White paper

How indirect tax impacts your manufacturing power — and what to do about it

When manufacturers get indirect tax wrong, the cost can run into the hundreds of millions of dollars. One global technology firm we worked with discovered it had overpaid its indirect taxes by $100 million, money it could have spent on important business priorities. Accurately tracking and reporting taxes is extremely complicated for manufacturers; hidden overpayments or underpayments — plus interest and penalties — are common. Indirect taxes, charged on consumption and often involving multiple legislative rules, can be particularly difficult and cumbersome to manage. With regulations constantly evolving, even the savviest of your tax professionals will find indirect tax compliance a significant challenge.

Indirect taxes around the globe

  • In the U.S., manufacturers pay vendor-charged taxes on purchases of equipment and supplies, but tax laws on what is taxed and when vary
  • In other tax jurisdictions, indirect taxes include value-added tax (VAT), goods and services tax (GST), property tax, customs and excise duty, and environmental tax
  • More than 170 countries charge VAT, which is assessed at each stage of production
  • GSTs are flat-rate fees that are not linked to value creation
  • Globally, companies will spend $27 billion by 2024 on indirect tax management solutions to optimize processes

Fortunately, technology is available to help you protect your spend by addressing the many complexities around indirect tax compliance for manufacturers. An automated tax engine can determine tax obligations in multiple jurisdictions with a speed and accuracy that humans cannot match. Indirect tax software can increase your visibility into your company’s tax position, help you streamline processes and reduce costs with automation, and align tax spend with regulatory requirements.

We’ve designed this white paper to help manufacturing tax executives and professionals understand the benefits of adopting technology to optimize indirect tax processes. With the right indirect tax software, you can avoid overpayment and underpayment of taxes, which can lead to missed early pay incentives, supplier frustration and conflict, and penalties and interest payments.

Read on to learn how manufacturing companies can future-proof their tax processes and:

  • Accurately validate vendor-charged tax, accrue use tax, and account for VAT and other global taxes
  • Scale with growth across geographies
  • Respond accurately and quickly to regulatory change
  • Help ensure business continuity with a cloud-based platform
  • Gain visibility with analytics and reporting for informed decision making
  • Elevate the indirect tax department to drive strategy and add value to the business

Chapter One

Indirect tax compliance is getting harder — and doing it wrong is costly

Efficiently and accurately managing, tracking, and reporting indirect taxes is increasingly complex as tax regulations become more complicated and supply chains expand across jurisdictions. When manufacturing companies get it wrong, they risk losing huge sums of money in hidden overpayments or underpayments, plus interest and penalties. This money drains away from their business — and the cost can be significant.

Manual processes like manually selecting tax categories and training AP to check supplier tax can no longer keep up with the complexity of indirect tax management. Today’s manufacturers are turning to tax software platforms to help them focus on what matters most: managing tax strategically. Doing so requires processes that calculate tax and correct issues in real time, plus analytics and reporting that help create visibility around spending, which drive continuous improvement.

With an indirect tax software platform, a global technology firm that had previously overpaid taxes by $100 million can now predict and pay its taxes much more precisely, making financial decisions from a position of increased strength.

What could automated tax compliance software do for you?

Chapter Two

Manufacturers are losing money with manual indirect tax processes

Your indirect tax strategy has probably evolved over the years. Perhaps you use spreadsheets and emails, putting up with disconnected and duplicative data and slow processes. Or maybe IT and the business have spent millions on customizing enterprise resource planning (ERP) platforms, such as SAP and Oracle, gaining powerful capabilities but dealing with entrenched business silos. Or perhaps you’ve chosen a hybrid approach, using multiple systems and manual processes to estimate and pay these critical taxes. These strategies drain your tax and IT teams, taking them away from other value-add activities.

Despite the drawbacks of manual processes and spreadsheets, many indirect tax professionals continue to use them. They may view automation as complex, challenging to adopt, or not customizable to their unique tax requirements. However, in a world that favors speed, visibility, and accuracy, tax leaders are increasingly realizing that manual processes can’t scale and can ultimately harm the business.

What happens if your current indirect tax practices can’t keep pace with your business needs? Manufacturers may experience significant pains in the following areas.

Tax implications of inventory movements
The manufacturing industry has unique business tax requirements, including accruing correct use tax on inventory movements and determining the taxability of mixed-use items. For example, you’ll probably determine tax when purchasing inventory and then again when you put it into use. Withdrawing items from inventory for consumption — such as free samples, internal use, or research and development — can also create a tax liability. Similarly, moving inventory items across geographies can subject you to a variety of indirect taxes, even if those items continue to be owned by the same entity. 

Tax practices across jurisdictions
Manufacturers must accurately validate and reconcile vendor-charged tax on all the equipment, materials, and other goods and services they buy. Manufacturers must do this for millions of transactions that cascade across e-commerce and other channels in hundreds or thousands of tax jurisdictions. In the U.S., you need to verify that your suppliers have charged you the correct tax on indirect spend based on federal, state, and local requirements. In other countries, you must comply with the laws in their tax jurisdictions, which often require calculating the correct VAT on your sales and purchases. Did you know there are 11 different types of 0% VAT, which are all calculated and reported differently? Even though it’s 0%, miscalculating it will subject you to penalties. The smallest of errors can have an enormous financial impact.

