A guide for tax, finance, and IT professionals, worldwide

INSIGHTS FOR UNDERSTANDING TODAY’S GLOBAL INDIRECT TAX CHALLENGES.

Ron Ellis

Director of Business Development Global Growth Organization, Thomson Reuters

3

INTRODUCTION

EXPOSING THE THREE PHASES OF GLOBAL INDIRECT TAX MANAGEMENT

PHASE 1: THE IMPLEMENTATION PHASE

PHASE 2: THE INVOICE PROCESSING PHASE

PHASE 3: THE SUPPORT & MAINTENANCE PHASE

3-PHASE SUMMARY TOTALS

CONCLUSION

CONTACT

CONTENTS

INTRODUCTION

Global indirect tax requirements on a) global content, b) sales-and-purchase tax determination, and c) the compliance filing and documentation process are unavoidable, ever-changing, and increasingly time-sensitive. Regardless of where a company is headquartered, today’s business and regulatory environment is evolving at a pace that has mid-level and executive management’s attention, because of its impact on IT, tax, finance, accounts payables, accounts receivables, sales, purchasing, treasury, and customer support.

Since changes to global indirect tax (VAT, GST, sales, use, and excise) affect all of these departments, it is truly an enterprise-wide and mission-critical function that warrants the attention of management. The C-Suite is now aware of the multi-departmental impact that indirect tax has on the company’s systems, processes, and people. This awareness has exposed the time, money, effort and risk that an insufficient, mainframe-era approach has had on the bottom line of today’s multinational companies.

The subtext when it comes to indirect tax is this: Tax authorities have become more creative in generating revenue from a company’s indirect tax operations. They are also beginning to use more sophisticated approaches and technology to deliver faster, wider-reaching and more intrusive audits, including global inter-country government collaboration, when suitable. It is clear that governments and tax authorities around the world will continue to implement initiatives that demand heightened levels of tax transparency across the entire business operations of multinational companies.

Companies spend a considerable amount of time, money and effort in search of a consistent and reliable approach to properly manage the real impact that these challenges create. Tax and finance teams want and need accurate information and outcomes from a reliable, repeatable, and predictable process, to effectively perform their critical compliance functions. They want to move away from tactical, clerk-level tasks and focus on strategic, value-added work.

Tax departments realize that their efforts and objectives occur downstream, after activities that have already happened in other processes and departments, upstream. So, tax gets what they get.

From a transactional tax determination and treatment requirements standpoint, IT carries the burden of keeping the company’s systems modified and up-to-date. As global indirect tax conditions change, their systems and processes enforce desired tax policies upstream. This, in turn, creates timely and accurate reporting and compliance data downstream that tax and finance requires.

Since changes to global indirect tax affect all departments, it is truly an enterprise-wide and mission-critical function that warrants the attention of management.

This document outlines a best-practices approach that successful indirect tax automation evaluation projects take to build a straightforward and logical business case to justify a project to improve their global indirect tax function. Its approach seeks to set up a way forward to answer three essential questions:

1. What is the multi-departmental impact in time, money, effort and risk when the tax is incorrect on a sales or purchase-related transaction?

2. What is and who are involved with the current business systems that have sales and purchase tax-related requirements to a) react to, b) fully absorb, and c) accurately comply with global indirect tax rate and rule changes, worldwide?

3. What would be the five-year return on investment, if most or all of the company’s enterprise-wide sales and purchase tax treatments were automatically responded to and consolidated, by a single tax-intelligent determination engine, with continuous access to up-to-date global content?

By addressing these questions, companies can better understand the value that an indirect tax automation project can have on their accuracy, control, and efficiencies across their systems, operations, processes, departments, and people, worldwide.

