For indirect tax teams, the question of whether and when to invest in more tax technology often looms large, depending on the size of the organization and the immediate challenges facing the department.
On one hand, tax automation saves time, minimizes the risk of human error, and can help elevate indirect tax from a back-office compliance function to a more valuable strategic advisory role. On the other hand, it doesn’t always make sense to invest in a more robust tax solution if the organization is small and its indirect tax obligations are already being managed adequately.
So when is the right time to invest in indirect tax automation? And what factors tend to move the needle on such an important decision?
Get ahead of indirect tax problems
In a recent Thomson Reuters report, “Indirect taxes: Much more than a process,” we interviewed more than 30 tax directors around the world and found that the decision to adopt a more sophisticated tax technology solution was usually triggered by two issues.
First, something bad happened — for example, a negative audit, penalties — which raised awareness that time was being wasted on correcting errors, or that pressure from tax authorities to digitize had to be taken seriously. Second, existing systems couldn’t handle the company’s rapid business growth, so the decision was made to upgrade the tax system along with the entire finance function.
The common denominator here is that something had to go wrong, or a problem had to be addressed, before management would pay attention. Furthermore, one respondent noted, tax teams themselves often make it easy for management to kick the technology can down the road by using workarounds to manage problems as they arise — in a sense, doing their jobs a bit too well. If management doesn’t see a problem, after all, they will assume there is no problem to see.
How to successfully make the business case for an indirect tax tech investment
Once a problem has been identified, however, the only remaining hurdle in most cases is making a solid business case for investing in an indirect tax technology solution. A clear cost-time and risk-benefit analysis is usually persuasive enough on its own, but some leaders also need to get a clearer picture of the tangible and intangible benefits, and opportunities, before signing off.
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In general, tax directors who have successfully made the business case for investing in indirect tax tech suggest following these key steps:
- Pro-actively identify “the problem”: Don’t wait until something actually goes wrong. Instead, communicate to leaders the risks of waiting by showing them what could go wrong if they don’t act — such as penalties for inaccurate filing, lost tax revenue, incorrect invoicing, and the increasing need to interact digitally with tax authorities.
- Perform a cost-benefit-risk analysis: Find out how much time individual indirect tax team members are spending on checking spreadsheets, data handling, and correcting errors. Tie that to the bottom-line cost of potential penalties or tax revenue that can’t be reclaimed.
- Highlight tangible benefits and opportunities: Fewer costs and penalties. More accurate invoicing. Reclaimed tax revenue. More efficient processes. Better responsiveness to changing tax regulations. An improved customer experience, especially online. Reduced support costs. These are just a few of the advantages of a contemporary indirect tax technology solution. Emphasize them.
- Don’t forget the intangibles: Some of a technology solution’s most salient benefits aren’t immediately connected to the bottom line. In addition to reduced risk, less time spent dealing with errors, and a convenient audit trail for every transaction, it’s vital that indirect tax teams show how an additional investment in technology will free up time for more value-added work, such as advising leaders on strategic business and tax issues. Automation also helps with talent development and retention by making indirect tax jobs more interesting and engaging (for instance, less drudge work for everyone).
- Address key tax technology issues: Resistance to advanced tax technology comes in different forms, and it’s helpful to be aware of them before entering any negotiations. Some feel they don’t need better tech because their operation is manageable without it. Many people are skeptical that new technology solutions will deliver the added value promised. And some feel it’s pointless to consider a new tax engine before ironing out other data issues with their enterprise resource planning (ERP) system.
Read the 2021 indirect tax report for insights on how global tax leaders have successfully transformed their corporate tax teams into strategic advisors.
Regardless of the rationale, interviews with corporate tax team leaders suggest that there are at least two key issues that should be addressed before embarking on an ambitious indirect tax technology journey:
- Clean up your data: Make sure the data available through various ERP systems is reliable and accurate — otherwise, nothing downstream will work properly. Those who are waiting to add a tax engine when they implement a new ERP system should heed the same advice, as it is difficult to implement both systems at once without reliable data upstream.
- Know your process: Don’t rely on implementation consultants to solve all your problems, because they will eventually leave. When they do, the indirect tax team should have enough in-house expertise to problem-solve without calling the consultants back. Also, more than one person should know all the details about how the system has been customized and how it operates within the organization’s other systems.
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Some other recommendations from respondents:
- Have a senior sponsor in both Finance and IT
- Hire consultants with experience in indirect tax and your specific ERP system
- Keep customization to a minimum
- Test every possible scenario
- Purchase the latest version of the indirect tax software
- Educate and involve all users as early as possible
- Establish a handover procedure from implementation consultants
- Plan for allowing more time and budget to complete the job
Whether or not a company decides to upgrade its tax technology, corporate leadership should be made aware that indirect taxes are getting more complex and resource-intensive than they have been in the past. The risks involved — financial penalties, missed opportunities, reputational damage, and more — are perilously high to ignore, and the benefits to the company in the long run are too numerous to dismiss. Tax teams and companies that choose to invest in the indirect tax function are the ones who will be properly positioning themselves to meet tomorrow’s tax challenges. They will also profit from the reduced risk and improved financial performance that a modern indirect tax system inevitably provides.
Browse our related resources to keep you up to date on indirect tax technology and help you provide more value to your organizations:
- Article: How to choose the right sales tax automation software
- Blog: Indirect tax automation: Practical tips for companies beginning a tax transformation journey
- Article: Avoid incorrect indirect tax calculations and protect your organization
- White paper: Get access to your indirect tax data for faster analytics and reporting
- Blog: Building a better business case: 5 ways to demonstrate ROI for sales tax automation
- Case study: Adobe transforms their global indirect tax process with ONESOURCE Determination