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Accountancy Technology Tax - Opportunity Knocks

By Lesley Meall

July 2005 — If you are struggling to manage global transaction taxes with your legacy systems, it is time to explore other options.

Tax rates and regulations change with relentless frequency. The UK Budget in March introduced dozens of tax changes, the US has seen a change in tax law or rate every month for the past 20 years, and the rates for worldwide indirect taxes, such as VAT and other consumption taxes, go up and down like they're on a piece of elastic. Marry all of this with the increasing globalisation and consolidation of business, plus developments such as International Financial Reporting Standards and Sarbanes-Oxley, and you have an environment that is both a challenge and an opportunity for tax professionals.

'All these factors are contributing to a new impetus for flexible tax calculation and compliance services that can meet local needs on a global basis, and remain responsive in a frequently changing environment,' suggests Jon Abolins, vice president of tax and governance affairs with specialist software supplier Taxware.

As organisations including Amazon, BASF, Cisco, DaimlerChrysler and Hewlett Packard have discovered, a global transaction tax system can improve the accuracy of tax determination, cut compliance costs, and provide greater visibility. So, why do other organisations soldier on with the complex and time consuming hotchpotch of legacy systems that characterise many large international enterprises?

Tax is a complicated area: the scope for error is considerable and the penalties substantial, but ways of dealing with it vary from enterprise to enterprise depending on myriad factors. These include the expertise of their inhouse staff, which back-office accounting or ERP system is in place, where their main office is located, how many countries they trade in, and the unique way in which they manage and structure their business.

Beyond ERP

Specialist suppliers such as Coda, Microsoft Great Plains, Oracle and Systems Union all provide their users with built-in capabilities for handling indirect taxes such as Australia's goods and services tax, Japanese consumption tax, German VAT, and US sales tax. But they all mechanise it in slightly different ways.

Take Microsoft Great Plains and Sun Systems from Systems Union for example.

Because of its history and its international focus, Sun Systems can offer fiscal compliance in almost any country you care to mention; once users have set up the necessary analysis codes and categories. But as Shabbir Osman, managing director of Eclipse, a company that resells both packages, explains: 'Because Great Plains started life as a US product, and its fiscal compliance code is embedded, it has needed to develop a new "dictionary" for every country it has entered.'

Organisations such as SAP and Oracle also provide built-in compliance in this area. But they also cultivate relationships with partners such as Sabrix and Taxware, so that the necessarily limited scope of their products can be supplemented by international clients. 'Tax rates may seem relatively easy to monitor,' explains Abolins, 'but tracking specially taxed goods and services and cross-border transactions requires more resources than most corporate tax and treasury departments have available.' Not surprisingly, the frequency and complexity of change it necessitates is no more popular with suppliers of accounting applications.

Some organisations have dealt with the issue by outsourcing their compliance with VAT and other international consumption taxes. Specialists such as OBE and the Global Invoice Corporation will handle some or all of the electronic payment and presentment cycle on behalf of clients, relieving them of the burden of international compliance.

But when Cisco was looking for a way of maximising potential cost savings in this area, and exploiting changes in the international tax environment, it decided to supplement its global ERP solution Oracle 11i with software from Sabrix. 'It has given us the confidence that we will be able to handle the volume of transactions we have, and to streamline compliance on a global basis,' enthuses a Cisco spokesman.

'The big enterprise resource planning (ERP) suppliers don't want to get involved in the process of accommodating the volume of changes that transaction tax can generate internationally,' says Stewart Nivison, UK country manager for Sabrix. As he points out: 'The US alone has 8,000 different tax jurisdictions.' Europe has numerous VAT rates and differing treatments for various categories of goods and services.

For the first time, Cisco will be able to automate all transaction tax determination, calculation and reporting for its global transactions: order-to-cash, requisition-to-payment, inter-company and intra-company.

Streamline and simplify

'Organisations with complex supply chains that operate globally want to take advantage of changes in tax and technology to maximise their cost savings and explore tax breaks,' says Nivison, 'and this has created a need to rationalise.' The need to consolidate tax-related information from multiple back-office systems is a common motivation behind a specialist add-on.

'A lot of international corporates have more than one ERP in place,' says Nivison, 'making some degree of aggregation necessary.' If a company is using both SAP and Oracle, or multiple versions of one, this creates a level of complexity.

Until a few years ago, Hewlett Packard was supporting 165 copies of SAP and more than 150 application-specific tax calculation engines. But its search for a way to streamline its operations and avoid unnecessary costs has led to a shared services approach to ERP and international tax management, and HP now has only four copies of SAP and a single centralised global transaction tax management solution.

'The Sabrix solution delivers real time centralised transaction tax determination, calculation and control to my tax professionals,' says Dan Kostenbauder, VP of transaction tax at HP, 'along with sophisticated tax planning and modelling functionality they've never had before.'

Supporting so many different tax solutions previously led to sub-optimal cash management processes. HP estimates that overpayments, underpayments, days-sales-outstanding impacts, and recovery timing, all led to millions in avoidable expenses, and the company has saved millions in annual IT costs alone since the implementation.

HP tax professionals no longer need custom programming or IT to manage their tax system, and tax management has ceased to be a bottleneck. But according to Nivison, many corporate tax and treasury departments are unaware that they no longer need to grapple with an ever-increasing number of tax codes, or devote huge amounts of time and effort to the maintenance and management of their tax code selection manual.

'I think that tax professionals need to be educated on the possibilities of what a modern tax solution can deliver,' he asserts. 'A lot of accountants still think in terms of the restrictions of procedural legacy systems, rather than the possibilities offered by software that works on an object-oriented basis.'

Of course, this is not the only barrier. 'Tax is often the poor relation of the finance department,' observes Nivison. 'When business decisions on IT are made by senior execs, the last thing on their minds is tax.' The rising profile of corporate governance is changing this. As Nivison adds, it has created an environment where tax technology sits alongside ERP in terms of importance, and gives tax professionals an opportunity to raise their hands and demand systems that are good for the tax department and the business.

BUSINESS BENEFITS

Any organisation that supplies or purchases taxable, non-standard rated, zero-rated or exempt products and services across borders, or participates in triangular trade transactions could benefit from automating the tax compliance process. The advantages include:

  • protection against audits
  • the elimination of obsolete data
  • real-time compliance with changing tax laws
  • improved accuracy
  • centralised tax decisions
  • reduced costs