Deloitte Dbriefs Article: 13 November Indirect Tax Technology: Time for an Upgrade?

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1 Deloitte Dbriefs Article: 13 November 2013 Indirect Tax Technology: Time for an Upgrade? With depleted coffers in government treasuries, complex new rules both globally and in Asia, heightened audit scrutiny and a sluggish economy, the indirect tax 1 environment has dramatically become a focal point of organizations. Historically, many of these taxes were often handled at the business unit or controller levels at companies; the increased focus has mandated greater involvement of overburdened tax departments. This dynamic environment, coupled with the related administrative burdens, presents significant challenges for tax departments. The advancements and developments of technology have resulted in new automation solutions that may help improve / ease, among other things: increased data management, rules maintenance, rates maintenance, reporting requirements, process refinements and efficiencies, risk management and internal controls. Today s enterprise resource planning (ERP) systems and other tools are better equipped to provide this type of support than they have in the past. Critical to the success of any ERP solution, is early involvement by the tax department, successful teaming with operations personnel and a defined implementation plan that optimizes the use of internal and external advisors. Recently, Deloitte hosted a series of Dbriefs webcast across the globe to review the indirect tax landscape, as well as trends related to automation of indirect taxes. Presenters discussed ways in which automation solutions can help tax departments manage indirect taxes more effectively. Nearly 1,300 participants shared their own views through responses to polling questions posed during the webcast. Examples of the rapidly changing landscape On 1 January 2010, changes in European Union VAT legislation (the VAT Package ), mainly concerning the place of supply rules for services, came into force. While this is one of the more significant indirect tax changes in recent years, it is far from the only one. A sampling of the others include: A large number of countries have increased VAT rates and others will follow. Canada is introducing new calculation methods for the taxable base for self-assessment of goods and services taxes for certain financial institutions. Canada in several provinces has harmonized its Goods and Services Tax (GST) with the Provincial Sales Tax (PST). China is clarifying the temporary Business Tax treatment of cross-border services and gradually piloting VAT project across different regions and type of transactions. Malaysia announced the implementation of a VAT regime starting April 1, 2015 India is working on a GST implementation. Under this plan, goods and services would be subject to a dual central-state GST. The situation in the United States is equally dynamic. Districts are constantly introducing rate changes and changes to local law. Often these changes are announced literally days before they take effect to avoid rate shopping. The Price to Pay or Not Pay Integrating indirect tax requirements into an ERP system can help protect against costly errors. For example, from a VAT and GST perspective where tax rates average 20 percent across Europe, the Middle East, and Africa and 10 percent in Asia Pacific small errors can add up to large amounts, have 1 Indirect taxes, in the general sense, are above the line taxes. Some illustrative examples are: Value Added Tax ( VAT ), Goods and Services Tax ( GST ), Sales / Use Taxes ( SUT ), property taxes, payroll taxes, excise taxes, etc. 1

2 a significant impact on financial performance and impact the reputation of an organization. While the tax rates are burdensome in their own right, it should be noted that the imposition of penalties and interest can more than double or triple any of the assessments. Proper planning and investment in an automation solution should address two key indirect tax goals: Tax risk management Improving visibility of tax positions and risks, facilitating data and information sharing, creating process transparency and documentation, establishing tax-specific internal controls, and providing capabilities for tax record retention and audit defense. Compliance accuracy Simplifying and standardizing processes to improve consistency, streamlining compliance and regulatory compliance processes, developing easy-to-maintain tax processes and tools that do not require redevelopment every time a change occurs, and redirecting employees efforts from reactionary tasks related to inaccuracies and compliance issues to highervalue work. Beyond the stated benefits, the simple issue of improved cash flow lends to enhancing the overall value of the organization. Integrating with ERP initiatives: Key planning considerations Irrespective of the ERP system, there are three requirements that must be addressed in order to produce tax-sensitized data. These include: 1. System Architecture: the system should mirror the corporate structure and tax requirements 2. Tax Determination Process: the system should substantially automate the tax determination process, rules and rates maintenance 3. Tax Reporting Requirements: Facilitate the flow of data and supporting documentation for the reporting requirements The chart below highlights key considerations for each of these areas. Enhanced ERP tax integration Two of the most common ERP systems in use today are Oracle and SAP, and the current versions of both offer enhanced tax integration capabilities. To illustrate the capabilities, in designing Oracle R12, developers talked with users to understand their expectations. These discussions revealed three key components that have been integrated into Release 2

