WHITE PAPER
Digital transformation meets tax: Why IT must prioritize indirect tax compliance
IT professionals don’t typically spend much time thinking about how indirect taxes are calculated or recognize the extent mismanaged taxes can drain IT resources. It may be time to start, especially if your company is considering any form of digital transformation.
That’s because the impact of indirect tax management is increasingly seen as a strategic asset to the organization, not just a regulatory requirement. The ongoing shift toward digital reporting means more scrutiny from regulators and pressure to provide more real-time tax information — all which IT must understand and support. Failure to calculate and report indirect taxes correctly can also result in extensive audits, massive data pulls, and hefty penalties, not to mention lost time and money, tarnishing of the brand, and additional pressure on IT staff.
While tax departments are directly measured on compliance, IT plays a crucial role in supporting these compliance efforts. An increase in tax audits translates to a higher workload for IT professionals, including more frequent and complex data requests, increased demand for system access and reports, and the need to provide technical support for tax-related software and databases.
IT teams must be prepared to quickly respond to these requests, ensure data integrity, and maintain secure access to sensitive financial information. Effectively managing this increased workload is essential for IT to support tax departments in meeting compliance obligations and successfully navigating audits.
If you’ve ever been involved in an indirect tax audit, or ever had to respond to multiple requests for data sets from the indirect tax department, you already know the pain corporate taxes can inflict.
The challenge is particularly acute when dealing with a mix of outdated IT systems and a tax department that still performs some or all its tasks manually using Microsoft® Excel. When systems are unable to adequately automate tax calculations, the responsibility falls on IT to maintain them.
Fortunately, the indirect tax burden on IT can be almost eliminated by incorporating an end-to-end tax automation solution that easily connects to the company’s Enterprise Resource Planning (ERP’s) and other systems.
The benefits of a tax engine in an evolving regulatory landscape
As your business grows, managing tax compliance becomes increasingly complex. A tax engine is a software solution that integrates with your existing systems to ensure accurate tax calculations and compliance, keeping you up to date with changing tax laws, including sales and use tax, VAT, and GST. By implementing a tax engine, you can scale your operations while minimizing the risk of non-compliance and costly errors in tax calculations.
Shifting towards digital reporting means more scrutiny from regulators and pressure to provide real-time tax information than IT must support.
Finance and tax professionals who dream of automated solutions but lack budgetary authority need to convince IT departments of their merits. This is especially true if your company is involved in a merger or acquisition and is deploying a tax engine with an ERP upgrade.
If transformation is done without bringing tax to the table early, IT teams can be left with disparate systems that don’t talk to each other, require more ongoing maintenance that creates more work for their team, increasing costs and raising both financial and reputational risks to the business.
Organizational growth spurts are the logical time to re-evaluate IT systems and processes to ensure the enterprise is prepared for future demands. Tech transition periods are an ideal time to introduce new software and acquaint departments with more efficient, effective ways of working.
With an integrated, scalable indirect tax solution, your tax professionals aren’t required to be IT experts, and your IT professionals aren’t required to be tax experts. By removing the multi-departmental burden of fixing tax errors and updating global regulatory changes each month, you’ll save significant amounts of time, money, effort, and risk each year.
The growing need for transparency requires IT systems to be more flexible and responsive to regulatory changes. This requires constant updates and improvements. This ongoing need for adaptability can stretch IT resources thin, highlighting the importance of strategic planning and investment in a scalable solution.
The imperative of indirect tax compliance for IT
Governments are increasingly relying on indirect taxes, tightening regulations, and moving towards digital, real-time tax reporting. It is crucial for IT professionals to understand the implications on them, their systems, and their teams as well as the benefits. Automation of indirect tax processes can eliminate up to 95% of IDT processes, custom coding, and workarounds, freeing up time and resources for higher value work.
These developments depend upon reliable IT systems with consistently clean, accessible data, as well as software and processes tailored to fit their organization’s specific business goals and tax responsibilities. As e-invoicing and digital reporting requirements increase, so does the need for strong IT infrastructure. This puts a strain on resources as IT teams work to ensure requirements are met and new tools work well with the businesses’ systems and processes.
