Understanding International Accounting: Global Indirect Tax and Procurement

MS. SCHWABENBAUER:  Hi, I’m Kristen Schwabenbauer.  Welcome to Tax Today, a Vertex podcast series.  On today’s episode, we’ll be exploring understanding the international accounting behind global indirect tax and procurement with two repeat contributors, Peter Boerhof, Vertex VAT director.  Peter, thanks for taking the time.  
    MR. BOERHOF:  Yeah.  Thanks, Kristin, I’m happy to be here.  I’m looking forward to this podcast.  
    MS. SCHWABENBAUER:  Great.  And Tiffany O’Neil, Vertex’s practice leader in Vertex consulting.  Tiffany, again, thanks so much for taking the time.  
    MS. O'NEIL:  Thank you, Kristin.  
    MS. SCHWABENBAUER:  So today we’re talking about the accounting aspects around indirect tax and procurement.  This is actually a topic that I’m excited to talk about.  It’s a little bit more challenging.  And it’s kind of one of the reasons why I think we wanted to do this podcast series.  
So, Peter, I’ll ask you first.  How confident do you feel in master data in the AP process?  And can you talk to us a little bit about that concept of master data in the AP process?
    MR. BOERHOF:  Yes.  I definitely can, Kristen, because yeah, with most processes it starts with the data.  And in the AP process, the procurement process, it’s quite a challenge, I must say, at least from what I’ve seen.  And there are two elements that -- it’s the master data that you refer to.  And then there’s also -- the second part is the transactional data.  
And let’s start with master data.  And, for example, if a purchaser enters a PO into an ERP system, he has to select the correct vendor.  And what you often see in these ERP systems is that vendors are actually registered multiple times because this registration is case sensitive.  It’s different punctuations and abbreviations.  So sometimes they can choose from three, four, or five different vendors that they’re actually the same.  
And on the buying side, so, the entry of the entity that’s actually buying, it’s quite relevant that the correct entity is selected including the correct VAT number and the ship to location.  Because if you, for example, have a German entity with a French fed registration, buying materials destined for France, the buyer has to make sure that the French VAT team number is included in the PO.  Because the invoice should not be erased to the German VAT number.  
    And then, stopping with this simple master data, example, assume that the master data’s all correct.  Then still you have to invoice processing in the accounts payable process.  And the invoice, at least in VAT is the leading document.  And the data on this document is not by definition completely in line with the PO data.  And, again, with an example, it may well be that the vendor had to ship materials from a different plant, and as a result, invoices with different VAT number that you expected when you bought your goods.  
And if this VAT number is not properly registered in the vendor master data, then the AP clerk cannot process the invoice.  And that leads to delays of dating of data et cetera.  So also processing the invoice, processing the transaction, yeah, can result in data issues.  So definitely data is a core element.  And you should feel confident, but I do know that’s a challenging area.  
    MS. SCHWABENBAUER:  Oh.  That makes a lot of sense.  Tiffany, do you have any thoughts on that as well.  I know with your experience implementing and especially working with VAT from a system perspective. 
    MS. O'NEIL:  Yeah.  I agree with Peter.  It is very difficult sometimes to get all the correct data that is required for -- in the system to automatically flow in the transaction.  And, you know, because you have various folks in the process entering data in different places, you’ve got different master data, potentially people making a purchase doesn’t know where something’s gonna be shipped from or what registration number needs to be on it.  So, from a system perspective, this is a challenge. 
    MS. SCHWABENBAUER:  Yeah, I would agree.  I can’t imagine how people are trying to find.  It’s almost like a paper trail of everything you need from a tax perspective.  So how does the AP process ultimately affect the accounting?  It seems to be, you know. I don’t know if it’s more complicated on the U.S. side or on the global side.  I think there’s two different perspectives there.  Peter, can you give us an idea of what we’re looking at from a global perspective?
    MR. BOERHOF:  Yes, I definitely can.  And I’m a bit biased here.  So, I approach this from kind of an SAP process kind of perspective.  And one of the aspects in AP that has to be done and that’s extremely important for VAT accounting is text coding.  And assigning a text code to an AP invoice determines how the invoice is accounted for VAT purposes.  
So even if all data is correct and the invoice is correct, assigning an incorrect text code can result in incorrect VAT accounting.  And as a result, also an incorrect VAT reporting.  
    And also to elaborate on this a bit if you have a Belgium invoice with 21 percent VAT and you assign a Dutch tax code to this for 21 percent VAT, this invoice will actually be reported in the Belgium VAT return instead of the Dutch VAT return.  And this sounds like a theoretical issue, but it actually really happens in practice in this AP accounting process.  
And it’s also at the same time considered by the tax authorities to be quite a serious issue to report VAT in incorrect country.  So, this also often leads to penalties if this is discovered.
    And another scenario is if an invoice does not contain any VAT amount at all.  And this could, for example, by the case if VAT exemption is applied or if there is zero percent VAT for export of intercommunity transactions or if a reverse charge is applied for for services.  And assigning the correct tax code on these kind of invoices is crucial otherwise the VAT reporting gets messed up.  
