The road to VAT (indirect tax) automation - What to automate ?

20+ years of experience in VAT automation motivated me in writing the ‘road to VAT automation’.

I tried to formulate it in different topics. My texts are meant to trigger discussion: How did you cope with VAT Automation in your company? What experiences you want to share? What questions you have? 

I will be using the word ‘VAT’ throughout the entire blog, but it does cover indirect tax systems called GST as well as sales tax.

Off we go … on the road to VAT Automation.

 

What to automate ?

When automating VAT, the first choice to be made is about what to automate:

• VAT reporting

          and/or

• VAT determination

 

VAT reporting automation

VAT reporting automation allows you to obtain some relatively quick results in respect of automation and maybe savings. Instead of spending hours and hours on manipulating spread sheets facing a high risk for making errors you can make your reports immediately and preferable in the format to be uploaded or to be sent to the authorities. A basic condition though is that the data to be reported is extracted straight from the ERP system and that the data extracted is complete and of high quality. 

The downside is however that the data reported may be not correct, depending on the reporting tool used, a number of validation checks is done, however, there is still room for errors.

Further down the road I will write a blog on the need to have a complete set of parameters available in your ERP system.

 

VAT determination automation

VAT determination automation, whereby the applicable VAT regime is calculated by means of a VAT engine, allows you to determine the correct VAT regime applicable on every single transaction at source. The use of an engine should ensure you that the VAT calculated on every single transaction is correct. In this respect, a basic condition is that your ERP system has sufficient parameters available in order to make the calculation and on the other hand, that the engine makes use of a sufficiently detailed set of parameters to do the calculation. Setting defaults kills the correctness of the outcome. There is more to come on this subject in another blog.

The downside of only automating the VAT determination part is that you do not save much in the field of man hours needed to do your reporting. Furthermore, this can also be a lengthy project, since many different data fields are to be consulted, a calculation to be made and moreover data is to be written back into the ERP system if the engine is an external calculation engine which is most often the case.

 

The best way forward?

It is thus fairly clear that combining both ways of automation is the best, but often long, way forward. Since it is often quite a long way in order to achieve the desired automation level, do not defer this decision too long anymore. Why?

Back in time, not more than 3 to 5 years ago, most tax authorities asked for periodic and aggregated reports. For most countries it was okay to file a monthly or quarterly VAT return and sometimes some additional aggregated lists like e.g. the VIES lists in the EU or some customer and supplier lists.

Times have changed and are changing fast currently.

 

Aggregate v real time reporting of every single transaction

Real /short time reporting deadlines are more and more becoming a fact, but also reporting per transaction line is becoming a very trendy requirement by the tax authorities.

To me, the pure fact of requiring real-time or short time reporting is a mere IT-issue: your system should be e.g. adapted in order to be able to transmit the data in an automated way on a real-time or regular basis and should be able to capture return messages, just to name a few requirements. However, the reporting per transaction line requirement is much more adamant. In some jurisdictions for every single sale or purchase all details must be reported to the tax authorities, details which were in the aggregated VAT reporting era only provided to the tax authorities at the time of a VAT audit. If you combine this with the real/short time obligation, this means that tax authorities are immediately in the possession of all details of all transactions. When filing monthly or quarterly aggregate reports often corrections are made at the time of filing when errors are detected since the VAT returns are prepared by VAT Compliance managers and their assistants. When real/short-time is put in place, it is very often regarded as an IT project with little intervention from the VAT manager, the focus often lies on getting the data transferred instead of ensuring the correctness.

 

My advice

Hence it has become very important that the correctness of the VAT determination is validated at the time the transaction takes place in order to ensure the quality of the data at source that will be reported. 

So, therefore, my advice:

• be careful when putting defaults,
• write many and detailed test scenarios,
• run those test scenarios frequently, also when being live. Legislation does change.
• put the focus on being compliant next to the data transfer requirements

It is not easy, but so necessary, that the VAT manager is involved in the VAT automation project from the very first step, even before the first steps are made in the project. Therefore my advice to all VAT managers: do network a lot within your company, so that you get aware of upcoming projects as soon as possible!

 

Isabelle Desmeytere

VAT Technology Implementation Consultant - VAT Interim Manager - VAT Software Developer

isabelle@desmeytere.be