Manufacturers should ask these four questions to focus their Value Added Tax (VAT) tax strategy, avoid VAT overpayments, and control spend.
Controlling spend is essential at a time when manufacturers are experiencing an unprecedented level of stress from many directions. Given the amount of change in 2020, one important lesson learned this year is that many manual processes in VAT departments are costly to the business and cannot be sustained. Although it might seem counterintuitive, this is exactly the time when you should be thinking about automating those manual processes to protect and future-proof your business. If you do, you’ll discover considerable value in better managing tax to optimise spend.
One way for manufacturers to reduce spend is by improving controls on VAT obligations. Because each manufacturer has tax complexities that are specific to their unique operations, there is no one-size-fits-all approach. However, there are implications of indirect taxes that all manufacturers need to address. These include incorrect treatment of VAT charged by suppliers, potential penalties for excessive VAT recovery from the authorities, and maintaining good relationships with suppliers.
Manufacturers are experiencing amplified VAT complexities due to COVID-19
In 2020, the worldwide COVID-19 pandemic created major shifts in consumer behaviour that directly impacted manufacturers. Some manufacturers experienced an explosion in demand for their goods. For example, a sudden surge in demand for medical supplies and equipment had these companies scrambling to move inventory and ramp up production. For other manufacturers, demand dropped significantly. Still, others saw opportunities and were able to pivot to new high-demand product lines. In one case, an auto parts manufacturer rapidly retooled to manufacture medical masks that were in short supply.
If these stresses on manufacturers weren’t enough, interruptions across the global supply chain were exacerbated by geopolitical factors, such as escalating trade tensions between the US and China and a worldwide financial crisis. These various financial and political actions have placed a premium on supply chain diversification and a close re-evaluation of the manufacturing supply chain strategy – all of which is impacting investment and procurement portfolios.
Save money by avoiding tax overpayments and controlling hidden and unnecessary spend
Manufacturing is changing rapidly. Your tax team must understand the indirect tax obligations and complexities that result from purchasing decisions that are made to facilitate changes in operations. An EU based manufacturer is liable to pay domestic VAT from its local suppliers. And when they acquire raw materials from other EU member states, the supplier’s effective VAT rate charge is 0% and instead the recipient is liable to self-assess local VAT per the reverse-charge mechanisms. However, there may be errors in the VAT treatment applied by the supplier that can result in excess payment by the recipient or in some cases, even double taxation.
Your tax department needs to be confident that vendors are applying the accurate VAT treatment because inaccurate VAT payments can add up quickly to significant amounts of money. While overpaying input VAT can not only be costly, it also complicates or even jeopardises the business’ ability to recover that VAT under the course of its standard VAT compliance processes that can ultimately impact the bottom line.
A related concern is that tax authorities are ramping up audit activity to make up for revenue shortfalls, and this primarily focuses on your procure-to-pay program. Even slight errors in purchasing can have an enormous financial impact. A small failure to declare excessive input VAT for recovery can turn a modest and necessary investment into tens of thousands of euros in tax obligations.
The point is, managing and tracking these various taxes requires that your VAT teams understand the tax requirements for your industry in each tax jurisdiction in which you and your suppliers operate — and these requirements change often. Manufacturers are finding this nearly impossible when relying on manual processes because they impose enormous demands on the tax teams’ time and energy and require a high level of specialised expertise. On the other hand, automated indirect tax software solutions can eliminate those human errors, perform tasks more quickly and accurately, and liberate your tax teams to work in more strategic and creative ways.
Four questions to help you focus your manufacturing VAT strategy
Assumptions can lead to unexpected and negative financial impacts. These assumptions can lead to errors that result in money being “left on the table.” A frank appraisal of your VAT processes is a good place to start so that you can make the right decisions to improve efficiency and protect your business.
These four questions can help you with that appraisal:
- Do you know if you’re paying accurate VAT on manufacturing equipment, raw materials, and other goods and services?
Some manufacturing companies have done reverse audits only to find they had overpaid tax in hundreds of thousands and even millions of Euros. Those overpayments are hidden costs and can be significant.
- Do you know how to calculate tax globally?
Many manufacturing suppliers get this wrong. With e-commerce and other digital channels being rapidly adopted in different parts of the world, suppliers suddenly have a global reach, but they don’t necessarily have global tax expertise.
- Would you know if your manufacturing company overpaid taxes?
If you pay too much and it is discovered, the government is under no obligation to tell you about it or refund that tax. It is up to you to prevent overpayments — and if you find any overpayments, it’s up to you to request a refund which is also never straightforward as it can impact the output VAT charged by your suppliers and their relationship with their respective tax authority potentially.
- Do you know what is subject to tax?
How a product or service is defined and whether it is delivered locally or across EU member states can impact the VAT determination International and constantly changing supply chains and procurement channels require keeping up with VAT determination which can be complex for your local tax teams.
Manufacturing companies face unpredictable tax challenges
The challenges manufacturers face are exacerbated by rapid changes in regulations and tax codes, the breakdown and restructuring of supply chains, and shifting market demands. In the Thomson Reuters 2020 Corporate Tax Departments Survey, more than 300 tax managers and executives were asked to reflect on the biggest challenges facing their teams. Even before the global pandemic, 30% of the respondents cited a need for new technology as a major challenge. An additional 14% said they faced pressure to create greater efficiency, and 9% were juggling it all with reduced budgets.
Many of these tax leaders understand that technology and automation can help them address some of the challenges they are facing. They realise that technology investments can have an immediate and dramatic impact on the bottom line. And automating procure-to-pay processes could prevent tax overpayments and save money.
For example, Lenovo, a global manufacturer of personal computers, aligned its tax strategies with business processes by automating and integrating its indirect tax processes with Thomson Reuters ONESOURCE™ Determination. This allowed Lenovo to overcome the logistic and geographic challenges of consolidating corporate tax processes globally, streamlining and integrating tax processes with its finance applications.
With a single software solution for European and global VAT & GST regimes, ONESOURCE Determination automatically calculates all tax rates based on tax region and jurisdiction. For every requisition, purchase order, and AP invoice, our manufacturing VAT software automatically calculates the tax amounts quickly and accurately the first time, eliminating time-consuming calculations and rework. For companies like Lenovo, this is essential to ensure that VAT and other similar indirect taxes are calculated correctly in each of their locations around the globe.
2020 was the year where the global COVID-19 pandemic altered the world forever and introduced both significant risks and new opportunities for manufacturers. As your business moves forward, don’t let VAT inaccuracies cut into profits or keep you from creating distance between you and your competitors. Your organisation may be overdue for genuine transformation — moving from manual to automated processes — and this may be the best time to make it happen. Let us help.