11 Nov, 2019
Post EU VAT Determination Part 1: Tax Engine Explained
This informal CPD article on Post EU VAT Determination Part 1 was provided by Vertex Inc, a leading provider of corporate tax software and services for companies of all sizes.
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Business model transformation driven by fourth industrial revolution advancements and ongoing regulatory compliance changes combine to make value added tax (VAT) management more demanding and complicated. As this VAT complexity intensifies, more tax functions throughout Europe are looking for new ways to balance the need to lower VAT-related risks while supporting their company’s innovative forays into new product lines, sales channels and markets.
VAT automation is a crucial enabler of this balancing act. Sure-footed tax functions are further strengthening and refining their VAT automation by retrofitting their existing enterprise resource planning (ERP) systems with a powerful tax engine. A tax engine is a third-party tax management system that integrates with ERP applications while replacing those system’s native VAT management functionality. Tax engines remove the need for in-house tax research activities (along with tax-related ERP updates) while strengthening VAT determination accuracy by:
- Providing VAT calculations for all accounts payable/accounts receivable (AP/AR) transactions in a real-time manner;
- Continually updating and maintaining the latest VAT rules, rates and taxability logic within the ERP systems; and
- Enabling tax professionals to create custom rules based on the unique needs of their business and industry.
The achievement of these and related benefits is important at a time when VAT management complexity poses several growing risks to tax departments, including:
1) Tax calculation accuracy
Complex transactions as well as increasingly complex VAT compliance requirements in certain countries are challenging the limits of native ERP tax determination capabilities.
2) Growing audit risks
Tax reporting functionality that uses summary data may prove insufficient if an audit occurs. A lack of standardised VAT treatment across business units – a condition that a tax engine eliminates – also raises audit risks.
3) Inefficient tax operations
The time and effort associated with ongoing tax research (across all relevant tax jurisdictions), continual updates to ERP systems (to input new tax content) and VAT reporting can become excessive while hindering the tax function’s ability to perform more strategic, higher-value activities.
These challenges help explain why a growing number of tax departments within global companies have shifted from managing VAT determination within each transactional finance system to having a single, centralised tax engine to address global tax needs including VAT management.
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