3 12 and the concurrent Oracle ebusiness Suite Tax module--a tax engine that resides within the Oracle system itself: Global visibility a single source of data that eliminates the need to maintain tax logic in different modules, the ability to handle global operations, and self-service capabilities for tax managers. Operational efficiency the automated tax calculations, simplified tax configuration, and serviceoriented architecture that makes the system comprehensible for tax professionals as well as IT teams. Compliance support the ability to deal with local as well as global compliance and reporting needs. Oracle R12 allows tax departments to set up and configure legal entities, branches, and indirect tax registrations all within the system. The ebusiness Suite Tax module extracts data from purchasing, payables, receivables, and other dimensions into the configured structure. The module then sorts the data elements and then dynamically produces tax conclusions, calculates the tax basis, and stores it for tax reporting. Another example, SAP has enterprise-wide scrutiny, encompassing all the enterprise applications that the tax department wants to configure and providing a single source for tax data. It also promotes efficiency and consistency by automating business processes, provides manageable tax configuration for VAT regimes, and enables integration with external systems for the purposes of calculating domestic sales and use taxes. Finally, it supports global indirect tax compliance and provides accessibility to tax audit data, although the latter may be limited due to layers of security within the system. Indirect tax tools for managing complex indirect tax requirements Today, many organizations particularly in United States but increasingly around the world are evaluating the merits of native ERP solutions 2 versus bolt-on indirect tax solutions, such as OneSource Indirect Tax, Vertex and Taxware Enterprise. Every company s environment and requirements are different, so this question requires a full evaluation just as one would do for an ERP solution. One of the typical drivers will be a company s profile. If an organization is only active in a few less-complex countries such as Singapore, Australia, or Thailand, those jurisdictions are relatively easy to configure in an ERP system. On the other hand complicated countries such as India or China present greater configuration and on-going rules and rate maintenance challenges. Bolt-on solutions help manage complex indirect tax requirements efficiently. Many of the solutions facilitate more detailed data fields (e.g., vendor name, addresses, rates, exceptions, etc.) to tax specific report capabilities that ease reporting requirements for an organization. 2 native ERP solutions relates to the building of the tax determinations, tax rates and requirements into the selected platform (i.e., Oracle, SAP or otherwise). Bolt-on solutions are separate software packages built and designed to be integrated and configured to maintain such information 3

4 How can the tax department integrate its needs without derailing the ERP project? Similarities and differences between bolt-on solutions Regardless of the ERP solution, the process for integrating tax requirements is the same. The diagram below provides a framework for this process beginning with development of the vision and continuing through operational deployment. Process for integrating tax requirements Regardless of whether an organization chooses to build its tax logic in the configuration of the ERP module or through a bolt-on solution, it is imperative that tax be involved every step of the way. Tax involvement during the vision phase is critical. This is the point at which ERP owners can prepare for addressing tax needs and, ideally, provide the tax function with its own formal thread for the implementation process before key decisions are made in the planning and design phases. While this framework follows a typical ERP implementation methodology, given the volatility of the indirect tax 4

