ERP set-up is often per business unit and thus multiple kernels per country are more likely than not.
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 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.
In practice, configuration (the amount depends) is needed when companies deal cross border and/or complex business model are set up such as a centralized principal structures.This could cause difficulties in running exception reports to look for missed opportunities, underclaimed VAT and potential fraudulent transactions.
A lot of (manual) work is required when reconciling the periodic VAT compliance reports from these different sources (divisions, different systems). As the ERP systems do not have flexible reporting solutions, multiple spreadsheets are often used to reconcile VAT numbers. Manual processes are subject to human error and often inefficient due to the amount of rework (‘hidden factory’).
Operational disruption
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 result returns precious time and money to the business.
It is about extra man-hours, additional costs due to rework (credit/debit notes) and retrospective corrections and/or disclosures. Example: how much rework is required before numbers received from finance systems can be used?
Does the process of preparing and compiling the client’s VAT return take more than 5 man days? (starting from the moment of VAT-data collection until the VAT return is approved and filed). Are manual adjustments made to ERP figures before inclusion in VAT Returns?
During assessment of any solution determine the amount of increase of workforce efficiency, how much rework is avoided, risk exposures are decreased but as well how visibility and awareness are improved by which the tax function is able to set better priorities.
See Chapter Spreadsheets and VAT Compliance and ERP systems and tax engines
'Remediate own ERP system' or purchase a 'third party solution’
Indirect Tax functionality can be automated (full or to a certain extend) in a company’s own ERP system. The problem might be that multiple ERP systems are used and that interfacing via a third party tax engine is considered an alternative. That option means that part of the system functionality is actually outsourced.
In order to fix a problem, we have to first understand the root cause thoroughly. We have to accept the possibility that the problem involves far more than what is immediately apparent and will require more work than is estimated at the beginning.
It could be that the current problem at hand turns out to be nothing more than a symptom of a bigger issue and an easy fix will probably not solve the real problem.
An important question to raise is: which tools are available in the market that achieve VAT automation objectives? And the functionality increases workforce efficiency, avoids rework, decreases risk exposures, increases visibility and awareness by which the tax function is able to set the better priorities.
Some important questions from a tax software selection to ask
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Some important questions from a tax software selection to answer are |
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1 |
Does remediation of own ERP systems close any gaps? |
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2 |
Is setting up a single ERP platform within the company a practical solution to consider? |
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3 |
Are third party solutions available to harmonize multiple ERP systems? |
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What is the advantage of third party solution compared to upgrade own ERP system(s) (GAP versus SWOT analysis: complexity of business model, number of tax codes needed now and in the future, resource requirements to manage the rules and VAT rates, monitoring and controls)? |
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Is a third party solution required for determination and calculation of indirect tax or only for the reporting |
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What reporting functionality does my organization need? |
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Are risks of outsourcing functionality known, documented and managed? |
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8 |
Are the liability clauses of the third party known and evaluated? |
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Is the financial position known of this third party? |
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Is the market position known of this third party (sustainability, competitor’s strength)? |
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What is the feedback of customers (references and credentials)? |
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What is the amount of staff of this third party? |
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What is the company’s history where it relates to upgrades its technology to trends in the tax market and client needs (amount of upgrades)? |
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Is the solution compatible with existing ERP environment? |
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Is the IT architecture of the third party solution compatible with the existing IT landscape? |
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Is the interface of the solution “approved/supported” by the ERP system supplier (i.e. SAP Netweaver partner)? |
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What will be the level of configuration / customization in ERP system and/or third party solution? |
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18 |
How much time does it normally take to implement a country, region or even a big bang roll out? |
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Does the third party have an example of a roadmap for implementation that includes each others roles and responsibilities and milestones? |
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20 |
Which countries and indirect taxes are supported by the third party solution? |
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What is the impact on the company’s own resources? |
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What does the price tag look like (initial fee, configuration fee, license / usage fee, maintenance fee, etc.)? |
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What is the level of support a vendor gives in case of trouble shooting, legislative updates, irregular maintenance, etc.? |
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.