The opportunity to use proven technology to automate a company’s day-to-day functions that are mundane, yet mission-critical, such as global transaction tax processing and management, is easily accessible and can deliver a significant return on investment in multiple areas. Consider the challenges: new global technology standards; evolving change-reaction requirements on multinational companies to process, retain, and leverage enterprise-wide data; and a growing realization of the need to react to tax authorities. It’s the perfect storm for tax, finance, and IT departments to partner on delivering global value to the company. A platform that allows a company to control its desired tax policies globally and accurately, upstream, and in a repeatable and predictable manner, while also consolidating the results for efficient and confident compliance processing and audit defense purposes, downstream, impacts top, and bottom-line results.

Of course, securing that platform requires the cooperation and commitment between three key groups: tax, IT, and the C-Suite. Is there a way to effectively and efficiently help them all to clearly understand the value of addressing their global indirect tax challenges that affect not only the organization’s global and mission-critical systems, processes, and people, but also their customers, vendors, and brand protection?

INTRODUCTION (CONTINUED)

EXPOSING THE THREE PHASES OF GLOBAL INDIRECT TAX MANAGEMENTAny time a company buys or sells something anywhere in the world, it has a tax consequence. The outcomes vary. The tax amount can certainly be correct -- or it can be too low (i.e., underpayment—leading to penalties) or too high (i.e., overpayment—leading to bad business value).

Managing the tax on purchases is important because often the supplier determines the tax that the purchaser accepts. If the purchasing company accepts the tax that the supplier provides, it is also accepting any possible overpayments or underpayments. Furthermore, in many cases taxes on purchases can be recovered if reported accurately, reducing this cost to a company.

It should be no surprise that sales-related activity gets top billing and the majority of the attention. Revenue drives the priorities of executives, satisfies shareholders, and creates jobs. So, it should also be no surprise that when a company is launching a new ERP or business application that has sales and purchase functions, immediate attention must be given to tax decisions affecting sales tax versus purchase tax. The key to managing tax with a high degree of accuracy, control, and efficiency is to put in place a system and process that is proven, predictable, and repeatable. Moreover, the high-level business goals for the tax and IT departments is to reduce the time, money, effort and risk associated with all sales and purchase process-related tax activities. Specifically, the three phases of indirect tax, regardless of the approach a company takes, are as follows:

1. The Implementation Phase involves sales and purchase-tax-related project management, requirements, design, tax advice, development, configuration, testing, training, and deployment.

2. The Invoice Processing Phase involves the approach and processes associated with how the tax is determined on sale and purchase-related invoices. Tax reporting and compliance processing complete this phase typically in monthly cycles.

3. The Support & Maintenance Phase involves what it takes to make the necessary updates to the company’s business applications as global rates and rules change.

EXPOSING THE THREE PHASES OF GLOBAL INDIRECT TAX MANAGEMENT (CONTINUED)

Each of these phases impacts both the sales-tax-related processes (i.e. a quote, sales order entry, adjustment, and accounts receivable) as well as purchase-tax-related processes (i.e. purchase request, purchase order entry, adjustment, and accounts payable). The total consideration should be made on dealing with indirect tax support realities for all of the following scenarios:

The Implementation Phase

a. Sales Taxb. Purchase Tax

The Invoice Processing Phase

a. Sales Taxb. Purchase Tax

The Support & Maintenance Phase

a. Sales Taxb. Purchase Tax

However, as previously mentioned, attention and priority are usually given to revenue-generation activities, and as a result, decisions are often quickly made by examining how seemingly quickly and efficiently to complete the sales tax process of the implementation phase (Scenario 1a above), with little regard to the other five scenarios. Exposing the impact on time, money, effort, and risk borne by all of the above scenarios over multiple years reveals the whole picture.

The key to managing tax with a high degree of accuracy, control, and efficiency is to put in place a system and process that is proven, predictable, and repeatable.

PHASE 1: THE IMPLEMENTATION PHASE

At the beginning of the implementation phase, planning activities and decisions need to be made based on short- and longer-term requirements and objectives. One of the critical requirements involves the scope of countries that may be involved in the address fields of the day-to-day sales and purchase transactions. A typical invoice can have from one to four different country addresses involved (e.g. Sold-From, Sold-To, Ship-From, Ship-To). In addition to the data representative of the products, services, dates and other variables, the ultimate tax determination treatment will also depend on these addresses involved in the transaction.

