Tax Engines and ERPs

The global indirect tax landscape is constantly evolving, and the revenue authorities are regularly reviewing their activities. As a result, organisations are seeking ways to transform their tax operations and enhance their control framework to manage indirect tax reporting more effectively. This move can sometimes be triggered by a wider digital transformation or cloud migration project. Other times it's part of a broader IT consolidation program following M&A activity. Either way, such projects can provide opportunities to align the organisation's strategic goals of operational efficiencies with that of ensuring compliance with indirect tax requirements.

Whatever the reason, it's critical for decision-makers, including professionals in Finance, Tax, and IT departments, to understand how their tax technology choices impact the rest of the organisation. As a transaction-based tax, indirect tax touches every area of the enterprise. It is critical to ensure that the finance environment has sufficient controls to capture data accurately and report indirect tax downstream.  When technology fails to provide timely, accurate indirect tax determination and compliance, the negative impacts on the organisation can be widespread.  Operational efficiency may be impeded, as well as customer service, investor relations, and even the company's bottom line. Consequently, not having the right tax technology has the capacity to damage an organisation's reputation in the market and its tax risk profile with the relevant revenue authority.

Developing and deploying an effective and reliable tax configuration within an ERP is not as easy as it seems. It requires expert tax knowledge, not just IT knowledge, to ensure tax determination logic is developed carefully to meet business needs and comply with tax requirements. And from there, this logic needs to be updated every time there is a change in the tax or business landscape.

Nonetheless, some organisations do not see a need to move beyond an ERP-centred approach. Perhaps there's a perception among decision-makers that because indirect tax rates have been relatively stable in Australia and because there are no state-based or local taxes to consider unlike in the United States, there will not be a major return on investment for adopting a tax engine. This is, arguably, a short-term view, given the substantial number of interpretations and public rulings on indirect tax issued by the ATO over the years. ONESOURCE Indirect Tax Determination updates any changes imposed on product/services taxability from the ATO and other tax authorities around the world.

Australian-based multinational organisations must consider how they deal with the global indirect tax rules and regulations of countries that they have a presence in.  Often these multi-national organisations will have few or no local resources to manage the many different indirect tax regimes, let alone the changes made to those rules.  In the Asia region alone, there have been substantial changes in the indirect tax legislative landscape.  Further, there is a shift to real-time reporting and e-invoicing (including countries such as Malaysia, Japan, China, and Saudi Arabia) making it incredibly challenging for the local head office to keep up with the increasing number of changes or requests from the relevant tax authorities.

Data fragmentation is another challenge. Tax teams need access to accurate, complete data to calculate and report on indirect tax. However, this is not always the case when separate ERP platforms are used to handle specific aspects of the organisation, or different business entities. Having disparate data sources and systems can leave the tax team scrambling to solve missing or incomplete data. This drains time and makes it difficult to maintain tax logic, accuracy, and compliance. While IT teams can be called in to develop multiple bridges and workarounds, these are often labour-intensive to build and require ongoing maintenance. ONESOURCE Indirect Tax Determination integrates with all source systems to ensure the right amount of tax is being calculated and reported. This reduces the time your IT department needs to spend on building bridges and work arounds. ONESOURCE Indirect Tax Compliance then takes your transaction data from multiple source systems to create your indirect tax return.

When an organisation undergoes changes such as mergers and acquisitions, cross-border expansion, or modifications in tax structure and IT architecture, the problem is compounded. Many organizations do not realize that consolidating into a single ERP can be significantly more complicated, time-consuming, expensive, and disruptive.

she explains.  At this point, however, automating or streamlining the process would result in a need to change the underlying ERP design. At this stage, such stand-alone projects are out of scope and funding, or attention is hard to obtain. The result in these cases is tax teams are left to fend for themselves using legacy processes until similar opportunities arise. 

There are many reasons why organisations, especially multinational organisations, should consider adopting a cloud-based tax engine with an automated compliance tool into their current IT environment. Here, we outline five key advantages.  

