Companies around the world are quickly approaching a perilous intersection, where modern tax enforcement approaches are starting to drive digital transformation in core enterprise resource planning (ERP) and business-to-business transactional process.
Tax has generally been a small part of financial IT projects, but that is starting to change as more governments turn to various forms of continuous compliance, like e-invoicing regulations. These regulations require IT departments to embed complicated, transaction-level compliance workflows in core accounts receivable (AR) and accounts payable (AP) processes.
For example, starting in January, buying from any B2B supplier in Italy will require a real-time VAT compliance check with the Agenzia delle Entrate, Italy’s revenue agency. The mandate, which expanded the requirement on business-to-government transactions, is aimed at closing the country’s estimated €35 billion tax gap.
While Italy is the first European country to mandate this form of “clearance” e-invoicing, more than 70 countries on six continents have some form of electronic invoice compliance regulation or transaction-level reporting.
Most existing ERP applications were configured to handle tax calculation and periodic reporting. But as the number of transactional systems increases and the burden of continuous compliance escalates, every IT project will need to accommodate modern, transaction-level tax enforcement.
Best practices for a smooth transition
The risks are great, particularly for businesses moving to modern ERPs in the next few years, because failing to account for fast-changing tax rules can lead to project delays, out-of-budget costs, or perilous compliance gaps. Yet with digital transformation firmly on the agenda of leading CIO and CFOs, the new role of tax presents an opportunity to improve some core financial processes from supply chain management to purchasing and AR invoicing.
The following best practices can help improve your IT modernization projects, including an ERP upgrade, while ensuring that your company can maintain compliance with tax regulations in all countries where you do business.
- Measure the true cost of compliance – Most businesses are blissfully unaware of the true IT costs of compliance because most have solved their existing compliance challenges locally. Take inventory of your existing compliance solutions to understand the current cost of compliance and future risk – particularly those costs associated with supporting e-invoicing compliance in its various forms.
- Consider tax when selecting B2B transactional applications – Digital tax compliance is particularly tricky in EDI, procure-to-pay, and supply chain management applications. Make embedded e-invoicing compliance a part of the RFP process to avoid unexpected costs and complexity after purchase.
- Stay nimble – You require a solution that will enable your organization to remain compliant as e-invoicing and other mandates evolve in complexity, which in some countries happens several times a year. Find a solution that was built to adapt to change without requiring intervention from your IT team. This is particularly important if your company operates in multiple countries, each with its own specific rules and processes.
- Plan globally to comply locally – You will need a native e-invoicing framework that follows each country’s specifications, such as those offered by Italy’s FacturaPA. Keeping up with unique technology requirements in 70+ countries leads to massive compliance costs, which is why leading businesses are beginning to consolidate vendors globally and across both ERP and B2B transactional solutions.
- Modernize processes – Standardization requirements in Latin American and Europe are designed to quickly identify errors and data discrepancies by eliminating paper-based reports in favor of automated processes. Use this as an opportunity to make a business case for digital transformation, particularly of legacy purchasing processes.
Now is the perfect time to develop a holistic approach for managing tax worldwide, given the impending deadlines associated with both required ERP changes and new VAT compliance rules. By considering these best practices, you can be more strategic in future ERP implementations, while considering the evolving tax rules in countries where your company operates. More importantly, with the right approach, you can future-proof your company’s operations to keep pace with constant change in tax regulations and enable your growth into additional markets.
For information on how your company can prepare for ERP transformation and VAT compliance, visit Sovos online.
For more on this topic, read How EU Countries Are Following Latin America’s Technology Lead to Narrow Their VAT Gap.