Sales and Use Tax and VAT Compliance Now Key Cash Flow Opportunity
In the context of current economic conditions, government bodies across the globe are doing everything they can to preserve revenue and stimulate the economy. Internationally and in the US, state and local governments reacted by instituting over 1170 tax rate and tax authority changes in 2008.
Meanwhile, consumer confidence is low, revenue is short and businesses must find ways to cut operating costs whether by reducing travel, non-critical expenses or closing offices. The US Department of Labor statistics reported 2.6 million jobs lost in 2008 – more than in any year since World War II.
So while governments work to balance the budget by changing transaction tax laws, this will have a direct effect on businesses which, despite their efforts to cut costs, will be burdened with additional tax compliance requirements.
Historically viewed as non-strategic, businesses have not dedicated as much time and energy to addressing transaction tax management as other financial issues. But with current market conditions in which a myriad of factors – from timing in which a company pays transaction taxes to the interpretation of a new tax law – can have a crippling affect on cash flow, more and more companies are relegating transaction tax management to the top of the priority list.
Transaction tax compliance is a legal obligation costing upwards of US$130,000-327,000 annually on staff, consultants, returns preparation, tax rate updates and more. However, if not done accurately, businesses risk significant exposure in audits, interest and penalties. In addition, with unrealistic timeframes in which business are often expected to comply within weeks of tax law changes, it should come as no surprise that a typical business gets hit with an average US$10,000-30,000 in penalties and interest each year.
Beyond the current market conditions, calculation and determination of taxes is not as simple as it might sound. Each transaction has unique characteristics that affect and change the specific tax rates applied depending on who, what, where, when, why and how the exchange was made. A business can face multiple, overlapping tax-collecting jurisdictions – countries, states, counties and cities – and tangled rules in the various tax authorities based on the type of business, location, nexus, or where the products and services will ultimately be used. Even for a small company, this can equate to countless hours updating tax rates tables, calculating tax, filing returns, reporting and auditing.
Add to the mix, a dynamic and fluid market, in which businesses are trying to cut costs only to be burdened with additional tax compliance requirements, companies are naturally finding it more and more challenging to remain in compliance
On 24 November 2008, the UK Chancellor announced a temporary VAT reduction from 17.5% to 15%, which took effect on 1 December 2008.
Within a week, over two million UK VAT registered businesses were required to make amendments to their systems or risk penalties, interest charges, additional transaction processing time and reconciliation costs.
In addition to the immediate changes, businesses are expected to carefully manage the reversion to the old rate on 1 January 2010, as any errors made will lead to a tax loss for the Exchequer.
For affected businesses, achieving compliance with the new VAT rate requires considerable effort and is expected to cost £300m over two years.
Pay your sales and use tax or VAT late and you incur a penalty. Interpret one of the many new tax law changes incorrectly and you incur a penalty or risk an audit. The list can go on and on. The bottom line is that transaction tax management has a direct effect on cash flow. Mismanagement of your tax management process can result in penalties and interest charges. The flip side is that establishing a world-class tax practice can increase your businesses cash flow.
Progressive finance departments looking to thrive, not just survive in this economy know that an integrated approach, in which their technology, people and processes work seamlessly, is key to capitalising on the transaction tax management cash flow opportunity and are swiftly taking steps to optimise their tax management process.
The first step to seamless integration is centralised technology. Consolidating your tax management technology across multiple business systems eliminates manual tax determination done by staff. In addition, this centralised technology approach acts as the hub from which domain experts can set tax rules and establish corporate tax policies and best practices centrally, which is automatically disseminated across the company from a single source. The result is improved accuracy and reduced workload, providing the company with higher degrees of compliance at a lower cost of compliance.
Centralised technology effectively automates the tax compliance process for efficiency and should integrate with a company’s finance and accounting applications for sales, purchasing, payment processing and resource planning. Also, with a myriad of software delivery models – from software as a service (SaaS) or on-premise – businesses can now choose whichever model best suits their needs. But automation alone isn’t enough, especially if you automate errors.
Tax domain experts provide the multi-disciplinary expertise in tax law, tax policy, research and audit to ensure the highest level of service to your business. Smaller organisations particularly may lack qualified tax professionals experienced with all the processes required to achieve and maintain the highest degree of compliance, and often choose to outsource this function entirely. Whatever approach you take, whether in-house, outsource or a hybrid model, you must build a team of tax domain experts that can help your business navigate through changes or growth.
Best practices/processes ensure that your company achieves streamlined compliance across the complete tax lifecycle – from tax determination to return preparation to rapid reconciliation and preparation of audit reports. As compliance requirements change, your company is automatically kept up-to-date.
By creating a tax management practices consisting of centralised technology, domain experts and best practices, organisations such as Cisco, Tektronix, Hewlett Packard and Lenovo are not only saving tens of thousands of dollars, which can be used for growth initiatives, but are also eliminating the need to hire additional headcount to support expansion. During lean times, the companies best prepared and opportunistic are the ones that will come out on top. Weaker players will dwindle leaving market share available for the remaining players to pick up. While every aspect of the company should be reviewed and ‘recession proofed’, focusing efforts on the transaction tax management, an opportunity to increase cash flow, is increasingly becoming a top priority for savvy finance departments.