Procurement and Tax - Time to Integrate: Why implementing a third-party tax engine is the best approach.

• Author: Bernard, Michael

One of the most important functions at which companies must excel is selling goods and services with as little transactional friction as possible--particularly in today's world of digital commerce. Companies invest significant effort in the sales environment, but an equally necessary value-add for tax is the ability to purchase goods and services and pay the proper amount of tax.

For far too long, a struggle has existed between procurement and tax to rate purchases properly. Procurement systems vary widely--from sophisticated enterprise resource planning systems (ERPs) to other home-grown or industry-specific systems. Because these systems are generally built for procurement needs--speed and inventory control--existing tax calculations (which includes built-in and custom functionality that may not be updated) are often treated as "good enough" and may not identify incorrect tax or flag invoices for reissue by the seller.

Historically, when tax is improperly calculated on purchases, the tax department has often borne the responsibility in terms of cost and personnel by researching the correct tax or dealing with use-tax audits. If the invoice is found to be improperly rated at the time of payment, the vendor faces "short paying" or even not paying the invoice. In a VAT or GST transaction a company cannot deduct incorrectly charged taxes.

The best approach to overcoming these challenges is to implement a third-party tax engine. Adding a tax engine to a procurement system enables the tax department to control the tax calculation within the P2P process, taking the onus off procurement and the accounts payable department. Any discrepancies requiring correction will be flagged immediately and managed in the procurement, accounts payable, and vendor workflow. The engine has built-in transactional and fee data content that can then be mapped onto the purchases that procurement makes. The mapping ensures proper rating of the transaction and can produce exception reports when transactions are improperly rated.

Such a tax engine allows the organization to fulfill its business requirements through automated purchases and to benefit from reduced costs and a lower risk of audits. Procurement can continue to focus on its own strategic efforts, and IT does not have to load manual tax updates to the ERP or procurement system; rather, the updates become part of the monthly tax engine update cycle. Furthermore, the tax engine supports additional applications...