Use tax penalties
The cost of tax calculation errors can often multiply. For example, spreadsheet errors replicated across a tax type can expose you to obligations that run into the hundreds of thousands or millions of dollars. Another area where you might be vulnerable is the accrual of use tax on purchases. If your suppliers charge you an incorrect amount, you may be responsible for accruing the correct use tax. Failure to do so can lead to penalties plus interest. Your business may be ill-equipped to make a tax payment that it wasn’t expecting. Interest payments grow with penalty payments if not paid on time, compounding financial hardships.

Tax overpayments
Overpayments are hidden costs that can be significant. If you make tax overpayments, the only way you will know is if you proactively identify them. Then, you must request refunds to recoup that money; the government is not obligated to inform you of any overpayment. A best-case scenario is that you spend additional staff time looking for overpayments and processing refund requests while missing the opportunity to allocate these monies to other corporate priorities. Once you do so, companies fear they will raise their chances of a future audit. If a third party is utilized to discover the overpayments, then a company can expect to pay a significant portion of the findings to the consulting firm conducting the study. A less-ideal outcome is that you never identify and recoup these payments.

Tax credits and incentives
In the U.S., manufacturers are often eligible for credits and incentives based on the sales, use, and income tax they pay. However, to receive these benefits, you must provide robust transactional data, which can be difficult to aggregate. If you can’t obtain accurate data and reporting on a timely basis, you may miss these key incentives. 

Tax exemptions
Your business and counterparties in the U.S. may be eligible for tax exemptions on items such as products and services purchased for research and development, equipment used to manufacture goods, and more. This is “found money” you’ll want to maximize. However, it’s no easy process to track exemptions and exemption certificates because they vary by tax jurisdiction. 

Audit requirements
Manual processes, incorrect data, and tax errors can increase your likelihood of being audited. You’ll have to allocate staff time to prepare for audits and defend data and processes that may not pass muster under a higher level of scrutiny. 

Supplier relationships
Offering seamless procure-to-pay (P2P) processes is part of the value proposition you can offer your suppliers. Being slow to pay suppliers or requesting corrections in vendor-charged tax can strain relationships. All things being equal, suppliers will naturally gravitate to the partners who are the easiest to work with and whose processes are reliable and trustworthy.

Stanley Black & Decker streamlines indirect tax and invoice processing with automation

Stanley Black & Decker is an industrial company that is a worldwide leader in tools and storage, security services, and engineered fastenings. The company uses the Ariba ERP system and has relied on various strategies to process indirect taxes, including harnessing a rates file, parking invoices, and processing them manually. However, none of these approaches were scalable enough for a global deployment.

The company evaluated its options for tax automation and determined that ONESOURCE Determination delivered an integration and tax determination solution with global coverage. To integrate seamlessly with Ariba, support multiple tax use cases, and provide automated indirect tax management in eight countries, Stanley Black & Decker uses ONESOURCE. In addition, integrated tax functionality has also helped the company achieve its goal of fully automating invoice processing.

Chapter Three

Predict changes and optimize outcomes with proactive indirect tax automation

According to the Thomson Reuters 2023 Corporate Tax Department Survey, more than one in two tax professionals is scrambling to meet their company’s tax demands in a manner that is either “chaotic” or “reactive.” The good news is that technology can help tax teams increase their control over their processes and move their departments to a model where they can predict changes and continually optimize.

Manual tax process for P2P

A manual approach to the P2P tax process can involve dozens of resource- and time-consuming steps. From tax setup and maintenance to P2P processes — such as requisition, approval, purchase order, reconciliation, and payment to end-of-month reporting and tax returns — these manual processes are lengthy, complex, and error prone. With ONESOURCE Determination, the P2P process is neither chaotic nor reactive. Rather, it is automated and streamlined, integrating seamlessly with your business applications and liberating your indirect tax professionals for more strategic work.

Automated tax process for P2P

Tax automation looks at invoice details, other ERP data, and the company’s tax policy — in effect, acting like a tax professional, ensuring the supplier charged the correct tax. With automated tax processes, your tax teams will have more time to search for opportunities to add value, such as finding manufacturing incentives and exemptions your business qualifies for and improving your bottom line. In addition, you can prevent tax overpayments, underpayments, and penalties that can accumulate and weaken your organization’s financial strength.

