Why Tax Compliance Must Be Embedded In AP Automation

Steve Sprague

For the past 20 years, enterprise finance departments have focused on process automation. By modernizing accounts payable (AP) strategies, organizations have eliminated paper and reduced significant costs. Being eco-friendly and helping the bottom line are certainly positives, but these process-improvement initiatives have inadvertently exposed global companies to serious audit risk.

Governments around the world are digitally transforming their tax-reporting and financial processes. Latin American countries have led the charge over the past decade, and now major changes are taking shape throughout Europe. Designed to address significant value-added tax (VAT) gaps, these reforms leverage technological advancements to look at every invoice – often in real time – to justify a company’s VAT remittance.

Essentially, the digitalization of corporate procurement processes is now intersecting with the digital transformation of public revenue collection. Enterprises have made it easier for global governments to ask for electronic data, and tax regimes now have the technology tools in place to obtain documents, scan transactions, and enforce penalties. Compounding this dynamic is that most AP offerings are simply designed for process automation, making tax compliance a forgotten element.

Practically every invoice that a company has digitized over the past decade is now an audit target. Tax authorities can go back years and impose penalties for noncompliance, which globally range from steep fines to potential operational shutdowns. 

From process automation to tax defense

To fully ensure VAT compliance, AP solutions must go beyond basic process improvement to include tax-rate determination, invoice structuring, archiving, and the ability to link to related reports. Fortunately, the cloud makes it easier to audit-proof AP platforms. Cloud-native purchasing systems can access a multitude of APIs to facilitate invoice clearance, perform tax checks, and adapt to constantly changing, country-specific rules, all while ensuring that daily operations are not disrupted.

But many companies may be going about it the wrong way. They adopt point solutions rather than seeking a comprehensive cloud-native solution that covers all AP-related tasks plus other government-mandated requirements. Often, they also ignore the importance of ERP integration to drive greater efficiencies internally and protect them from noncompliance.

The problems with specialized cloud AP systems

Specialized cloud vendors have gained significant market share with different AP automation services that cater to all types of suppliers. These services often manage complex transactions in a procurement cycle on a platform – or even a full-fledged many-to-many business network – that interacts with, but is otherwise independent from, the trading partners’ ERP systems. Examples of specific cloud-native purchasing systems include:

  • Electronic data interchange (EDI)
  • Supply chain management
  • Strategic sourcing
  • Procure-to-pay
  • Electronic AP invoicing
  • Travel and expense management
  • AP scanning and workflow solutions

The problem with these systems is twofold. First, they were designed to drive automation, not to audit-proof companies. Second, most multinationals require four to six systems. The reality is that enterprises cannot rely on a single-vendor strategy, at least for now. Therefore, they must ensure compliance across their solution mix as well as across changing tax regimes.

Government-controlled e-invoicing adds greater complexity to the process because it often requires acknowledging receipt and validity, or rejecting, vendor invoices within a government-defined period of time, sometimes in as few as eight days. ERPs and disparate AP solutions are not tailored to such aggressive response times, making it important to adopt a tax-compliance approach that is flexible enough to adapt to the increasing data requirements imposed by governments.

The pressure from affiliates and local teams to adopt local vendor approaches to panic-fix short-term digital tax mandates can be significant. However, the fragmentation and lost opportunities that arise from the resulting patchwork of e-invoicing, reporting, and B2B transaction automation systems drives significant cost and risks. Such a tactical, task-specific approach runs counter to companywide attempts to standardize on strategic solutions and approved best practices, limiting the ability of organizations to scale with growth.

Rethink the importance of the cloud in procurement

Business processes and IT systems around the world are coming under impossible amounts of pressure to deal with these constant multi-layered changes and aggressive time frames. Globally, businesses no longer own the innovation agenda. Their resources are being spent to keep up with the avalanche of technological requirements that stem from the innovation driven by tax administrations.

This revolution is transforming the world of procurement, and it’s doing so in a way that is more granular and fundamental than anyone could have predicted. Think of it this way: The central paradigm of a procurement system is that there are two parties to each transaction – a supplier and a buyer. With the emergence of real-time tax controls, data flows now must be orchestrated around the needs of three parties – the supplier, the buyer, and the tax administration itself. The complexity behind this fundamental shift is staggering.

By 2025, it is expected that companies in industrialized and emerging economies will exchange more than 75% of all invoices electronically with tax administrations in real time or very shortly after the invoice-exchange process. It has become mission-critical for companies to prioritize tax compliance in their cloud procurement strategies.

Comprehensive cloud-native applications are key, particularly for companies operating in or with trading partners in multiple countries where rules can be vastly different. As companies seek solutions to address tax-reporting reform, now is the time to explore flexible, cloud-native platforms that can not only manage the diversity of suppliers and the entire purchasing process but also seamlessly integrate with existing ERPs and offer the flexibility to scale and transform as individual country rules change.

Download the 10th edition of Trends: e-Invoicing Compliance for more information on how today’s digital tax environment is transforming AP systems.

Steve Sprague

About Steve Sprague

Steve Sprague’s experience in the electronic invoicing and middleware integration space spans two decades. As chief strategy officer at Sovos, Steve manages global messaging, product strategy and field enablement. Prior to Sovos, Steve was senior vice president, product strategy & marketing for Crossgate, Inc, where he grew the global e-invoicing compliance solutions and market-leading cloud-based B2B platform.