The Case for a Tax Engine
October 11, 2018
As Ben Franklin once said, “In this world nothing can be said to be certain, except death and taxes.” This phrase accurately captures the inescapable burden of taxes.
Paying taxes in procurement can be very complicated – a fact that is compounded by the increased globalization of industry and the ease of procuring materials and services across different tax regimes.
Enterprises need to navigate this web of complexity to find a consistent way to comply with tax laws and report to authorities. Most enterprises have a solution that accurately calculates taxes on the sales side of their business but many neglect the procurement side.
This blog will explore the challenges presented while validating taxes on the procurement side and why you should care.
The complexity of taxes should not be understated.
For example, in Brazil, there are four different types of VAT taxes and two types of withholding taxes. In The US, states like Illinois have taxes that differ between its 102 counties. The criteria for calculating taxes can include the type of commodity, characteristics of the supplier and/or ship to and ship from locations (country, state, county, city). In addition to this mix, some materials and services may be tax exempt.
It is the legal responsibility of the supplier to the collect taxes. Hence, most enterprises rely on suppliers to provide the correct tax information on the invoices. However, suppliers often provide inaccurate numbers and enterprises end up paying the wrong amount. It should be noted that when the supplier does not provide tax amounts, it is the legal responsibility of the enterprise to accurately calculate the use tax.
To remedy these challenges, many companies rely on in-house tax experts to manually intervene on each invoice and create the reports to provide to the tax authorities. This approach is resource heavy, inefficient and ill-equipped to keep pace with a dynamic global tax regime.
Tax engines are third party software platforms that can be bolted on to existing procurement platforms to address this gap. They provide three primary functions:
- Calculate and validate accurate taxes
- Provide tax codes and handling information to correctly book taxes
- Compile tax reports to conform to regulatory requirements
Most procurement implementations now include a tax engine deployment. The three leading tax engines are ONESOURCE™, Vertex and Avalara. The benefits are immediate and many-fold:
- Invoices are no longer considered source of truth for taxes; independent validation tracks supplier errors
- Elimination of incorrect tax assessments
- Meeting regulatory and compliance requirements for taxes
- Customers no longer need to maintain tables/rates or in-house tax experts to validate each invoice
Why You Should Care
Without an accurate and consistent way to validate taxes, an enterprise risks either over or underpaying their tax obligation. Neither option is a desired outcome.
Underpaying will result in non-compliance with regulatory authorities and can cause expensive audits and/or fines and penalties while overpaying means spend leakage that affects the bottom line. Leveraging a tax engine handily solves both.
Learn More Today
To learn more about the importance of tax engines and The Shelby Group’s custom-built connection tool, CTX™, which seamlessly connects any of the major tax engines to the major procurement platforms, click here.
Nomare Sattar, Senior Manager