The work required to implement and configure global indirect tax functionality within an ERP system is not only significant but also manual and tedious. The effort involves exhausting the configurations of all possible sales scenarios for a given country (i.e. the Sold-From address) for all of the possible Sold-To, Ship-From and Ship-To addresses that may be possible. Similarly, although to a slightly lesser degree, this is also true for the purchase scenarios. All of this work is required to ultimately resolve the final tax treatment decision down to a tax code, which in turn will have a tax rate associated with the final tax calculation.

One general misconception is that an ERP’s native tax solution provides most of the tax determination functionality and/or content “out-of-the-box.” This isn’t the case. Transaction systems have a framework that will allow for these configurations to be implemented but are not delivered as such. Considerable time and effort have to be spent in setting up all possible tax processes, conditions, and actions, to ultimately resolve each transaction’s final treatment down to a tax code and/or tax rate for calculation purposes.

Some of the categories that are considered in the business case analysis for the implementation phase include:

+ Number of countries in scope.

+ What are the simpler, medium and more complex countries in scope.

+ Number of country combination scenarios

+ Number of total sales scenarios.

+ Number of total purchase scenarios.

+ Average number of hours to implement a simpler, medium and complex country’s total sales scenarios.

+ Average number of hours to implement a simpler, medium and complex country’s total purchase scenarios.

+ Average fully-loaded salary for a tax finance professional involved in the implementation.

+ Average fully-loaded salary for an IT professional involved in the implementation.

+ Total number of hours for all internal tax, finance, and IT professionals to implement the countries in scope.

+ Estimated cost for outside tax advice and IT consultants during the implementation phase.

+ Average consulting rates.

+ Total estimated costs of all of the above for the entire implementation phase.

PHASE 2: THE INVOICE PROCESSING PHASE

The invoice processing phase involves what is required operationally to obtain the tax on a sales or purchase-related invoice or transaction. Often, when using an ERP to support indirect tax determination for a sales-related transaction, a significant amount of work has already taken place during the implementation phase. Specifically, the sales tax is derived from the internal logic that was set up and configured within the ERP.

However, for purchase tax determination support within the ERP, usually, a non-tax professional will be required to select a tax code from a drop-down menu of several options, guided by training or some form of documentation provided by the tax department, for purchasing or accounts payable invoice processors. These manual tax code selections are the primary source of errors and have a cascading effect on multiple departments whether the error is corrected or not.

As mentioned in the introduction, errors introduced in early parts of the tax process (e.g., sales or purchase order or invoice) are not detected until posted to the general ledger account. Correcting these tax errors are now very costly due to correction and rebilling processes, reposting and documentation requirements --- not to mention customer and vendor relationship and satisfaction impact issues.

Some of the categories that contribute to a business case for the invoice processing phase include:

+ Total estimated dollars of global tax under management for the last or next fiscal year.

+ Average global tax rate (~15%) applied to the total tax under management amount.

+ Anticipated error rate associated with the incorrect manual selection of tax codes.

+ Estimated loss/leakage costs due to overpayment.

+ Estimated costs for reconciliation efforts by internal resources.

+ Estimated costs for reconciliation efforts by external resources.

+ Estimated costs associated with fines and/or assessments for the last or upcoming fiscal years.

+ Estimated delta in tax reserves that may not be available for the reporting periods in scope.

+ Total estimated costs of all of the above for the invoice processing phase for the business case years in scope.

PHASE 3: THE SUPPORT & MAINTENANCE PHASEThis phase is usually the most significant one regarding enterprise-wide impact. It involves the time, money, effort and risk required by all tax, finance, and IT resources when indirect tax-related changes occur to support and maintain those changes. When a change in a rate, rule, or cross-border logic affects any tax determination-related logic or codes, an internal or external resource must ensure that the company’s systems are updated to maintain tax treatment accuracy, and ultimately, compliance processing precision.

