Indirect Tax Compliance Challenges in Accounts Payable Automation

Alex Forbes
September 19, 2019

AP automation is supposed to save SAP customers money, but developments in digital tax could derail its benefits and actually create further liabilities. With tax authorities all over the world seeking to increase revenues and close tax gaps, IT professionals and AP system administrators face new challenges in indirect tax compliance.

Among those challenges are supplier invoicing errors, which have led companies over time to adopt different types of AP automation systems that specialize in maximizing business controls. In addition to business inefficiencies, supplier errors can lead to buyers losing a significant portion of the invoice value in irrecuperable tax. AP departments also face potentially costly complications in dealing with sales and use tax in the U.S.

Complicating the situation is the diversity of AP systems themselves. As SAP customers began to adopt AP systems over the last two decades, they often did so piecemeal, rolling out a specific solution based on a category of supplier or the territory in which the supplier operated. As a result, most SAP shops employ multiple types of AP systems, each of which serves different business purposes and is configured differently. 

VAT determination challenges for AP automation systems 

Why has the challenge of multiple AP automation systems and their weaknesses in the area of indirect tax functionality become so pronounced? It’s always been paramount for trading partners to determine the right taxing jurisdiction and apply the right tax rate for every item in a supply chain. Now, however, in an increasingly real-time tax control environment, getting invoices right or correcting them quickly has become critical to keep supply chains moving. 

In many modern tax compliance models, including clearance-model electronic invoicing, a tax administration needs to approve a company’s invoices before that business and its trading partners can proceed with the next step in the transaction. That often includes physically dispatching the goods in question. Therefore, having the wrong VAT rate on invoices doesn’t just expose a buyer to fines; it can also damage operations substantially, such as when shipments simply don’t arrive or suppliers don’t get paid. 

Some AP automation systems, such as cloud-based third-party supplier portals for procurement and invoicing, actually try to issue as many invoices as possible “in name and on behalf of” the supplier (for example, by flipping a purchase order into an invoice), which provides a great opportunity for buyers to help suppliers deal with indirect tax determination via a tool they control. 

In other types of AP automation situations that don’t pursue such a three-corner strategy, and where the formal invoice is still issued in the supplier’s system, the best a buyer can do is catch suppliers’ VAT determination errors as early in the AP approval process (upstream from the ERP and invoice booking) as possible. Being able to return an invoice that doesn’t carry the right rate(s) or associated invoice data with suggested changes – immediately upon receipt of that invoice into the AP approval workflow rather than much later when all business-related approvals have already happened – saves resources and avoids costly business interruptions.

Sales and use tax complexity and AP automation 

AP processes also play an important role in sales and use tax compliance on purchases, which is low-hanging fruit for auditors. In the U.S., for instance, states and the IRS continue to digitize efforts at tax collection and enforcement. The South Dakota v. Wayfair Supreme Court decision on remote seller state sales taxes has complicated this process for many suppliers. With new economic nexus standards, sellers need to determine whether they are complying with new mandates, while purchasers need to make sure that sellers are. Additionally, some multinationals with sister companies selling into the U.S. may want to rethink who their equipment distributor or selling entity should be to avoid potential disruptions caused by new state filing requirements

With the potential for error, regulators will be looking increasingly at how much companies pay in sales tax. 

Globally, paying too little in indirect taxes such as VAT or GST can trigger an audit, so SAP users must be able to verify their suppliers are calculating and assessing tax correctly. For those purchases where the supplier may not charge tax, AP departments must have solid processes and technology in place to accurately self-assess tax where applicable.

And the risk goes beyond audits. While paying too little in indirect tax can lead to regulatory trouble, paying too much can dent profitability and diminish cash flow. Again, blindly relying on suppliers to determine indirect tax rates is not a sustainable plan. SAP shops need to ensure their AP systems provide clarity and accuracy on tax rates paid, as well as on rates charged.

Take Action

Download the eBook, “Accounts Payable Tax Compliance: 5 Challenges SAP Shops Must Overcome,” and overcome supplier errors and AP system diversification while ensuring domestic and international tax mandates don’t derail your SAP S/4HANA digital transformation.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Alex Forbes

Alex Forbes is Senior Manager, Content Marketing, at Sovos. When not helping readers navigate their tax-related digital business transformation journeys, he enjoys day tripping around New England with his wife.
Share This Post

LATAM VAT & Fiscal Reporting
May 20, 2020
Sovos Acquires Taxweb, Extends Tax Determination Capabilities in World’s Most Challenging Compliance Landscape

Earlier this month Sovos announced its second acquisition of 2020, completing our solution for Brazil with an unparalleled offering that solves tax compliance in the place where it is most challenging to do so.  Too many companies doing business in Brazil have been burdened by managing multiple point solutions for continuous transaction controls (CTCs), tax […]

EMEA IPT
August 12, 2020
Can IPT Drive Behavioural Change in the Population?

Unprecedented times. It’s a phrase that’s been used so much of late but the pandemic is certainly not the first incident that has adversely affected society on a global scale. Before coronavirus, there had been a strong focus on environmental issues and initiatives. With an increase in extreme weather incidents over the last decade, governments […]

E-Invoicing Compliance EMEA
August 12, 2020
Portugal: Details on the QR Code and UUID Expected

In February last year, the Portuguese government published the Law Decree 28/2019 rolling out changes affecting e-invoices. The goal of the Law Decree is to simplify and consolidate pieces of law that are scattered around the Portuguese legal framework. However, the effectiveness of many of those rules is still dependent on further regulation, such as […]

ShipCompliant
August 11, 2020
10 Steps to Expand Your Winery

Looking to enter a new market or bring new wines to the marketplace? Growing any business can be complicated, and the beverage alcohol industry is no exception. Not knowing how or where to begin can be the biggest hurdle. From market research and branding to strategic considerations and compliance, this 10-step guide will get you […]

ShipCompliant
August 10, 2020
Ask Alex: Your Bev Alc Compliance Questions Answered (August 2020)

Do you have questions about the rules, regulations, and compliance requirements of the beverage alcohol industry? This series, Ask Alex, is a perfect opportunity to get those pressing questions answered straight from one of the industry’s regulation and market experts, Alex Koral, Senior Regulation Counsel, Sovos ShipCompliant.  To take advantage of this opportunity and get […]

Tax Compliance
August 7, 2020
GAO Urges IRS to Overhaul 1099 Reporting for the Gig

A couple of weeks ago, the Government Accountability Office (GAO) released a report to the Senate Finance Committee describing the issues the IRS faces in enforcing income tax compliance for gig economy workers. The report highlighted long-standing issues the government has been grappling with in receiving tax information necessary to enforce compliance along with specific […]