Tax engines questions to ask before you commit

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, under claimed 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’).

'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.

Some important questions from a tax software selection to ask

Written by Richard Cornelisse, one of the articles published on Global Indirect Tax Management