Leveraging Existing ERP Technology: A Hybrid Approach to Indirect Tax Compliance

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A truly global solution will use existing ERP technology, coupled with specialized tax solutions to improve performance and protect a firm from unwanted risk.

Since their inception, implementing an enterprise resource planning (ERP) system has been an ambitious undertaking. Costing potentially multiple millions of dollars to install, companies want to leverage their automated ERP software—designed to link functions such as accounting, inventory control and human resources across an entire company—to do as much as possible. But when it comes to indirect taxes, is it possible to rely on an ERP system alone to achieve full compliance?

It’s more difficult than one may think. The expansive indirect tax market landscape (also known as transaction tax, sales and use tax, value-added tax (VAT) compliance) is undergoing a regulatory evolution. In 2013, there were more than 350 rule changes that affected value-added taxes and goods and services taxes worldwide. More changes, including the controversial new 2015 VAT rules which will apply to telecom and cable company customers throughout the European Union, are on the way. These complexities create a host of potential pitfalls, and as a result, more tax, information technology and finance resources are needed to support the process.

Relying primarily on an ERP solution to manage indirect tax will not necessarily result in your objective of saving time and money as you manage indirect taxes, or in reaching higher levels of accuracy. In fact, companies that exclusively use automated ERP systems to track their indirect tax processes spend significant resources complying with local tax laws to ensure they calculate the correct amount of tax for each of their foreign operations. That’s because an ERP system generally only provides basic tax determination capability. While it may be configurable, this can result in costly IT expenses and creates a process where the tax department loses control and visibility into the tax policy being established.

Another shortfall is that the ERP systems generally do not provide ongoing tax content, leaving the ever-changing tax rates, tax calculation logic and item taxability in the hands of the corporate tax department to attempt to manage. Also, although configurable tax code-based reporting can be possible within an ERP system which may be extended to provide box-level tax return reporting, the ERP systems fall short and are limited when it comes to the more complicated task of determining and calculating tax on certain types of taxes or complying with certain regulations. As a result, many companies struggle while trying to find other means to deal with complex and frequently-changing tax rules and rates, regulatory variances in other countries, or rules that are independent from ERP software.

So if complete automation is out with an ERP system, what is the answer? For an increasing amount of companies, it’s a hybrid approach. By melding the best of the ERP systems with the best of a focused indirect tax solution, many companies are finding ways to reduce cost, complexity and risk around indirect tax.

Take Lenovo, for example. As one of the world’s largest personal computer manufacturers with businesses all over the globe, Lenovo is subject to some of the most complex tax structures. An ERP solution alone would not allow Lenovo to account for the various regulatory deviations around the world, so the company turned to a hybrid approach that combined the flexibility and scalability of an ERP system with the domain-specific expertise from a specialized indirect tax solution. This helped Lenovo understand the overall impact of new configurations, guaranteed data integrity, and accurately determined their tax and compliance responsibilities in various countries. As a result, they were able to consolidate their indirect tax compliance processes into a single interface without missing any nuance. This ensured that all tax decisions were timely and accurate.

This streamlined approach allowed tax decisions to be made at the time of a transaction, and ensured that accurate data was used for both the determination and compliance process. It also provided the ability to maintain data for more than 1,500 global tax codes with minimal IT resources.

In a constantly-changing global marketplace, leaning on an ERP system alone to handle indirect taxes is just not enough. While it may seem like the simplest answer, the reality is that there are “no one size-fits all” solutions to today’s complex indirect tax challenges. Today, a truly global solution will use existing ERP technology, coupled with specialized tax solutions to improve performance and protect a firm from unwanted risk.

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What's BizTax Insights?

A blog from Thomson Reuters, a source of intelligent information for businesses and professionals.

Contributors

Carla Yrjanson

Carla Yrjanson is the Vice President of Tax Research & Content for Indirect Tax within Thomson Reuters. She leads the Tax Research & Content Team which is responsible for delivering Sales/Use...

J. Harold McClure

Dr. James Harold McClure, senior manager of transfer pricing at Thomson Reuters, has over 18 years of transfer pricing and valuation experience and has authored a number of papers on the subject....
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