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Indirect tax automation is the need of the hour

The days are gone when businesses sent paper invoices or PDFs through emails to their clients and users would key in invoices manually.

With the rapid transformation of technology, corporations started enforcing EDI (electronic data exchange) to become more efficient. In this format, businesses sent invoices to customers, and buyers received invoices electronically. It resulted in invoices getting posted in financial systems with little to no human intervention.

The issues that result with electronic invoices

But what about the accuracy of taxes on these invoices? Some businesses decided to pay as charged and others rejected the invoices. Both had their consequences — one might have been overpaying and the other might have caused cash-flow issues for their suppliers by rejecting the invoices.

A frequent issue for companies is getting accurate taxes on invoices and ensuring exemptions are applied correctly. On top of that, tax authorities worldwide are now asking for invoice and tax data in real-time, on-demand or with shorter frequency.

At the same time, if the provided data is accurate and in the digital format as expected, these government authorities have promised to give the refund, in other words, input value-added tax (VAT) credits, as soon as possible.

Some tax authorities in countries like Mexico, Argentina and others approve the invoices before suppliers send them to their customers — otherwise known as e-invoicing. E-invoicing is gathering momentum all over the world. But what about the accuracy of data and correctness of indirect tax applied on sales and purchase transactions? If corporations get audited and there is no data to support applied taxes on transactions, these corporations may get penalized heavily.

Using tax automation to your benefit

Businesses of all sizes now realize that tax automation is the need of the hour. Having the correct taxes on your invoices solves issues with cash flow and reporting and compliance processes, which in turn, avoids penalties if there’s an audit.

By bringing world-class indirect tax engines like ONESOURCE, Vertex and Avalara, along with exemption certificate management systems, reporting and compliance tools, into your technology landscape, you can resolve issues within your upstream and downstream processes.

However, there are some prerequisites to keep in mind when using tax engines to automate indirect tax calculations in financial systems like Oracle, SAP and e-commerce systems like Salesforce. First, you should accurately maintain vendor and customer addresses in your system. If you need assistance with this, there are many address cleansing tools readily available in the market that you can use. In the US, the taxes are on jurisdiction levels. To determine the accurate and unique tax jurisdiction, a zip code plus four-digit geo code is necessary. The address cleansing tools can help determine a geo code based on street name/number, city, state, and zip code.

Another prerequisite is to ensure that you have correctly added VAT and goods and services tax (GST) registration numbers for suppliers and customers in the ERP system. If the indirect tax automation is for the VAT countries, these registration numbers play a key role in determining the correct VAT at the bill-to and ship-to addresses.

Lastly, you should make sure SKUs (materials) are mapped accurately with the product categories. For countries such as India, HSN (Harmonized System of Nomenclature) and SAC (Services Accounting Codes) codes are mandatory on tax invoices if the business has a turnover above $.5 million. The tax engine contents, rules and rates also build upon these codes. Businesses in the U.S. mostly use UNSPSC (United Nations Standard Product and Services Codes).

Integrate indirect tax automation in your business

There are more than 13,000 tax jurisdictions in the U.S. along with different product taxability at various jurisdictions. Because of this, it’s not possible for any ERP to handle indirect tax calculations for corporations with connections in every state. Therefore, integration with any of the tax engines is a must.

With a team dedicated to tax transformation and automation, Baker Tilly is well versed in conducting indirect tax diagnostic reviews for corporations either using native tax functionality of a financial system or integration with any tax engines.

We can assist businesses in understanding their sales and purchases scenarios, and also work with Baker Tilly International’s member firms worldwide to prepare the taxability matrix and product category mapping. We can also aid corporations in choosing the right tax engine to support their short-term and long-term business goals.

With expertise in project management, requirements gathering, solution design, customizations and configuration, training and post-production support, our team can work with you to implement indirect tax automation to support your digital transformation journey.

To learn more on indirect tax automation, 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
Partner, CPA
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