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An introduction to tax engines in the world of VAT

Since value added taxes (VAT) are always changing and authorities are requesting more and more information to be provided in a shorter timeframe, one of the most popular topics nowadays is tax technology. Companies are automating their systems in many ways to meet all these requirements. One of the solutions companies are considering is the implementation of a tax engine for VAT determination. In this article, we provide you with a brief glance on how a tax engine for VAT works and some factors to keep in mind when considering a tax engine solution.    

Tax engine 

A tax engine is a piece of software containing VAT rules, VAT rates and VAT logic per jurisdiction which is connected/integrated to the Enterprise Resource Planning (ERP) system of a company. The tax engine is used to determine the correct VAT treatment and calculate the correct VAT rate and amount. It will overrule the native VAT functionality of the ERP.  

The way it works 

Data like taxpayer and location information and taxability drivers (e.g., type of goods/services, ship from, ship to, invoice amount, etc.) allows the tax engine to determine the applicable VAT treatment. This information needs to be provided to the tax engine as the tax engine does not contain any company-related transaction information. This information will be derived from a company’s ERP. Specific information needed to generate a VAT result will be connected and mapped between the ERP and the tax engine. Based on this information the tax engine will determine the applicable jurisdiction and VAT treatment, followed by a calculation of the VAT rate and VAT amount. The result will be sent back to the ERP to be processed and used, for example, on invoices to be issued.  

Tax engine or not? 

Without a tax engine the in-house tax team of the company is responsible for the VAT position of the company. The team needs to monitor the VAT legislation, as well as changes and rates of the company on a local and global level. Being in control of the VAT position is a “manual” and labor-intensive process. Implementing a tax engine will improve the VAT compliance process of the company. A VAT-related tax engine: 

  • Contains and maintains the latest VAT legislation and VAT rates per region and will be updated automatically; 
  • Ensures that the company can quickly react to VAT changes resulting in risk reduction; 
  • Provides the VAT calculation per transaction in real time; 
  • Automates and centralizes VAT calculations across the business of the company; and  
  • Reduces costs and human errors due to less human intervention. 

A tax engine is a substantial investment for every company. In this rapidly changing VAT environment, however, being in control of your VAT position all the time is crucial. Therefore, a tax engine could be the perfect solution for your business, making your business’ VAT compliance process more efficient, agile and scalable.  

Baker Tilly is here to discuss the available options and solutions to improve the VAT compliance process of your company. If you’d like to learn more or if you have any further questions, please contact our team.  

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Josh Din
Washington D.C.
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