Tax Engines – Questions to ask before you commit

Tax Engines – Questions to ask before you commit

15 October 2012

By Robbert Hoogeveen and Richard Cornelisse

The Current State of Many Multinationals

Determining the VAT liability and VAT recovery of business transactions (the system’s indirect tax functionality) can be automated within Enterprise Resource Planning (ERP) systems such as SAP and Oracle, or by way of manual processes. Such determination logic can be hugely complex.

Multinationals often run various versions of ERP systems without harmonization. The ERP is often set up per business unit and thus multiple kernels per country are likely.

This can cause difficulties in running exception reports to look for missed opportunities, underclaimed VAT and potentially fraudulent transactions. A lot of (manual) work is required when reconciling the periodic VAT compliance reports from these different sources (divisions, different systems).

As 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 are often inefficient due to the amount of rework (‘hidden factory’).

‘Remediate Own ERP System’ or ‘Third-Party Solutions’

Indirect Tax functionality can be automated (fully or to a certain extent) in a company’s ERP system. The problem may arise that multiple ERP systems are used and that interfacing via a third-party tax engine must be considered as an alternative. That option means that part of the system functionality is actually outsourced.

Some important questions to answer during tax software selection are:

  • Does remediation of own ERP systems close any gaps?
  • Is setting up a single ERP platform within the company a practical solution?
  • Are third-party solutions available to harmonize multiple ERP systems?
  • What is the advantage of a third-party solution compared to upgrading 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)?
  • Is a third-party solution required for determination and calculation of indirect tax or only for the reporting?
  • What reporting functionality does my organization need?
  • Are the risks of outsourcing functionality known, documented and managed?
  • Are the liability clauses of the third party known and evaluated?
  • Is the financial position known of this third party?
  • Is the market position known of this third party (sustainability, competitor’s strength)?
  • What is the feedback from customers (references and credentials)?
  • How many staff does this third party employ?
  • What is the company’s history with respect to upgrades of its technology in response to trends in the tax market and client needs (number of upgrades)?
  • Is the solution compatible with the existing ERP environment?
  • Is the IT architecture of the third-party solution compatible with the existing IT landscape?
  • Is the interface of the solution “approved/supported” by the ERP system supplier (i.e. SAP Netweaver partner)?
  • What level of configuration / customization will be required in the ERP system and/or third-party solution?
  • How much time does it normally take to implement a country, region or even a big bang roll out?
  • Does the third party have a roadmap for implementation that includes each others’ roles, responsibilities and milestones?
  • Which countries and indirect taxes are supported by the third-party solution?
  • What is the impact on the company’s own resources?
  • What does the price tag look like (initial fee, configuration fee, license / usage fee, maintenance fee, etc.)?
  • What level of support does a vendor provide in case of troubleshooting, mandated updates, irregular maintenance, etc?

These are some important questions that need answering in order to make sure that the technology is a right fit for contributing value to the organization’s business objectives.

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Take aways 

We combine technical knowledge with industry understanding and knowhow of technologically advanced tools and methodologies available in the market or developed by ourselves.

  • Focus on tax processes that could be improved
    • Manual process: same data requests are made by different stakeholders
  • As Is assessment
  • Anticipate future changes and the data needed
    • What are tax trends?
    • What is happening locally and what should be considered across jurisdictions where you operate?
    • Anticipate new stakeholders and their data needs or requests (internal and external)
  • Define scope and actions for short, mid and long term
  • Write business case for change
  • Realize sponsorship for implementation
  • What tax data is requested and by whom?
  • What tax process can be improved and what can be automated?
    • CIT, VAT, tax data warehouse
  • What is the Return on Investment?
    • Hard saving: process improvement
    • Meeting (new) tax requirement
  • What systems are in use: SAP, Oracle, etc
    • By which entities?
  • How many end-use computing tools (e.g. excel spreadsheet) do we have?
  • How do we avoid an ad-hoc solution?
    • Understand the bigger picture
    • Real problem and not the symptom

Technology-related tax risk: understand and address the potential harms and benefits of (new) technology.

Ascertaining proper IT support for ensuring efficient, timely and reliable reporting.

VAT should be considered in every aspect of the process, from concept through completion and beyond. Managing by design — looking at any process or transaction from end to end and factoring in all the requirements and controls essential to designing and optimizing a compliant VAT process.

We speak the language of the business and IT and no translation is needed.