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Multinationals: what is the impact of running various ERP systems or legacy systems from a VAT perspective.

Value Added Tax (VAT) Tax Automation
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Richard Cornelisse
In the last decade, companies have increasingly automated their business processes. The most common method is by using an Enterprise Resource Planning (ERP) system.

Such a set up can be hugely complex.

This is definitely the case where it relates to European based indirect tax. As manual processes are subject to human error, automation could - under circumstances - result in performance improvements and savings.

A third party tax engine might be a better solution than improving the indirect tax functionality of its own ERP systems when the organization uses multiple ERP systems. Interfacing via a bolt-on could be a better alternative.

ERP systems such as SAP and Oracle either determine the VAT treatment (liability and VAT recovery) of businesses’ transactions automatically or this is a (semi) manual process.

Multinationals run often various versions of ERP systems or legacy systems without harmonization. The ERP set-up is often per business unit and thus multiple set ups per country are possible.

This could be the root cause that:

- running of system's exception reports to look for missed opportunities, under claimed VAT and potential fraudulent transactions is still a challenging exercise
- a lot of manual (re)work is often needed to file the VAT reporting and reconcile the VAT numbers due to the use of multiple spreadsheets and various data sources (divisions, different systems)

The latter is interesting as spreadsheets are usually found at critical points in the audit trail
 and are designed by non-specialists with no system expertise

An ERP system is not just an accounting system but also provides information about planning and production as well as being able to produce invoices and various reports.

The advantage of these systems is that management information is readily accessible and that should give some food for thought for tax auditors as well.

Transactions from various business units can be monitored and managed on time. Is this something to take in consideration during updating or setting up your 'Tax Controversy Strategy'?

The decision to adopt a particular ERP system is usually made for business reasons whereby the VAT administration is only a minor consideration or not considered at all.

Despite that according to Sarbanes Oxley the configuration of the VAT rules in an ERP system is a 'material weakness' audit item (a 1% mistake or less often impacts shareholders value), in practice, it is often still overlooked.

The Global Survey of 'KPMG Benchmark 2012' confirms again that indirect tax policies are either not documented or monitored properly.

VAT as a transaction tax is an essential element within the ERP system. The impact of the 'VAT Throughput' should be understood and managed properly within the organization.

The advantage is that Indirect Tax functionality can be automated (full or to a certain extend) in a company's own ERP system especially if SAP or Oracle is used.

It is about mitigating of risks and reduce the amount of manual work and rework (the 'hidden factory').

Is the functionality of the ERP system used at full VAT capacity? What are the gaps and consequences?
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