Multi-country tax deployments can be large and complex. Managing different processes and tax codes in an ERP environment increases the risk of errors, fines, and penalties. While tax managers do conduct regular error and duplication checks as part of tax reporting processes, these are incredibly time-consuming and don't always catch every issue.

A cloud-based tax engine mitigates these risks by connecting different systems and data sources to automate indirect tax decisions, without the headache of managing and maintaining tax codes in the ERP. A well-chosen and designed tax engine can calculate correct tax amounts in milliseconds and easily handle millions of transactions daily for a global footprint, including complex markets such as Brazil, India and the US. 

• Significantly iimprove the accuracy and consistency of tax calculations
• Reduce error rates on tax invoices to below 1% from 75%

The longer-term return on investment offered by tax engines outweighs the immediate costs of implementing this technology. Tax engines are specifically designed to alleviate tax teams from daily firefighting, and the manual processes and data mapping that drain time. This increases efficiency overall, bringing down operating expenses.

A content-enabled solution also ensures timely and continuous compliance and speeds up the process of adapting to changes in the tax landscape. The use of a tax engine reduces the risk of errors or late filings – empowering organisations to focus on managing their business and tax teams to focus on higher value tax advisory or support services.  This should in turn lead to reduced risk of penalties or adverse audit findings.

• Achieved efficiency gains within the compliance team, saving $494,000
• Gained efficiency for indirect tax team, saving $468,000
• Was able to reallocate 3 FTEs across both compliance and determination teams to focus on more value add-strategic work 

While the tax codes and indirect tax rules in an ERP or custom add-on are embedded in the system and must be manually updated, a cloud-based tax engine is more efficient, offering automated tax coding and indirect tax rule updates.  

states Mark Oh, Indirect Tax Lead for Thomson Reuters. "Each time a tax rule or law changes, IT or the tax team, must update and test new tax logic for every ERP platform in use. Using tax technology, such as ONESOURCE Indirect Tax Determination and ONESOURCE Indirect Tax Compliance delivers trusted, relevant content from local tax authorities and tax experts. Updates happen automatically and feed into any ERP system that is connected to the tax engine. This eliminates tax teams needing to conduct development and testing of an in-house solution."

To mitigate the risk of ERP failures and the business disruption that ensues, cloud-based tax engines are designed to keep operational processes running. With the right cloud-based tax engine in place, organisations benefit from a high level of technology expertise as well as near-certain uptime (provided the vendor operates high-quality data centres with exceptional security strategies, disaster recovery capabilities and extremely low latency). Thus, the indirect tax team is always able to manage tax on a transaction-by-transaction basis, as well as comply with new policies and developments in the tax landscape, such as e-invoicing, that require reliable, real-time access to data.

In that context, a well-designed and tested tax engine with an automated compliance tool can help to mitigate the risk of costly invoicing errors and inaccurate reporting, allowing organisations to save time, reduce risk, and build better relationships with customers, suppliers, and tax authorities.

The Forrester Consulting study found that having to manually research and implement global tax rate and regulatory code changes requires around 4,800 hours (or 6.5 months) of IT [or tax] personnel time every year. The reported organisation was able to substantially reduce IT maintenance through automated change updates, saving $297,000 [1].

With less need for IT support and external research input, the use of tax solutions gives tax managers control over their indirect tax processes at a central level, saving valuable time and reducing costs.

Additionally, automated records and logs of tax procedures provide documented proof of compliance. Should a dispute ever arise over alleged non-compliance, the tax team can substantiate their activities with supportive evidence.

Considering how easily a tax engine can be integrated into any existing IT environment, and all the benefits this offers, it can be short-sighted for organisations to rely solely on limited ERP functionality to manage the demands of indirect tax determination and compliance. The decision creates both opportunity costs and risks in a dynamic tax and business landscape.    

A tax engine with an automated compliance tool is an IT investment that is up-and-running quickly and continues to deliver value over the long-term, by ensuring efficient tax and accounting processes, and accuracy on tax calculations every time. The tax team is also able to scale quickly to address new challenges or support business initiatives focused on innovation and growth.      

All of this elevates the strategic value of the tax department as a function that helps the organisation thrive in an increasingly digital, data-driven economy.