Chapter Four

Avoid leaving money on the table and protect your operational spend with ONESOURCE

Our tax technology platform:

  • Optimizes processes. Automate tax processes across P2P and order-to-cash (O2C) cycles to maintain compliance and minimize underpayments and overpayments. Reduce the burden on your tax team while decreasing costs and errors.
  • Integrates with multiple systems. Connect to your P2P, e-commerce, and other business systems. Automatically and accurately validate vendor-charged tax, accrue use tax on inventory movements, and account for VAT and other global taxes. 
  • Maximizes exemptions. With our self-service portal, you can easily gather exemption certificates from your suppliers and store them all in one place. By filing for and receiving all the exemptions you are entitled to, you can increase your business’s profitability. 
  • Stays current. Get monthly content updates covering hundreds of thousands of rates and rules globally. Avoid human errors or omissions that can result in tax penalties.
  • Scales easily. If you’re entering a new market or dealing with an acquisition or merger that has expanded your tax needs, you need an indirect tax system that can scale. When you’re combining systems into one tax engine, ONESOURCE will scale with your growth. 
  • Improves collaboration. Your tax team collaborates with other stakeholders, such as finance, IT, C-level leaders, and outsourced resources. Use our global collaboration, research, and workflow platform to bring new visibility into your tax processes, enhancing your decision making while reducing risks.
  • Saves time and improves accuracy. Avoid wasted effort, such as time spent researching regulatory changes, gathering data, and performing repetitive processes. Using our research tools, platform, and multilingual solutions, you’ll gain accurate, real-time information and tools to make updates and administration simpler.
  • Streamlines audits. Having access to accurate data, analytics, and reporting will make it easier for you to prepare for an audit so you can defend your decision making and avoid tax penalties. ONESOURCE provides you with access to hundreds of signature-ready returns, numerous standard tax reports, electronic filing, ad-hoc reporting, and tax technology so you can complete returns and respond to audits faster and more accurately. In addition, you can use our web portals to access detailed audit reports each month for visibility, as well as Sarbanes-Oxley compliance, saving you time and money when it comes to audit defense. To most efficiently manage audits, leverage our Global Tax Audit Manager solution.
  • Provides digital governance. Tax professionals are often tasked with doing more with less. Stay current with emerging electronic reporting regimes and compliance pressures without needing to add extra staff.

Lenovo integrates e-commerce and indirect tax processes

Lenovo, a global manufacturer of personal computers, sought to streamline indirect tax management by automating its processes with ONESOURCE Determination. Lenovo uses SAP for ERP and customer relationship management (CRM) but required a solution to automate U.S. sales and use tax and international VAT determination, calculation, and recording. The company has deployed ONESOURCE Determination at its manufacturing facilities in Mexico, Poland, Brazil, the Americas, Europe, the Middle East, and Africa.

“Whenever we take a quote or make an order, SAP CRM will make a tax call to ONESOURCE Determination to make sure we’ve put the correct value on the quote or order. In most of the countries where we do business, we’re also implementing complete e-commerce capabilities, and we’re doing sales quotes, orders, and invoices in that environment as well. And again, the call is being made to ONESOURCE Determination anytime a transaction is changed or saved,” says Dennis Culin, director of business transformation at Lenovo.

Cisco Systems creates a global indirect tax management system

Cisco Systems, Inc. is the worldwide leader in networking for the internet and provides data, voice, and video solutions. The company sought a global solution to provide real-time tax determination for every transaction, no matter where it occurred.

Cisco is using ONESOURCE Determination to increase its response time for business and system changes, gain worldwide visibility and control over all transaction tax, and simplify processes via automation. By eliminating underpayments, overpayments, and penalties, Cisco reduces its financial risk and tax exposure on an ongoing basis.

Chapter Five

ONESOURCE delivers indirect tax determination and compliance

ONESOURCE is the only platform you need to manage your indirect tax determination and compliance responsibility. It’s the only industry calculation-to-compliance tax solution that delivers indirect tax rates, logic, rules, and policy from a global perspective. Our customers trust ONESOURCE because it:

  • Covers over 205 countries and more than 56,000 global tax jurisdictions
  • Offers a patented process for determining, calculating, and recording indirect tax liability
  • Is a comprehensive, web-based solution for VAT, GST, and sales and use tax
  • Provides a cloud-based architecture ideal for software security center (SSC) deployment
  • Automatically updates content from thousands of global tax authorities, certified to SSAE 18 and ISAE 3402 standards
  • Is designed to optimize performance, reliability, interoperability, scalability, and security with cloud-native technologies
  • Provides interfaces to SAP, Oracle, and other ERP platforms
  • Avoids the trap of constantly customizing ERP solutions, which is limiting and costly
  • ONESOURCE e-invoicing enables customers to both receive and send compliant invoices

Chapter Six

ONESOURCE Determination helps manufacturers get tax right and protect their business

When you adopt ONESOURCE Determination, you gain a software solution for indirect tax that will future-proof your tax processes and scale with growth as you add new businesses, geographies, and suppliers and respond to regulatory changes. You’ll ensure business continuity with easy access to a cloud-based platform. You’ll gain newfound visibility with analytics and reporting that empower executive decision making. Finally, you’ll position your indirect tax department as a strategic partner and value driver to the business.

By paying taxes accurately, you will be able to avoid costly tax issues, freeing up funds for critical priorities like investing in digital transformation, building revenue-generating plants, hiring staff, and investing in new equipment.

Start today. Learn more about ONESOURCE Determination for manufacturing.

Manufacturing tax determination software

Choose ONESOURCE Determination for Manufacturing, our procure-to-pay software that automates tax invoice reconciliation to reduce tax overpayments