So, starting with data and then starting with processing in AP and assigning a tax code, there’s quite a lot that can go wrong from a global perspective in VAT accounting. But I don’t know exactly how that matches up with let’s say the accounting from a U.S. perspective.  
    MS. O'NEIL:  Well, I would say that the accounting from the U.S. perspective doesn’t have the same level of complexities.  And even from a VAT perspective, you know, what we’re really trying to automate is the assignment of that tax code to say how can we use that transactional and system data to predict what that tax code needs to be.  So, we can tell the difference between the countries for the VAT when they have the same rate to make sure that’s accounted from by using system data like addresses and getting all of those determinations correct.  
And that part is similar for the U.S. because we are.  We’re using the system addresses that are coming from the company that’s making the purchase.  And not so much the vender.  In the U.S. really it is just driven based off where we’re purchasing the items.  Where that tax needs to be accounted for.  So that’s a little more simplistic.  And then, we also don’t have the complexities with some of the recoverability and some of the other nuances with the VAT accounting.  Where really, we’re just trying to determine is it taxable. Are we gonna pay the vendor or are self-assessing itself.  
So, we have much less data points.  But at the end of the day, you know, we still are truly trying to capture that data and automatically determine what the tax is.  And then how we need to account for it. 
    MS. SCHWABENBAUER:  Okay.  Yeah.  That, I think, from a global perspective, that’s a really good, I guess basis of understanding.  Because I can see now with this is that there could be short cuts.  And especially -- and Tiffany, you and I have talked about this.  The end-to-end solution.  So, I think everyone is very familiar with okay, you know, we’ve got an ecommerce type of an integration to Vertex, right.  Straight forward.  Back and forth, back and forth, right, getting tax calculated.  
    Now what we’re looking at, you know, a lot of companies are still purchasing in the ERP.  And that from, you know, an end to end solution and getting all that data pulled together is pretty I wouldn’t say straight forward, but it works, ‘cause those are accounting systems.  But now with the best of breeds with your Ariba’s and your Coupa’s and things like that, we’re seeing some discrepancies there, because Vertex is meant to help Ariba and Coupa, to make sure that people are calculating the right tax and you’re self-accruing, and you’re doing all those kinds of things.  
But then, there’s that whole GL aspect.  And that back-accounting process that needs to happen where you need to get data from Ariba or Coupa into your ERP.  And into, you know, the right GL account.  And I would imagine there’s some shortcuts and maybe bad practices on handling some of these things.  Can you speak to any of that for us?
    MS. O'NEIL:  I think that some of these integrations are new.  And with the end-to-end process, you know, a lot of these integrations that are feeding into an ERP are really trying to leverage the functionality the ERP already has.  You know, so Peter was talking about the tax codes.  And the tax codes in many of these systems are what drive the accounting.  
And so, in order to be able to get the accounting populated correctly in the ledger from, you know, payables data that’s interfacing in, there still requires configuration in the ERP.  So even if you’re doing your taxability determination in a third-party procurement system, if that data is then flowing in with an okay to pay file or another interface into the ERP, you know, then you’re gonna run into tax codes again.  
There’s still gonna be additional configuration and logic being able to map that tax treatment that was so carefully placed in the downstream system to say, “Okay.  This 21 percent VAT tax code you still need to get the correct tax code associated with the transaction in the ERP to get that accounting posted correctly.  So, adding an additional purchasing system doesn’t eliminate the need for some of the tax and accounting configuration in your ERP systems as well. 
    MS. SCHWABENBAUER:  Yeah.  I think you put that correctly.  Just that you nailed it there in that explanation.  I think that’s -- people really need to recognize that.  I know initially the first couple of years when we're talking about integrating with Ariba, and we were going to shows and stuff and trade shows and talking to people in person or even on calls, they were just worried about the direct functionality of the integration.  What’s it gonna enable me to do?  But, you know, when we tried to say, “Hey, guys, look at the full picture here.  It’s important.  And it means it’s a more complex implementation.  There’s a lot of things at play.  A lot of things you need to take into consideration.  You may need to bring in your SAP or your Oracle, you know, team as well.  Enterprise architects and things like that to really -- to make sure that, you know, this is taking it into account.”  
So, Peter, how -- help us.  How do you design the process correctly?  How should tax be involved?  And how -- like, how do you think tax automation may help this process?
    MR. BOERHOF:  Yeah.  That’s an interesting one.  And what you see like I just explained in my previous answer is that a lot of, let’s say, the complexity and difficulty are still on assigning the tax code.  And in most businesses, it’s still a manual process.  So that’s actually done by AP clerk.  So, there’s not that much automation.  And it’s also still not completely clear to what extent you can automate, let’s say, the more complex invoices.  
