The road to VAT (indirect tax) automation - The parameters required 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. This is the sixth one whereby I discuss what parameters are needed to automate. 

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 again ... let's continue on the road to VAT Automation.

The parameters needed to automate

 

The number of parameters available in the ERP system and the number of parameters which can be used for the determination and reporting by the selected VAT automation solution are determining the extent to which you can automate as well as the quality of the outcome. The quality of the outcome meaning: the extent to which you are compliant.

 

Goods v services

A first distinction to be made, however obvious it may seem, is the difference between goods and services. Care should be taken about the fact that some goods may be considered to be a service in other jurisdictions and vice versa. Again, a worldwide collaboration of all regional or local teams is necessary when doing the analysis.

The optimal approach for goods is to link them with the international HS (Harmonised System) customs classification; this also allows you to link VAT rates to specific products. Unfortunately, not very often ERP systems store these useful parameters. The needs for business operations and for VAT automation needs do not always fully coincide. Often, the ERP system only takes into account the strict needs for business operations when it comes to detailing the goods in the material database. At sales side, goods are sometimes quite well detailed (initially for business operation purposes) but c.q. also allowing to determine the VAT regime or VAT reporting. However, at purchasing side, the situation is very different; some goods may simply be missing in the database. Goods should not only be detailed up to the extent that the VAT rate can be attributed to a specific good – even that is not always the case - but also to the extent that a certain good may require a specific VAT treatment. Some common examples are the deduction of VAT for certain goods, the fact whether goods are subject to excise duty or other specific taxes or not, but also whether reverse charge applies or not, all the aforementioned (and many more) situations may differ per type of good. If the entire business uses a global material database and is supposed to automate its VAT through this global material database, then it should be detailed enough to allow for each jurisdiction to be compliant. Some parameters detailing one good may thus very well be superfluous for some jurisdictions whereas they are needed to distinguish the tax treatment in other jurisdictions. You can choose to either set up a global database of all goods detailing all parameters (and if possible indicate which ones are specific for what specific jurisdictions) or you need to set up (and maintain) local databases. It is not to be recommended to use a global database set up and ignore the specificities for certain jurisdictions and have them deal with these specificities in a manual way. Remember, you are automating.

The same applies for services. Unfortunately, for services, there is no such international standard as the HS codes for goods. The UN-CPC code is one of the better-known service classification codes; however, it does have its limits and there are many more of these sorts of classification codes. As for goods, your services classification should be detailed enough in order to be able to distinguish to such an extent to be able to automate. Especially in the field of services, the type of service is often determining the way VAT is calculated and by whom it is paid, or even whether an exemption may apply.

 

Ship from / to v who is who

Ship from and to countries are likely the first parameters to be mentioned when referring to automation. Yes, most if not all ERP systems have them in their tables. Though, the concept of ship from and to is only to be used in a goods context. However, especially for services, it is often important by whom the services are rendered and who is the actual recipient of the services and where those respective parties involved are established or not. Of course, when supplying or purchasing goods, the detailed information about the supplier and customer may also be crucial to do a correct determination or reporting.

VAT registration numbers, especially within a EU or even broader European context are a very important parameter, especially given the fact that one business partner may not only have VAT registration numbers in various countries, but he may also have VAT registration numbers of different types: established as such or via a fixed or permanent establishment, registered with a tax representative or just in his own name. These facts may influence the determination of the VAT regime and the way of reporting or the reporting requirements.

Often seen for purchase transactions is that the supplier’s (used) VAT registration number is simply not stored in the ERP system, let alone that the type of VAT registration number would be indicated. The supplier’s VAT registration number is however a required field in many reports, how to automate if this is not foreseen in your ERP system?

 

Document and payment type

Document types are in many ERP system rather crucial to drive automation in respect of VAT reporting and even VAT determination.

The very minimum set of document types for indirect tax reporting are: invoices, credit notes, debit notes. Only three, and very often not even foreseen in the ERP system. Again, many reports require today the indication of the document type. In the EU, some jurisdictions even require an indication that it is about a simplified invoice or ticket: for sales you could argue to be using a different serial number for simplified invoices, but still then, a different serial number does not allow you to automate unless you build an extra piece of software which determines a different document type for these simplified invoices in order to allow your automation. Still, is using an appropriate document type directly in your ERP system not much more straightforward? At purchase side, you do not have any indication in your ERP to indicate that the document received was a simplified invoice or ticket at all, except for the document type.

When harmonizing and rationalizing tax codes and GL-accounts, it may be beneficial to do the same exercise in respect of the document types foreseen in your ERP system. Indeed, document types do go further than the indirect tax scope, so either, you only clean them up for indirect tax purposes, or, and this is very likely, you may have to consult other departments to achieve your standardization and rationalization.

A recent evolution also shows the requirement to report along the payment type (cash, bank transfer, credit card, ...). Another field yet to foresee thus.

 

You know what you sell, but …

The above examples of parameters are not meant to be an exhaustive list; on the contrary, the few parameters I mentioned are miles away from a complete list of parameters to take into account. The sector and jurisdictions operating in will also influence the number of parameters needed.

However, keep in mind, you (should) know what you are selling, but you never know what you will buy, especially in respect of miscellaneous purchases.

 

Defaults

Setting defaults is often a recourse when setting up an automation system.

Just remember that by setting defaults, you can easily create structural errors. All defaults set should be extensively tested and be retested in every single phase of the implementation and for every update. Too much work? Then, the answer is simple: do not default, but foresee the parameter in your ERP system.

Again, when setting defaults, it is important to have a full and in-depth understanding of the global impact of your defaulting exercise.

 

Conclusion

Setting the list of parameters you need for your VAT automation project is very important. Nobody will doubt this. But remember, it is also a global exercice.

Close interaction within your global implementation team is also for determining the parameters in your ERP utmost important.