Indirect Tax in Procurement Transformation

Leaders within the procurement space need to shape how indirect tax is handled within procure-to-pay (P2P) processes and strengthen their capability to manage tax compliance and value-generating activities. 

It is well known that companies face disruption from different aspects due to political, environmental or market changes. Competitors emerge and new market participants challenge the market with business models leveraged by new technologies. These external and competitive pressures force businesses to operate faster, more accurately and extract value from every operation, leaving no room for inefficiencies. This is why improving processes and leveraging the right technology is key to maintaining your competitive edge. This is also true for procurement processes. There are many software solutions on the market, among them SAP Ariba, Coupa or Ivalua, that can assist organizations in building a new digital procurement suite. These management systems support the entire spectrum of the procure-to-pay (P2P) process — including supplier onboarding, engagement to sourcing, inventory and payments. They are designed to give organizations real-time visibility and AI-powered insights into all types of expenditure within the organization – procurement, expenses and accounts payable.

Heads of procurement need to shape how indirect tax is handled within P2P processes and strengthen their capability to manage tax compliance and value-generating activities. For this, the company’s entire business operation must be translated into the language of indirect tax as well. Without that or an end-to-end indirect tax control framework, a simple repetitive booking can constitute a VAT risk (underpayment) or result in an unpreferred overpayment of VAT.

For more details how an internal control system can facilitate Finance transformations, see our previous blog Internal Controls as enabler for Finance Transformation - KPMG Switzerland.

We see a vital connection between procurement and indirect tax. There is not a single accounting entry that does not require a VAT analysis or  decision. Regardless of the transaction’s complexity, in the end, all transactions must be captured in the enterprise resource planning system (ERP), requiring the accounts payable (AP) staff to allocate the costs to an account by defining the appropriate VAT treatment.

The calculation and reporting of indirect taxes (VAT, sales and use tax, GST) is an integral part of the requisition, purchase order and invoice entry process. Whether using native tax functionality (SAP Ariba, Coupa, Ivalua) or a third-party tax engine/add-on solution, companies need to focus on their core indirect tax requirements during the implementation.

The indirect tax function (group tax) relies heavily on procurement. It is typically responsible for the data extraction, calculation and submission of the recurring indirect tax returns to local authorities. However, the fundamentals as well as the data’s level of accuracy is sourced from the procurement processes. For this reason, it is absolutely vital for procurement teams to be aware of indirect tax risks so as to thrive in their increasingly transformative jobs. The tax function and the procurement team should join forces to adequately include tax topics in transformation projects to gain clarity on the followings: (a) what indirect tax is (b) what the critical points in the P2P process are where a tax specialist should be involved (c) what the difference is between business-to-business (B2B) and business-to-consumer (B2C) indirect taxes rules and (d) how key indirect tax risks should be monitored.

Different types of indirect taxes have different accounting treatments, depending among others on where the transaction took place, where the goods were shipped to, what the buyer’s taxable status and domicile is and/or which tax jurisdiction’s rules apply. Due to these complexities, managing indirect tax in a procurement project can be challenging.

It is essential to have the right indirect tax design and implementation approach including specifying master data granularity, defining the required commodity code structure, agreeing on the methodology for calculating expected vendor-charge tax, deciding on tax accounting to improve the audit trail, creating processes for VAT reverse charge and tax accrual accounting as well as defining the rules of invoice verification and posting back to the core ERP.

Apart from being a practical solution in Procurement processes tailored for the challenges mentioned above the incorporation of indirect tax could deliver the following benefits:

• Improved cash flow 
• Fewer procurement cycles (“first time right’’)
• Accurate accounting for taxes in the purchase order approval process
• Enhanced accuracy and automation (“single source of truth”)
• Centralized VAT control framework on AP
• Consistent compliance and less operational effort

We collected our key recommendations for a successful procurement transformation also from an indirect tax perspective:

• Involve the tax function early and often
• Identify interdependencies with key stakeholders
• Ensure a reliable and clean data sourcing
• Assess tax pain points to drive discussion