A well-run tax system, empowered by data analytics and modelling, is a strategic asset that allows the tax department greater control, relieving the burden on IT.
What are indirect taxes?
Indirect taxes are taxes applied to the sale or use of goods and services, such as a sales tax, excise tax, value-added Tax (VAT), goods and services tax (GST), or gross receipts tax (GRT). These taxes are “indirect” because they are applied to the ultimate sale, whereas for VAT, they are applied at each stage of value addition.
- Indirect taxes are not directly paid by the end consumer to the government. They are collected by intermediaries (like businesses) who then remit them to the government.
- The economic burden of the tax is typically shifted from the entity that collects it to the end consumer. For example, a store collects sales tax from customers but doesn’t bear the cost itself.
Why IT professionals must prioritize indirect taxes
Indirect taxes pose a significant challenge for large companies because they are constantly changing, creating a shifting landscape that requires businesses to continually adapt and update their systems to ensure compliance. This moving target demands ongoing efforts from both the business and IT teams to avoid potential penalties or risks.
For example, sales taxes are based on the ultimate value of a good or service purchased and added at the point of sale, whereas VAT is a tax based on the “value added” at each stage of the production process. The consumer ultimately pays both, but they are assessed differently and require different data to calculate.
Indirect taxes are complicated by the fact that different products and services are taxed according to different rules. Municipalities, states, and countries also have different regulations and compliance procedures, as well as different penalties for non-compliance. A national or international retailer must assess and collect indirect taxes across dozens or hundreds of products manufactured, distributed, and sold through thousands of transactions every day, then remit the correct tax to authorities in the state or country in which the transaction took place, in accordance with the rules and regulations of that locale.
Failing to comply with tax regulations can have serious consequences, including audit penalties and fines if taxes are underpaid, and wasted expenditure if taxes are overpaid on purchases. In countries that require real-time e-invoicing compliance, non-compliance can prevent businesses from operating altogether.
From a financial standpoint, indirect tax cash flow can represent 10% or more of a company’s total revenue. For a business with a $1 billion turnover, this translates to $100 million in indirect tax cash flow that requires careful management. Manual processes, system limitations, and constant changes in regulatory requirements can increase the risk and cost of managing this substantial amount of money, creating a necessary but non-strategic expenditure for the business.
How IT resources are drained
The drain on time and resources isn’t confined to the tax department. IT departments often get pulled into the discussion as well. This is especially true at companies that are constantly updating their legacy IT systems with patches and fixes to accommodate the evolving needs of the enterprise. An IT department faced with the task of creating an ad-hoc program to calculate indirect tax obligations can expect the need for substantial coding on the front end followed by necessary corrections on the back end, eating up time and resources better spent elsewhere. Such practices also increase the organization’s risk for non-compliance or financial losses.
Compliance via the cloud
Indirect tax software can solve problems by moving technology, processes, and data management to the cloud, automating the indirect-tax compliance functions that are so cumbersome and error-prone when tackled manually. Organizations can achieve faster and more accurate tax determination and compliance by integrating a cloud-based indirect tax engine seamlessly to a company’s ERP or related financial system, making all enterprise-wide transaction taxes automated and repeatable.
Implementing indirect tax software meets the critical needs of business and tax teams, enables real-time cash flow management, provides a robust array of dashboards, metrics, and tools to measure tax inflows and outflows, identify trends, strategize, plan, and report. These capabilities significantly enhance tax department performance, supporting the overall efficiency and effectiveness of IT infrastructure. Ensuring seamless integration, data accuracy, and compliance ultimately drives business growth and profitability.
IDT software that seamlessly integrates with an enterprise’s larger ERP ecosystem gives IT departments significantly more control over different data sets and allows other departments — e.g., accounting, finance, sales — to access data they might otherwise have had to request on the fly. These capabilities, in turn, make it much easier to align an organization’s compliance functions and expand the usefulness of indirect tax data for other purposes, such as supply-chain management or other types of strategic decision-making.
During mergers or acquisitions, IDT software can also serve as a single source of truth around which data from another organization can be integrated and organized.