Many companies today support a mainframe-era approach to managing their indirect tax determination, calculation, and recording. These companies still monitor, analyze, update, test, re-test, and re-deploy all global tax-related changes, each month at a minimum, within their development, test, and productions systems. Failure to do this will be dealt with under audit.

This is the most significant phase regarding costs for time, money, effort and risk. It never ends, and only increases as a company’s business expands. It requires the proper attention to ensure that compliance accuracy is not a problem from within these mission-critical system operations.

Some of the categories that contribute to a business case for the support and maintenance phase include:

+ Average estimated total tax, finance, and IT resource hours per simpler, medium and complex changes within the company’s systems (i.e. change-type).

+ Estimated total change-related hours per change-type per year.

+ Estimated total change-related person-days per change-type per year.

+ 250 days in a work year.

+ Estimated total change-related person-years per change-type per year.

+ Average fully-loaded blended tax, finance, and IT salaries for a year.

+ Total estimated costs of all of the above for the support & maintenance phase given the scope in years.

3-PHASE SUMMARY TOTALS

Companies may consider a five-year total cost of ownership to start to build a business case, and may or may not also include potential adjustments for jurisdictional expansion, headcount, or salary growth, and other related operational costs. The resulting sum of the cost estimates for each phase should offer a reasonable estimate of the total indirect tax management costs for a company’s systems, processes, and people-based support requirements.

When the business case is part of what may be described as a compelling event (e.g. a newly planned ERP rollout, a system upgrade, a merger and acquisition, jurisdictional expansion, or a larger enterprise-wide financial transformation project), the total cost would naturally include the comparison for the implementation phase (i.e. phase 1). But it should also be noted that the analysis can apply to situations where the systems are already in production, and the compelling events may be a significant tax assessment or an unacceptable realization of current tax management operational inefficiencies on accuracy, control and/or costs). In this case, the business case would exclude the implementation phase comparison and more focused on the impact of the ongoing operational costs of the invoice processing and support & maintenance phases (i.e. phases 2 and 3).

The business case for any analysis for a third-party tax engine solution would add year-one software licensing and years two-plus recurring license-related and content costs, but would subtract costs from the elements of each phase which account for the savings that automation produces. And finally, the value associated with tax, finance, and IT professionals freeing themselves up to focus on more value-added work may have its place in the analysis as well.

the value associated with tax, finance, and IT professionals freeing themselves up to focus on more value-added work may have its place in the analysis as well.

CONCLUSION

Today’s competitive landscape requires more time spent on strategic efforts, versus mundane, tedious and tactical tasks. The right business case should demonstrate the cumulative return on investment that can be realized by moving past the inefficiencies of the mainframe-era status quo as it relates to global indirect tax. Understanding what is, and who are, involved, as well as a reasonable cost and impact analysis across all three phases of global indirect tax management process is the right step.

It’s not hard to imagine that there are inherent advantages in avoiding global indirect tax operations and support requirements managed by multiple approaches in multiple systems, and that impact numerous departments. Providing a consistent, repeatable and predictable approach for global indirect tax management is key to delivering accuracy, control, and efficiencies that affect multiple systems, processes, and people. Eliminating mundane, tedious and low-value-added tasks, via automation, adds to the “things that employees no longer have to do.” The result is that we see tax professionals that no longer have to be tax clerks, as well as IT professionals that no longer have to be tax professionals.

Ron Ellis is the Director of Business Development for the Thomson Reuters Global Growth Organization (GGO), working closely with international sales teams to bring the right resources to global indirect tax project evaluations. He has over 20+ years working in a pre-sales, sales and post-sales capacity for both start-ups and larger enterprise-class software companies. Ron holds a Bachelor of Arts in Mathematics from San Jose State University and a Master of Science in Systems Management from the University of Southern California. He has been with Thomson Reuters for over 14 years and is based in the San Francisco Bay Area.

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