5 environment, it is important to keep the design phase open through delivery in order to accommodate changes that may occur as the solution is built. Governmental pressures on tax data management. As previously noted, governmental authorities have made indirect taxes an area of extensive scrutiny due to the significant drop in income tax revenue. The effects have been seen through rules changes, rate changes and even administrative changes in how a jurisdiction audits a taxpayer. Overall, the number of indirect tax audits has increased significantly. Not only have the numbers increased, but auditors are under pressure to close outstanding audits, apply more aggressive interpretations of the rules and to complete new audits faster; accordingly, they are granting fewer and / or shorter waivers. This applies significant pressure to a taxpayer to provide supporting documentation for varying years, jurisdictions and applying the rationale for tax decision making that the tax department may not have been a part of. Altogether, these trends lend urgency to the need to maintain better data within ERP or other systems. The roadmap to best-in-class indirect tax processes. To improve indirect tax documentation, companies can take several steps: Perform tax data mining 3, proactively. As tax authorities increasingly use companies own systems to conduct their standardized tests, it will be important to have done the data mining first; otherwise, there may be surprises. Many newer technology solutions can automatically perform tax data mining and consolidations. Develop tax dashboards. Companies that use SAP, Oracle, and other solutions can build dashboards using Business Objects or another application consolidating data from different legal entities or countries on a single Web page. External dashboard packages are growing in popularity, as they are easy to implement although perhaps lighter in capabilities than custom-developed solutions. Utilize due-date-tracking applications. In order to manage filings and make sure that returns are filed on time, these tools also can be used to set some key performance indicators and increase tax compliance efficiency. A challenge for global organizations is centralization of certain functions in shared service centers. On the one hand, shared services can reduce costs, but can shift tax technical experience from the area of need a risk in a complex tax environment. The only way to manage both goals cost management and risk management is through greater automation. The diagram (at right) depicts a roadmap for creating bestin-class indirect tax processes. This tax-determination process example begins in the lower left quadrant, with a shared service center making manual tax determinations for invoices in the United Kingdom, France, China, India and other markets. In this example, because the servicecenter personnel do not have local tax knowledge, this process is subject to greater risk. In the second phase, the company has adopted a global framework, one that defines requirements globally and applies consistent processes or methodologies across regions, thereby reducing the risk somewhat. At a later stage, the company has moved on to automate some accounts payable decisions. Eventually, it reaches a best-in-class level by enhancing the automated solution to provide additional benefits, for example, preparing and submitting returns 3 More commonly, self-testing /self-auditing the underlying the data. Roadmap for creating best-in-class indirect tax processes 5

6 electronically, implementing a tax dashboard to consolidate the data, and establishing data mining capabilities. Tax executives views Deloitte hosted several Dbriefs webcasts to review the indirect tax landscape, as well as trends related to automation of indirect taxes. Presenters discussed ways in which native ERP solutions can help tax departments manage indirect taxes more effectively and recommendations for configuring a new system to adequately support tax requirements. Nearly 1,300 participants from all over the world shared their own views through responses to polling questions posed during the webcast. What was clear is the rapid pace of change in the indirect tax environment has elevated its importance in these organizations. In determining whether a tax-sensitized ERP system is critical to managing tax risk and compliance accuracy. In our Asia Pacific Dbriefs, seven percent of respondents said their organizations use various systems. Twenty-two percent said they use an Oracle system, and thirty- four percent reported using a SAP system. Just five percent said they use a custom-built system. To ensure tax-sensitized data and adequate support for indirect tax needs, tax departments must get involved in new ERP initiatives early on preferably during the vision and planning phases. But webcast participants reported mixed involvement in current or recent ERP initiatives. Nineteen percent of the respondents said their tax department was/is fully integrated in an ERP initiative, while twenty-seven percent said they were not. Another twenty-four percent indicated that their tax function did get involved, but too late. Given the increased audit activity and heightened expectations for supporting documentation, companies must make sure their ERP systems are able to address the added requirements. Yet, only twenty-two percent of respondents indicated that they have reviewed their systems and customized reports accordingly. Forty percent said they get some documentation, but not as much and/or in the format needed. Another fifteen percent said they do not get proper documentation from their systems. Centralization of indirect tax processes can produce cost benefits, but it can shift tax technical knowledge from the source in the process, increasing risk. Four out of ten respondents indicated that they centralize various functions, including tax compliance, in a shared service center, but they keep planning at the headquarter level. Eight percent centralize accounts payable in a shared services center, while twentynine percent said they operate in a fully decentralized manner. Additional resources For more resources that can help address the challenges tax departments face today, visit or reach out to one of the speakers at this Dbriefs As used in this document, Deloitte means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. 6