Data migration from one system to another is much easier because many of the complications that arise from incompatible systems and programs can be bridged using specialized import and export functions.
A tech transformation
The integration of IDT software with an organization’s financial system would ideally be part of a larger, enterprise-wide technology transformation aimed at future-proofing the organization’s IT infrastructure against technical irrelevance. Many medium- sized to large companies now find themselves at a crossroads. The bulk and cost of their hardware-intensive systems, which once served them well, are no longer economically viable and cannot deliver the performance and agility needed to compete in world where the digitization of global tax governance is rapidly digitizing.
The allure of a third-party, cloud-based form of indirect tax software from Thomson Reuters® is that the resulting system is self-scaling and self-healing as demand increases, offering automated change updates, which require little to no maintenance or downtime IT staff no longer need to conduct cumbersome, in-house upgrades on individual servers and computers, and the power and capability of the software can scale according to the organization’s needs without being slowed down by budget constraints or the system limitations. This allows IT staff to devote more time and attention to other issues, secure in the knowledge that their cloud-based solution is fully supported and operational 24/7.
Where taxes are concerned, indirect tax software also provides the additional benefit of a continuously updated database of regulatory policies for hundreds of countries and territories around the world. Governments everywhere may be tinkering with their indirect tax regimes, but it is ultimately the responsibility of companies doing business in any given region to understand and comply with the local rules or face the consequences. IDT software makes it possible to stay current on changing tax regulations and ensure compliance.
The advantages of tax automation
Global tax policy is no longer static — it is a fluid, ever-shifting framework of rules and regulations that requires constant vigilance on the part of companies that wish reduce tax liability. No single person or team can keep up with these changes, but now they don’t have to — indirect tax software’s support network incorporates global regulatory changes into its algorithm and the proper tax for each product sold in each jurisdiction is calculated automatically.
Indirect tax software provides the additional benefit of continuously updated database of regulatory policies for hundreds of countries and territories around the world.
Why IT professionals should care about indirect taxes
For IT professionals, indirect tax automation means:
- Seamless integration with ERP and other systems
- Lower overall IT costs
- Less time and resources needed to maintain systems and ensure compliance
- Dependable, real-time performance 24/7
- Tools that facilitate new ways of data-sharing and better transparency
- Scalable, future-proof technical capabilities and adaptability
- Unification of digital tax and finance workflows
- More resilience, speed, and precision
- No need for extra hardware or storage
- A more secure and reliable network
- Higher confidence in accurate tax calculation the enterprise
- Clean, organized, and accessible data
- Less staff time needed for data cleanup and support
- An end to custom coding and manual workarounds
Data is destiny
Data is the common denominator in all these tax arrangements. The more control organizations have over their data, the better equipped they will be to manage the tax requirements of an increasingly digital future.
Governments around the world are relying more than ever on indirect taxes while simultaneously leveraging technology to its fullest, deploying digital tax regimes that require more transparency and responsiveness from businesses operating in and across their borders.
No matter where companies are at on their digital transformation journey, those that want to prosper in the era of digital compliance must implement systems, processes, and workflows that can meet these new digital reporting demands and ensure accurate tax compliance in a swiftly evolving environment.
Thomson Reuters
Thomson Reuters is a leading provider of business information services. Our products include highly specialized information-enabled software and tools for legal, tax, accounting, and compliance professionals combined with the world’s most global news service – Reuters.
For more information on Thomson Reuters, visit thomsonreuters.com and for the latest world news, reuters.com
ONESOURCE®
ONESOURCE® is the industry’s leading corporate tax technology platform. ONESOURCE enables global tax compliance and accounting decision-making. In over 180 countries, ONESOURCE helps companies stay in compliance, avoid penalties and audits, save time, and increase efficiency through every step of the tax lifecycle, including corporate income tax, indirect tax, property tax, trust tax, tax information reporting, transfer pricing, data management, and internal processes.
For more information, visit tax.thomsonreuters.com/ en/corporation-solutions/c/onesource-indirect-tax- accelerate-transformation
Calculating indirect tax gets harder as businesses grow. Automate processes to reduce risk and increase efficiency. Trust numbers you can count on.