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Chris Walsh
Chris Walsh
VAT Automation Is a Mission-Critical Investment

Automating VAT tax calculations reduces risk as more countries adopt VAT style taxes and look to them for increased revenue.

May 28, 2009
by Chris Walsh

For years, value added taxes (VAT) have been managed under the radar, often by just one person in the tax department. This person (or small team) handles VAT on sales and purchases and then reconciles amounts during the corporate tax process. The fact is that billions of dollars of VAT flow through large companies every year. And while companies may not be paying VAT on a net basis, they are managing and processing it in vast amounts that demand closer oversight.

Since VAT rarely shows up on annual reports and other critical accounting documents, it is largely an invisible tax — one reason why it often gets less attention than it should. Large companies often use native enterprise resource planning (ERP) tax processing functionality to manage VAT, which means they must manually input tax data on the countries where they do business, which raises risk through knowledge gaps and human error that should strictly be reported in the accounts through a VAT provision.

The problem is that VAT tax data can quickly become obsolete. For example, if a tax department centrally manages a multi-country VAT position, its tax professionals may not know that a country they have been working with for years recently changed its VAT rates, rules, or policies. To stay up to date, someone must constantly monitor VAT changes around the world, register the business wherever such taxes are due, and update their company’s ERP system manually — a significant maintenance effort that is error prone and risk laden at best.

VAT Under Scrutiny

With the global economic crisis, VAT is no longer invisible. In fact, it is receiving more attention than ever. As a result, every inter-national business needs to take a more proactive approach to managing its global VAT position.

For example, VAT compliance requirements are becoming increasingly stringent, due in large part to Sarbanes Oxley legislation. In addition, many countries are implementing standard audit file requirements — reporting formats that dictate how companies need to present data on their VAT and other taxes to authorities. Because these formats make it easier for authorities to analyze data and look for errors and under-payments, it is more important than ever for companies to ensure the accuracy of VAT calculations.

Meanwhile, the global credit crisis has prompted a heightened focus on VAT by both company executives and governments. Executives are pressing tax and finance departments to find new cost, cash management, and process savings. Long ignored by upper management, VAT is finally getting the scrutiny it deserves, as it can often represent up to 25 percent to 35 percent of a company’s total cash throughput.

Simultaneously, governments are looking to VAT to bridge growing gaps between budgets and revenue from income tax. More countries are replacing sales taxes with VAT taxes, changing VAT rates and regulations to boost revenue and scrutinizing corporate tax data to make sure nothing falls through the cracks.
 
Given these conditions, every VAT-related process and activity should be viewed as an opportunity for error and potential business risk. If a business is not properly registered in a given country, unintentionally charges the wrong VAT amount (or fails to charge it at all), government bodies will eventually learn of the oversight. Penalties are punitive, and bottom line impact can be significant.

A Better Way to Handle VAT

Because of the increasing challenges, costs, and risks associated with VAT, more tax and finance departments are looking for better ways to manage VAT — most notably by deploying software that automates VAT data updates and calculations. These applications (or tax engines), which bolt onto existing ERP systems, contain vast amounts of tax data needed to drive an accurate tax determination. Vendors are responsible for applying comprehensive, stringent processes to capture, update, and ensure quality control of the tax data used in these systems. This means that corporate tax departments that deploy VAT automation are no longer required to monitor all of the countries where they do business or update their ERP systems manually. It is done automatically and is always up to date.

A tax engine gives tax departments more control over VAT because the software can be actively managed by corporate professionals, usually without IT assistance. For example, tax professionals can modify the software as the company’s VAT footprint and taxability profile changes.

At the same time, VAT automation reduces business risk. Because VAT calculations are automatically generated based on tax data, companies are ensured compliance regardless of where they do business. The software can also perform automatic reconciliations between VAT reports and the general ledger, which reduces Sarbanes-Oxley risks. Also, if a company initiates business in a country where it is not registered, the software can prevent non-compliant events from occurring and send an alert to the appropriate in-house tax professional.

Companies using a tax engine also benefit from:

  • Direct and immediate access to a global, up-to-date overview of the company’s VAT position (or any group company);
     
  • Flexibility to check and change taxability decisions in real-time;
     
  • Reduced process costs due to automation of manual tasks and faster reporting;
       
  • Improved cash-flow by ensuring companies don’t pay VAT earlier than they need to;
       
  • Fewer errors and assessments as manual Accounts Payable (AP) and Accounts Receivable (AR) processes are replaced;
     
  • Audit trails that enable accelerated, less costly audits;
     
  • Executive-level insight and confidence in how VAT is being handled;
     
  • Automatic generation of the standard audit files and other reports required by different countries; and
     
  • Reduced time spent in audit defense.

Using Automation to Solve Common Issues

To read more about VAT automation and the common issues facing global organizations, read the full article at: VAT Automation is a Mission-Critical Investment (PDF).

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Chris Walsh, Chief International Indirect Tax Officer, Vertex Inc. is a noted industry leader with more than 25 years of international indirect tax experience.