Tax and supply chain management are often considered to be two distinct disciplines, but this view misses an opportunity to leverage the business benefits achieved by an automated and integrated tax department.
The evolution of transaction tax management is a rapid affair. In the early 1990s transaction tax specialists were mostly the domain of the big accounting firms. Now any self-respecting multinational wouldn't be seen without at least one international transaction tax specialist.
A second evolution is occurring. Tax departments are benchmarking their headcount and services to be best-in-class. There is more focus on value creation, and on how much time is spent on compliance versus more value-added activities, such as planning and business advising. Within transaction tax such opportunity exists in the world of supply chain management — a world of logistics, global sourcing, customs duties, incoterms and free trade agreements.
Rarely are transaction tax and supply chain management mentioned in the same sentence. Yet there are many dependencies where the tax department and the supply chain team need to be working together:
Understanding Transaction Tax Impacts on the Supply Chain
- Procurement. Any procurement team performing global sourcing should be focused on landed cost, which is the true cost of the commodity including freight costs, customs duties and brokerage costs. The foreign supplier may well be 20 percent cheaper than the local supplier, but is that still the case when calculating the full costs of getting it to your door? Any procurement team that is not considering transaction taxes in their landed costs could be making an expensive mistake as normally recoverable value-added tax (VAT) and goods and services tax (GST) can sometimes become an expense that should be factored into landed cost.
- International Logistics. Drop shipments, multi-national contracts and triangulation have long been the staple diet of the transaction tax specialist, but too often this is focused on the outbound supply chain to the customer at the expense of in-bound supply chain or manufacturing models. If the logistics team is tinkering with the supply chain, trying a few new routings or looking at direct shipments, the transaction tax specialist needs to know about it.
- Incoterms. Incoterms, such as Ex Works (EXW), Free Carrier (FCA), Delivered Duty Unpaid (DDU) and Delivered Duty Paid (DDP), govern the buyer's and seller's responsibilities. These are normally well understood by the transaction tax specialist, because some can impact the importer of record and who has the liability to import VAT. Who in your company determines the incoterm policy, and who handles any exception requests from customers or suppliers? Probably not the tax department. Decisions on incoterms, without the involvement of the transaction tax specialist, could be a financial risk, and failure to use incoterms to help structure tax-efficient international transactions could be a missed opportunity.
- Cast Flow. This is the king of the business world. Transit times, incoterms, rapid customs clearance, sourcing decisions and pipeline inventory all impact cash flow. Any supply chain presentation has cash flow impact as the bottom line. Yet consider this: With an average international transaction tax rate of 15 percent on most sales and purchases the transaction tax specialist has a greater impact on cash flow, even if, eventually, it washes through.
- Customer Satisfaction. When your invoicing system calculates an incorrect amount of transaction tax, the reaction is often to think about compliance impacts. But the customer will either get frustrated if you can't get your invoicing right, look at it as an opportunity to defer payment or make a short payment (pay the net, but not the tax). Adding tax errors as a metric to drive credits, re-bills and payment issues may increase awareness that incorrect tax is a customer issue, not just a compliance issue.
- Audits and Compliance. It is now pretty common for the tax team to be involved, or at least aware of, customs audits, especially if they are focused on valuation and transfer pricing. Does the tax department always gives the customs team a heads up on transfer pricing policy changes, advance pricing agreements (APAs), transaction tax audits and other such events? In addition, Sarbanes-Oxley requirements and the increased focus on corporate governance drives the need for greater collaboration across the entire supply chain.
So what does this all mean? Bottom line, it's an increased awareness of the impact that transaction taxes have on the overall supply chain, sourcing decisions, customer satisfaction, cash flow, quote-to-cash and procure-to-pay processes that can create business value beyond tax savings. Is there another function that touches every single transaction in and out of the company and in such a big way?
Many Tax Departments Lack Sufficient Technology Support
Generally, the transaction tax professional has had a limited set of tools available to him or her. For the lucky supply chain folks, the main enterprise resource planning (ERP) suppliers provide immense capabilities in pricing, warehousing management and logistics management; but even then many purchase additional supply chain software solutions. In contrast, the ERP systems only provide basic transaction tax functionality to calculate tax on sales and purchase transactions, and some reporting options focused around basic compliance functionality.
So the tax department needs to look beyond their company's ERP system if they want to see transaction tax across the entire enterprise, create what-if scenario planning, perform non-standard analysis and have a one-stop shop for transaction tax data. This is where implementing a transaction tax technology solution becomes critical in the shift of the transaction tax department from afterthought to a more creative value-add strategic advisory and planning organization. All this is required to recognize transaction tax for what it really is: an integral part of the supply chain.
Selecting a Transaction Tax System
Thankfully, new technology is available to help the tax team with this new strategic role. When selecting a transaction tax application there are many things to consider: Is the solution a desktop U.S. sales and use tax application, requiring custom engineering for supply chain or ERP system integration? Was the solution created for sales and use, with VAT and other transaction tax functionality as an afterthought? Look for a solution built from the ground up to cover all transaction taxes. This provides a consistent tax approach, as well as a global view across all countries and across all types of transaction tax. Other functionality for which you should look includes:
- One centralized system that calculates all the transaction taxes worldwide, independent of ERP or supply chain platform. It's no longer necessary to maintain different logic in different ERP systems and manually consolidate tax information. With a comprehensive transaction tax solution, all data is in one place in one consistent form. Global visibility to the transaction tax picture across the enterprise is immediately available, making it much faster to do tax compliance checks, determine cash flow impacts and provide audit trails that help meet Sarbanes-Oxley requirements.
- An application that interfaces directly with financial, supply chain and ERP systems, in real-time, and replaces the ERP system's own transaction tax calculation routines with a more comprehensive and complete calculation functionality for sales and purchase invoices.
- Centralized tax setups, regardless of ERP platform and in an intuitive way, allowing the tax department to take complete control of setups rather than relying on IT.
- Integrated tax research, with automatic updates for rates, rules, and product and service taxability, freeing the tax department from maintenance tasks.
- The ability to do what-if scenario planning, to see how specific transactions would be taxed for better tax planning and cash management.
- Flexible reporting tools for analysis. If you want to identify drops shipments or transactions with specific incoterms before you meet with your supply chain colleagues then your new transaction tax system should help you do that.
In conclusion, there is an evolution in transaction tax management underway as we begin to understand the impact transaction taxes can have in the broader supply chain management space and the other business process areas that transaction taxes touch. Clearly such an evolution requires that transaction tax professionals have the desire to take the concept of transaction tax management and define new territories. It also requires having the right tools and data at your fingertips, for which the tax department needs to consider a centralized, comprehensive and specialized transaction tax solution. If all these factors are in place, the role of the transaction tax specialist can become very strategic indeed, and the seat at the supply chain table will be well deserved. (Article first published by Financial Executive Magazine)
About the Author: Neil Rees has more than 15 years experience in international transaction taxes and is a strategic advisor to Sabrix, a provider of consolidated transaction tax management software and tax research. He is also the director of Global Trade at a multinational company.