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Avoid incorrect indirect tax calculations and protect your organization
For businesses of all sizes, calculating indirect taxes correctly isn’t just a matter of getting the math right – it’s vital to the health of the organization. Inaccurate tax calculations can be costly, and can inhibit an organization’s ability to plan, grow, and adapt to changing market dynamics. Indirect tax errors can also result in penalties that impact the bottom line and can even affect public perceptions and customer loyalty.
Tax law is growing more complex
Keeping up with new business tax regulations is challenging, so the chances of getting it wrong are greater than ever. Passage of the 2017 Tax Cuts and Jobs Act (TCJA) introduced hundreds of changes to the U.S. tax code, followed by a constant stream of updates and clarifications. Furthermore, taxation of e-commerce goods and services is a constantly moving target, with individual states deciding their own rules and Supreme Court cases such as South Dakota vs. Wayfair abandoning the physical presence standard for online transactions.
Indirect tax professionals trying to keep up with these changes are in a bind. In order to do their jobs effectively, they must have an almost encyclopedic knowledge of the tax code for every country in which they do business. But business taxes are not static, they are a continuously shifting framework of rules and regulations, which makes it difficult for companies to stay current. The more fluid and complex the tax codes are, the greater the chances of making a mistake, and mistakes cost money – money that indirect tax professionals are paid to protect.
How complicated can it get?
If you are calculating sales and use taxes (SUT), value-added taxes (VAT), or goods and services taxes (GST), the answer is: very.
VAT: more than just a rate
For example, businesses operating in Europe and Asia must track and report value-added taxes (VAT) for almost all goods and services, as well as every component in their supply chain, at each stage in the production process, including assembly and shipping. While the EU has standard VAT rules, each country in the EU applies those rules differently. Different types of products and services – foodstuffs, e-commerce, electronic devices, etc. – all require different tax rates as well. Companies that do business in multiple countries must calculate and report the VAT for each transaction in each individual country. A supply chain involving multiple countries can require dozens of VAT variations, including a special “zero” rate for certain transactions.
Zero rates are particularly tricky because they don’t require consumers to pay the VAT on certain sales (education- and healthcare-related items, for instance), but still allow companies to deduct the VAT they’ve already paid on purchases related to the sale, such as products and services exported to other countries (exports are typically not subject to VAT). That almost sounds straightforward, except that in Europe, there are at least eleven different ways to calculate the “zero” VAT, and if you pick the wrong one, you can be penalized.
Companies operating in places like Vietnam face even more onerous VAT guidelines.
In Vietnam, invoices for each transaction must contain far more buyer/seller information than is normally required, and the rules for deductions, refunds, and exemptions are notoriously complex.
Companies doing business in the U.S. face a continuously evolving tax landscape for commercial transactions as well. The United States does not impose a VAT; instead, most states rely on sales and use taxes. But prior to the South Dakota v. Wayfair Supreme Court decision in 2018, companies were required to collect sales tax only in those states where the organization had a “physical presence standard.” Now, businesses that sell in any state are directly impacted: Most states base these tax collection and reporting requirements on the volume or dollar amount of a company’s in-state sales, creating a dizzying patchwork of ever-shifting rules for online retailers.
Solving indirect tax issues costs time, money, resources
No matter where a company does business, however, it is the company’s responsibility to keep track of all relevant taxes, report them accurately, and pay them on time. Failure to do so can result in fines and other penalties and can initiate a costly process of re-evaluation and course-correction that can, in turn, create friction in other parts of the enterprise. The time, money, and resources diverted to solving indirect tax issues can make the company less responsive and agile, especially if critical decision-making data is unavailable as a result.
Because accuracy in taxation is so important, tax compliance issues can cost a company in countless other ways as well. Over-paying taxes means revenue that isn’t available for other purposes and is difficult to reclaim. Under-paying taxes means possible penalties and unwelcome surprises on the other end of the balance sheet. Taxing incorrectly can also impact product prices, affect market competitiveness, and even damage a company’s reputation.
In truth, it’s difficult to calculate all the ways in which indirect tax errors can gum up a company’s operations. Inefficient, error-prone processes require analysis and training to overcome; in-house IT systems must be continuously updated; customer-support services can be overwhelmed; workaround solutions can become habitual, and undoing them can be difficult, if not impossible.
The right indirect tax software can help
The tax complexities of interstate and international commerce are why most companies use some form of indirect tax automation software to help track and calculate their organization’s tax obligations. But such programs are only as accurate as the programming and support behind them. In practice, a team of tax research and technology experts must essentially be working 24/7 to keep a comprehensive tax system fully updated. That’s why, after calculating the true costs of global tax compliance, more companies are turning to third-party vendors who specialize in software dedicated to indirect tax compliance. An efficient, accurate solution like ONESOURCE Determination can provide friction-less support, freeing up time, resources, and energy that can be dedicated to ensuring the organization’s future, rather than grappling with mistakes made in the past.