Like, for example, if you would have a marketing event in a hotel with multiple VAT rates and a limited deduction online items.  And what you see in AP is that for invoicing, invoice processing, the departments are quite often on a production target.  So, they have to process X invoices a day.  And that’s all about volume.  And I would say if you look at that process it’s actually essential to also include one or two KPIs on quality rather than on volume.  
So, I would say include a KPI about assigning the correct tax code to an invoice.  And then, what I’ve also seen in one of the companies I worked for is that then quality will definitely improve from a VAT perspective.  And, of course, you need to test on such KPIs to monitor how their performance is.  And the second element of a process for VAT in this aspect is to provide for good escalation.  So, an escalation process.  That if an AP clerk faces an issue with an invoice or he has a question that helps you be available actually immediately.  And take time zones into consideration for that as well.  
And the role for tax, yeah, should be as remote as possible.  But yeah, you still have to be involved.  For example, in agreeing to KPI and what your company accepts as an acceptable error rate.  And also, for the really complex invoices, tax should be part of the escalation process.  And I also still think that as long as this, in most companies, is a manual process, texts should also be part of the training.  
    But if you look at -- let’s say the automation, I would say like Tiffany also already mentioned that tax automation can help to automatically assign tax codes to invoices, to transactional lines.  But that cannot be done, at least not what I’ve seen in practice, to all invoices.  There are always complex invoices that need some manual processing or review.  
But if you automate the bulk of the text code assignment then AP will have more time for the complex invoices.  And they will have more time for quality checks.  And they will have more time to follow up on data issues.  So, I believe there are definitely benefits to tax automation.  
And for me, from a tax management perspective, one of the key benefits for automating this is that it can also block, let’s say, noncompliance transactions.  And that is what I see as one of the essential control benefits also of tax automation.  
    MS. SCHWABENBAUER:  Oh.  That’s amazing.  I just had like three aha moments.  Like, why didn’t I think of that.  Like a KPI for quality.  You’re right.  I mean, ‘cause you’re never gonna be able -- well, at least for right now and foreseeable future, you’re not being able to automate completely.  But if you got a KPI and -- out there for quality and then you have an escalation procedure in place where everyone has, you know, signed off on that and they’re aware of it, that’s fabulous.  I mean, that makes so much sense.  And I don’t think that’s come up in any of our conversations before.  So that was tremendous.  That was just tremendous input.  
Tiffany, do you have any other thoughts on this topic as well?
    MS. O'NEIL:  You really need to do a lot of planning.  And it is really critical to make sure that the organization works with the tax professionals and really maps out all those scenarios.  You know, as Peter mentioned, you may never achieve 100 percent automation.  
There’s always gonna be hard scenarios.  But the way you’re gonna figure out when you need to have those escalations and when you need to have the training.  And what areas you need to focus on with these teams is by mapping out all your scenarios and, you know, looking at the system data you’re gonna have to say, “These are ones we’re confident we can automate.  And these are ones we know we may have data issues that could require some more coordination and training with buyers or AP.  And these are ones we know we’re gonna have issues within AP.”  And really taking the time to review all your scenarios and work with the various teams that touch this process.  And doing that coordination.  And then doing the training can really make it less painful for everyone involved.  
And then, you know, as Peter noted, then the people working on the process can really focus on some of those trickier situations where somebody might always need to provide additional information or look at a scenario a little more closely.  But without that coordination and planning, you’re always gonna end up with, you know, problems even with your simplest transactions.  
    MS. SCHWABENBAUER:  Yeah.  It’s kind of like driving down the road and the wheels just come off the car if they’re not the right parts aren’t put in place.  And I think that’s a lot of what’s happening today for our clients and for, you know, our audience.  So, I think this is fantastic.  I really thank you.  That will do it for today’s show.  But I’d like to thank my guest Peter and Tiffany for joining me.  I appreciate you both taking the time.  
    MR. BOERHOF:  Yeah.  You’re welcome, Kristen.  Thanks. 
    MS. O'NEIL:  Thanks for having us. 
    MS. SCHWABENBAUER:  And thanks to our listeners.  Make sure to tune in for our next episode when we’ll discuss the overview of the integration with SAP Ariba version 2.

Episode 1: Why is Indirect Tax in Procure-to-Pay So Critical?

Episode 2: The Differences in Tax in the Procure to Pay Process: U.S. vs. Global

Episode 3: Indirect Tax in Procurement – Landscape, Opportunities, and Challenges

Episode 4: Indirect Tax in the Procurement Landscape: Opportunities and Challenges with Global VAT

Episode 5: Industry Perspective: Integrating a Tax Engine for a Global Motor Manufacturer

Episode 6: Aligning Tax and Procurement to Streamline Business Processes

Episode 7: Key Considerations When Deploying a Tax Solution for Procurement

Episode 8: Invoicing Explained: Understanding Indirect Tax During the Procurement Process

Episode 9: Keys to a Successful Procurement Platform Implementation

Episode 10: Tax Reporting: Why Internal Audit and The Sarbanes-Oxley Act (SOX) are Essential

Episode 11: Technology Trends in P2P and Tax Automation

Episode 13: Integrating Vertex with SAP Ariba: An Overview

Episode 14: Consumer Use Tax Audits: Pain Points and Solutions