The future of sourcing has never looked brighter.
Armed with digital procurement platforms, agile operational approaches, advanced analytics and other cutting-edge tools, leading procurement organizations look to the future with a focus on innovation, relationships suppliers and customers, and a decentralized operating model to support the business.
Yet clouds are looming on the horizon, even though many procurement professionals may not spot them: indirect tax risks are pending in most procurement-to-payment (P2P) processes. . While these risks are easy to mitigate, they often go overlooked due to the understandably inexperience with tax procurement.
Procurement is not alone on this point, and it should not be. Calculating taxes on purchase transactions and complying with applicable tax rules and rates (potentially hundreds of thousands worldwide) is the job of the tax group.
Yet for procurement teams to thrive in their increasingly transformative jobs, they must be aware of indirect tax risks. This requires having an idea of:
- What is indirect tax
- Why B2B taxes are more complex than B2C indirect taxes
- The handful of crucial P2P touchpoints that involve taxation
- Main indirect tax risks to monitor and manage
Define “indirect taxes” in public procurement
The description “indirect” refers to taxes that may be passed on to a buyer or a purchasing organization.
An indirect tax is collected by a transaction partner in the supply chain (usually, but not always, the seller), remitted to the tax administration (i.e. government) and then passed on to the consumer in part of the transaction price. Indirect taxes include sales tax, taxes on consumer use, value added taxes (or VAT, which is used in the EU and other parts of the world) and other taxes on goods and services (GST).
To complicate matters, more specific categories of indirect taxes – such as services tax, digital tax, digital services tax, entertainment tax, etc. – are also commonly used. In contrast, “direct taxes” refer to taxes that an individual or entity pays directly to the government. These include property tax as well as personal and corporate income tax.
B2B is much more complex than B2C
Accurate tax calculations are crucial from an accounting point of view, but this precision is difficult to achieve on purchase transactions. Different types of indirect taxes have different accounting treatments, depending on where the transaction took place, where the goods were shipped and / or the rules of the tax jurisdiction that apply. In the United States, sales tax is considered an expense. Outside of the United States, some indirect taxes are considered an expense, others are not.
The number of new taxing cities and district taxes that materialized in the United States last year hit a 10-year high – and that pace continued in 2021. The EU is advancing with the largest overhaul of its VAT rules, designed to keep pace with the widespread use of e-commerce, in more than two decades. In recent years, VAT jurisdictions around the world have also introduced new e-invoicing, self-billing and real-time reporting requirements.
5 tax-purchasing contact points
In addition to understanding the complex nature of indirect taxes on purchase transactions, procurement teams should focus on the following areas where procurement activities and tax management needs intersect:
- Master The data sesheep and supplier configuration – The objectives of this point of contact are to ensure the accuracy of the supplier’s address, delivery addresses and commodity codes must also be sufficiently detailed, or granular, for tax purposes.
- Requisition and order form – Users of the procurement system should clearly identify the correct delivery locations (i.e. delivery address) and select the appropriate commodity codes when making a purchase.
- Goods rthiseipt – It is important to keep in mind that a goods receipt may include indirect taxes.
- Invoice verification – At this point of contact, the taxes invoiced by the sellers must be validated; tax tolerances and thresholds should also be established.
- Invoice assignment – Once the invoice is validated and approved for payment, this data (including taxes invoiced by the vendor as well as any self-assessed taxes payable) must be transmitted to the general ledger in a resource planning system of the company (ERP).
3 risks to monitor and manage
When overseeing tax-procurement touchpoints, procurement groups should track common risks that can ultimately lead to visits from government tax auditors:
- Lack of tax knowledge – Tax compliance determinations are often ignored until much later in the procurement-to-payment lifecycle, typically at the time of invoicing and payments. This is a problem because Accounts Payable (AP) teams rarely, if ever, have the breadth and depth of tax expertise required to apply the correct tax codes.
- Overpayments and the underpaid – Misalignment of procurement and tax compliance practices can produce recurring errors that lead to underpayment and / or overpayment of a business. Underpayment of taxes generates increased exposure to audits and can result in substantial fines while damaging valuable relationships with suppliers.
- Ttechnological gaps – State-of-the-art sourcing platforms deliver major benefits in the form of cost reductions, greater volumes of spend data and better sourcing decisions as well as faster and smoother purchasing. However, these benefits may be limited when the tax calculations on purchases are not performed in an automated and accurate manner. Since procurement platforms typically do not have the tax data management functionality necessary to navigate a complex tax compliance environment, these tools must be integrated with advanced tax automation solutions.
Indirect taxes on purchase transactions are complex. Procurement teams can tame this complexity by gaining a basic understanding, knowing which touchpoints to look out for, and focusing on common pitfalls. This work will ensure that unforeseen tax compliance issues do not impact the bright future of sourcing.
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Vertex, Inc. is a trusted global provider of indirect tax software and solutions. The company’s mission is to provide the most reliable tax technology that enables global businesses to trade, comply and grow with confidence. Vertex provides cloud-based and on-premises solutions that serve specific industries for each major indirect tax line, including sales and consumer use, value added and payroll. Based in North America and with offices in South America and Europe, Vertex employs over 1,100 professionals and serves businesses around the world.