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September 5, 2012

Every business needs a cost-effective way to manage its compliance requirements while keeping up-to-date on indirect tax developments. For many finance or tax professionals, tax automation can be the key to such support and compliance. When done correctly, tax automation provides critical support for your tax department, gives your business instant updated information and ultimately can lead to increased sales. Best of all, there are plenty of tax solutions to choose from.

Tax automation comes in many different forms. Automation can be as simple as setting up tax codes and rates in an enterprise resource planning (ERP) system, or as dynamic as installing a "bolt-on" tax engine with fully maintained rates and rules. Unfortunately, many myths potentially shroud the benefits of tax automation, and tax departments sometimes fail to set realistic expectations. 

Before you can get your business the tax automation it deserves, you need to separate the tax automation facts from fiction. Here are some of the most common tax automation myths and the truth behind each myth.
 
Myth #1: Tax automation projects will fit any budget
 
While it is true that sometimes an indirect tax automation project can be implemented on a shoestring budget, the fact is that these types of implementations make up only a small percentage of tax projects. A typical automation project can be quite expensive, so it is important to weigh the cost of not automating the indirect tax function.
 
Most companies have unique requirements requiring sophisticated solutions at price levels that are usually financed by IT, finance or tax departments. To overcome these costs, tax departments can expect that the tax automation solutions could create labor savings, capital expense reductions, productivity benefits and other business benefits to offset the initial investment. It is important to explore the value that can be created by having better data for audits and avoidance of potential overpayments. Again, the benefit realized over the life of the project should outweigh the cost.
 
Myth #2: Tax automation engines are "plug & play" solutions
 
Tax engines come standard with rates, rules and smart tax logic algorithms covering indirect taxes for the U.S. and the rest of the world. But these engines can be complex, so it is important to note that all this standard information will not be useful if the system is not configured to process the incoming transaction data and return the tax results to the financial systems in a meaningful way. In short, when nonsensical information is put into the tax engine, the tax results will also be nonsensical. It is therefore essential to understand the company's business and tax requirements, and then design and configure the system appropriately (while performing extensive testing) to verify that all systems work. Without this important work, a tax engine will not be able to determine and calculate the correct tax.
 
Myth #3: Once the tax engine is in place, it will maintain itself
 
When the tax automation solution (engine) is in place, the real works begins. For the tax engine to truly support your business, it will require regular maintenance ---- potentially a lot. Every time new sales tax rates and rules files are published by the vendor, the system requires an update. Obviously, your company will change too. Every business change that involves new products, a new place of business or other changes could have an impact on your tax position. This requires reviewing the changes, determining if and how the system needs to be updated, testing the changes and putting them in production. Often, the business users need to be notified that tax changes can affect the way they may interact with the company's vendors and customers. Ongoing training for the business users and support by the tax department is needed to ensure that all systems continue to work properly.

Myth #4: Every tax engine can deliver what I need
 
You can't assume that every tax engine can do what you need it to do. You may have unique requirements or special taxes that don't come "out of the box." It is important to know what you need to verify that the tax engine can deliver on those requirements. Every tax engine solution requires significant effort to configure within a financial accounting package, so it is very important to review how much work is necessary during the implementation and ongoing maintenance. Also, be careful that your tax software vendor does not promise more than can be delivered. Talk to the vendor's clients and find out what is standard delivered and supported. Customizations are typically necessary, so make sure to realistically estimate the cost and time for development. Last but not least, the business must be able and willing to support the tax engine.
 
Myth #5: Standard reports are all I need
 
In most cases, "canned" reports support most of the standard reporting requirements but not all. The key part is that the tax engine has the appropriate data elements for all the reports you may need and that the tax engine results can be reconciled with the financial systems. A tax technology consultant is not as familiar with your company as you are. Therefore, consultants need the information you give them to be complete, correct and understandable. The best approach is to review the reports you currently use and decide if you want to generate compliance reports as well. The better you know what you want, the better your chances of buying and installing the solution you really can use.

Alvarez & Marsal Taxand Says:

One last myth: "This stuff is easy; anyone can do it!"

Getting a tax automation solution that meets all your needs is the optimum goal. However, it takes a team to do it. A tax technology team should adopt an approach that combines both tax technical experience and systems expertise to bridge the knowledge gap of typical system integrators, IT and tax departments. When you consider upgrading your existing tax engine, or want to review what is available today, we suggest that you pick a team that is familiar with working with the top software providers. Also, make sure the team has sufficient experience integrating into numerous ERP packages. 

Author

Erik van der Hoeven
Managing Director, Seattle
+1 206 664 8963

Craig Beaty, Managing Director, contributed to this article.

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Benjamin Diaz
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Anthony Fuller
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Mark McCormick
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Disclaimer

As provided in Treasury Department Circular 230, this publication is not intended or written by Alvarez & Marsal Taxand, LLC, (or any Taxand member firm) to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer.   The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.

About Alvarez & Marsal Taxand

Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the US., and serves the U.K. from its base in London.Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in nearly 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.

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