Procure-to-pay (P2P) tax determination helps manufacturers reduce Value Added Tax (VAT) exposure and avoid wasting money through overpaid input tax
Many manufacturers use a procure-to-pay (P2P) digital procurement system to help them extract the most value from their procurement spend. But they’re often overlooking a significant aspect of that spend: the rules around accounting for indirect taxes such as Value Added Tax (VAT) or Goods and Services Tax (GST). At scale, the material impact of VAT can be staggering — and most manufacturing companies aren’t tracking this impact. In fact, in some cases, internal audits have revealed that they have overpaid tax by millions of Euros.
The first step toward controlling this spend is to understand it. Do you know if you are paying the correct amount of VAT on your inputs? Do you know how to calculate this globally across all tax jurisdictions – and do your suppliers? To optimise spend and protect your business, you need to know that your suppliers are charging your business at the appropriate VAT rate applicable. This will ensure that you are not making costly overpayments and that your input VAT determination is accurate.
Calculating the VAT you should be paying is complex and challenging. Get it wrong and you may end up underpaying or overpaying VAT, increasing your audit exposure, incurring penalties and interest, being slow to pay suppliers, missing prompt payment discounts, and more.
Overpaid input VAT creates cash leakage from your business
Manufacturers often overpay suppliers for taxes without realising it. And tax overpayments can be significant. For example, consider an enterprise that is buying computers across multiple locations. If certain computers are procured domestically at a standard rate of VAT, it’s important to segregate those from the ones that will be procured through the EU cross border acquisition (subject to 0% VAT under the reverse-charge mechanisms). Computer and IT spend often put large sums of money at stake, so it’s important to know when you should – and should not be paying the VAT over to the supplier.
You need to verify that your suppliers are charging you the correct tax. Manual processes can make this a slow and cumbersome process, but you need to notify your supplier of any errors and get them corrected. If this process is a slow one, you’ll not only miss any early pay incentives, but you’ll be slow to pay your suppliers, which may introduce friction into the relationship.
Additionally, any inaccurately charged foreign VAT to your organisation, will not be permitted as recoverable input tax by your local tax authority. Instead, you will have to recover the money from the supplier after allocating time and resources in tracking down the overpayments, producing proof, and going through negotiations with them and possibly their respective tax authorities too. In the worst-case scenario, your business might have to absorb this cost and directly impact the bottom line.
Whether the expenditures are for laptops, manufacturing components, or other business-critical resources, the impact of tax overpayment can accumulate quickly. It results in wasted money – money that could have been used to drive innovation, invest in manufacturing R&D or support digital tax transformation and other strategic initiatives.
Failure to account for input VAT accurately leaves manufacturers vulnerable to tax penalties
Another common tax issue to be aware of is the failure to attribute for input VAT accurately on purchases.
For example, consider an automobile manufacturer (generally assumed to be making taxable supplies) is buying consulting services across its various business units. However, a part of those services advises on the matters relating to sales of car insurance or on how to extend financing services for its car buyers. In such cases, only the VAT paid on services that are directly attributable as inputs for taxable supplies can be recovered by the business.
If you can’t claim full VAT recovery – that is, only partial recoverability is allowed – the calculations get more complicated. Tax penalties for incorrectly accounting for input VAT/GST can be significant. Unfortunately, you can easily make an error because of the complexities around partial recoverability, exclusions, EU or domestic reverse charges, and other similar exceptions.
Flawed indirect tax processes can also harm your relationships with tax authorities as it draws unwanted attention from tax authorities, generating the possibility of more frequent audits for years to come.
Get VAT right with P2P tax determination
The stakes for manufacturers are high for getting indirect tax right. Manual processes are fraught with errors, they are slow, and they keep your indirect tax professionals from more strategic work. To optimise spend, consider automated software that integrates data between a P2P system and indirect tax software for end-to-end tax process optimization. With the right solution, you can perform tax estimates upfront and calculate taxes consistently and accurately, giving you the confidence that you are paying the correct amount of tax.
For example, Cisco Systems, Inc., a leader in networking solutions, was seeking a solution that would enable its indirect tax professionals to respond to and fully support the company’s rapidly changing global business environment. The company’s tax professionals in each country wanted access to the tax system to manage tax determination for their business units and ensure that they correctly met the requirements of the tax authorities wherever they did business. They needed a global transaction tax solution that could seamlessly integrate with their mission-critical Oracle E-Business Suite and provide accurate tax determination for all sales and purchase transactions at the line and item level – as well as at the total invoice level.
Migrating to Thomson Reuters ONESOURCE Determination, a centralised, automated solution, dramatically improved the indirect tax department’s ability to respond rapidly and accurately to business change. With its new solution, Cisco was able to significantly increase the accuracy and consistency of VAT determination on all sales and purchase transactions worldwide.
Automation of tax determinations and accurate attribution are significant benefits of an integrated tax software solution. With automated processes, organisations can streamline invoice reconciliation and use accurate tax accounting to help minimise the costs associated with manual tax processes. For example, Lenovo, one of the world’s largest manufacturers of personal computers, was seeking to streamline and integrate the company’s transaction tax processes with its finance applications on a global basis.
Optimise your spend management with integrated P2P and indirect tax processes
Close integration between a P2P digital procurement system and indirect tax software is the key to getting tax right. ONESOURCE Determination can help you avoid wasting money through overpaid or inaccurately charged input tax and reduce your exposure to audits, tax penalties, and interest. With fast and accurate calculations, our manufacturing indirect tax software also helps you respond more quickly to support business and system changes on a global basis. In a market environment where business agility is crucial, it pays – sometimes millions – to have absolute confidence in your tax, sales, and purchasing processes.
Avoid leaving money on the table from overpaid input tax and protect your operational spend with ONESOURCE Determination.
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