How can manufacturers maximise VAT recovery with indirect tax automation software?
Recovering as much value-added tax (VAT) as possible is a sound business practice for multinational manufacturing companies. VAT rates are typically much higher than the consumption tax rates in the US. For example, Hungary has a 27% VAT rate, the highest in Europe. VAT liability can quickly add up to a significant amount of cash and tax leakage for businesses. Although paying taxes to your suppliers and tax governing agencies is a part of doing business, organisations are often entitled to recover the tax paid to their vendors in the form of input credits. Therefore, having a strategy for managing indirect tax spend is a good place to start.
VAT is a complicated non-cumulative tax that’s subject to significant regulatory differences from region to region. Tax collecting government agencies are focused on challenging and auditing as many of those refunds as they can. To keep the cash collections your business is entitled to, you must be a VAT registered entity and have an audit trail that captures the status of each transaction to show that it was appropriately charged (or exempted from) VAT. By accurately recording as many tax credits in your tax account as possible, you can reduce your net tax liability.
Three complicating factors for VAT calculations in multinational manufacturing
Most countries have multilevel tax structures with multiple tax jurisdictions, which makes it very difficult for multinational manufacturers to track VAT accurately and completely. Three main factors contribute to the complexity of managing VAT:
1. Ever-changing and unpredictable regulatory requirements and VAT liabilities. Changes to rules and regulations are inherent to the global tax environment. This makes managing indirect taxes especially complex for manufacturers because there are so many potentially taxable aspects to the manufacturing business. In any given year, there may be millions of global changes in tax rates, rules, regulations, and logic. Staying current with these changes and understanding them well enough to implement them accurately is a huge task.
2. Toll manufacturing. Modifications are often made to goods by third parties at various stages of production, which can lead to additional tax liabilities. However, it can be difficult to identify which goods and services are taxable and, if they are taxable, what the correct tax rate is. For example, when a vendor adds a cap to a bottle, is that a taxable service or product? What are the rules in that vendor’s tax jurisdiction? The answers to those questions can make a difference in your indirect tax liability. Knowing the proper way to account for every aspect of the manufacturing process in a global environment is crucial to paying the right amount of VAT and protecting your business from non-compliance issues.
3. Significant regional differences in VAT regulations. Internationally, some jurisdictions are known to be particularly active in terms of changes to their tax regulations — and regulations vary from one jurisdiction to another. Simply moving inventory or assets from place to place may trigger a VAT liability. In some countries, you may develop a tax obligation by simply moving in-country inventory. Moving inventory across borders will very likely result in an indirect tax obligation. Tracking, monitoring, and implementing these changes is impossible for any VAT team to do manually while being timely and accurate.
Successful VAT recovery for manufacturers: Follow the money
Successful VAT recovery is much more likely with a robust indirect tax software solution. With indirect tax software, you know every detail about your VAT transactions, including where and to whom the money went, when, and why. With the many complex VAT regulations across multiple jurisdictions, accurate tax calculations are extremely difficult to accomplish manually. The cost of getting it wrong can quickly add up to significant amounts of money.
For example, assume that your company sells 5 billion euros per year in finished manufactured goods. To make those goods, you purchase 3 billion euros in various taxable goods and raw materials. At an average VAT rate of 20%, you would have 1.6 billion euros in money under your management in the form of indirect tax obligations: 1 billion euros on the goods sold and 600 million euros on the goods purchased. It is your responsibility to track and manage this money to remain in compliance with VAT regulations. Your objective is to be accurate in your tax reporting and payments and to make sure you recover the VAT that you already paid.
Whether it’s in accounts receivable (AR) or accounts payable (AP), you want to make sure every VAT transaction is calculated properly. Miscalculations on the AR side that require you to go back to your customers for additional tax collections could eventually damage your reputation and cost you business. Miscalculations on the AP side could result in costly penalties and other legal liabilities. Either situation can negatively impact your competitive advantage and your bottom line, both directly and indirectly. You can ensure that your VAT calculations are accurate and timely with automated indirect tax software that gives you real-time visibility into your VAT obligations.
Simplify VAT compliance for manufacturers with Thomson Reuters ONESOURCE
ONESOURCE is an automated indirect tax software solution that helps manufacturing companies ensure that they stay compliant with VAT rules and regulations wherever they do business internationally.
The tax engine integrates with your enterprise resource planning (ERP) billing system, or digital P2P digital procurement system and receives data inputs for every transaction. It automatically logs information such as what you’re buying and selling, from and to whom, to whom you’re shipping, service provider location, what type of service is being provided, and more.
The tax engine determines the proper reporting authority, whether a transaction is taxable and at what rate, what the tax base and tax point in time are, the calculation basis, and when the tax is payable. At the reporting period, the system computes all your credits and debits to define your VAT obligation.
Manufacturers can reduce costs and increase efficiency with automated indirect tax software
Automated indirect tax management makes the impossible possible by accurately and appropriately calculating and reporting thousands upon thousands of disparate transactions in milliseconds. Users of ONESOURCE solutions have reported cost reductions of up to 50%, increased efficiency of up to 75%, and a significantly lowered compliance risk.
Using ONESOURCE indirect tax software to manage your VAT and other consumption taxes will reduce the chances of leaving money on the table. It also reduces the complexity of managing your taxes and the many related regulations, which increases your company’s ability to recover VAT and reduces your risk of being non-compliant.
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