Indirect Tax Compliance Challenges in Accounts Payable Automation

This blog was last updated on January 19, 2024

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 compliance 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 indirect tax compliance 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.