Tax & Accounting Blog

Avoid incorrect tax calculations and protect your organisation

Blog, Corporations, Indirect Tax, ONESOURCE, Technology January 7, 2021

Automate tax calculation and overcome the complexities that accompany your global footprint.

For businesses of all sizes, calculating indirect taxes correctly isn’t just a matter of getting the maths right – it’s vital to the health of the organisation. Inaccurate tax calculations can be costly and can inhibit an organisation’s ability to plan, grow and adapt to changing market dynamics. 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 constantly evolving indirect tax regulations in numerous territories is challenging, so the chances of getting it wrong are greater than ever.

The Gulf Cooperation Council regions of the Middle East, for example, has introduced VAT to a group of countries that are unfamiliar with managing and reporting transactional taxes. This brings uncertainty, unexpected complications and risks, for both the government and taxpayer.

In countries with more mature VAT regimes, the reporting requirements are evolving, requiring a new level of detail on reporting, getting much closer to the source data and systems. For example, in the UK we have seen the introduction on MTD for VAT (Making Tax Digital) where electronic records and ‘hands-free’ record to report processes are now mandatory, stopping a lot of manual calculations and rekeying.

Poland has introduced JPK reporting, a new more detailed method of filing tax return data that is tied closely to the invoices in a company’s ERP system. Each invoice must be submitted electronically with details on how it contributes to the various “boxes” on the tax return. There are harsh penalties for non-compliance with this new process.

There is a significant shift in expectation in this electronic world, with tax authorities wanting access to all the source tax data close to real-time, and an expectation that the source data will always be correct. The world of manual corrections for day to day compliance is rapidly disappearing.

Tax professionals trying to keep up with these changes are in a bind. To do their jobs effectively, they must have an almost encyclopaedic knowledge of the tax codes 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 tax professionals are paid to protect.

How complicated can it get?

If you are calculating 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 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, clothing, electronic services 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 country. A supply chain involving multiple countries can require dozens of VAT variations, including a “zero” or “exempt” rate for certain transactions.

Zero rates are particularly tricky because they do not require consumers to pay the VAT on certain sales (certain foods, books, children’s clothing for instance), but still allow companies to deduct the VAT they’ve already paid on purchases related to the sale (e.g. raw materials).

This is in contrast to sales that are exempt from VAT, which while having no VAT charged, do not allow you to claim VAT on the costs associated with making these supplies. While it may seem that there is no difference in the ”rate”,  picking the wrong one will result in incorrect reporting on your tax return and potentially under-declaring your overall VAT liability, leading to significant interest and penalties.

Companies operating in places like Vietnam face even more onerous VAT guidelines. In Brazil, Vietnam or India, 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.

Countries like Spain (SII) and Hungary are now requiring real-time or close to real-time disclosure of detailed invoice information to the tax authority. Italy has gone one step further and mandates pre-clearance of certain invoices before issuing them to a customer.

Solving tax issues costs time, money, resources

No matter where a company does business, it is the company’s responsibility to keep track of all relevant indirect taxes, report them accurately, and pay them on time. Failure to do so can result in costly 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 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, indirect tax compliance issues can cost a company in countless other ways too. Over-paying taxes means revenue 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 how indirect tax errors can add up, as part of a company’s operations. Inefficient, error-prone processes require analysis and training to be 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 software can help

The tax complexities of multiple jurisdictions are why most companies use some form of indirect tax automation software to help track and calculate their organisation’s tax obligations. But such packages 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 specialise in software dedicated to tax compliance. An efficient, accurate solution like ONESOURCE Determination can provide frictionless support, freeing up time, resources, and energy that can be dedicated to ensuring the organisation’s future, rather than grappling with mistakes made in the past.