By Steve Sprague, general manager, E-invoicing and VAT, Sovos
While technology has changed how manufacturing operations grow, enabling new business models and expediting global supply chains, it has also empowered governments to implement innovative tax and reporting regulations with technology-enabled enforcement. Manufacturers are now required to report progressively detailed, transaction-level data to tax authorities wanting more visibility into business deals – hampering operations, requiring new processes and draining internal resources.
As global operations expand, manufacturers will encounter complex tax regulations that differ in every single jurisdiction. That’s one reason 60 percent of respondents in KPMG’s global management survey reported that indirect tax has a negative impact on cash flow, as manual processes and frequent errors result in delays and missed refunds, despite time-consuming, scrutinous internal management.
Cash flow isn’t the only concern complex tax regulations present. Earlier this year, Sovos published a report with research from Aberdeen to uncover manufacturers’ true time, costs and inefficiencies resulting from technology-driven compliance. The report, entitled Sales and Use Tax Compliance for Manufacturers: Boost Confidence, Ensure Accuracy revealed the collective challenges that are draining manufacturers’ internal resources:
- 24 percent of filings were submitted late.
- Only 60 percent of filings were accurate over the past two years.
- Respondents faced more than 30 audits, on average, over the past 5 years.
- Penalty costs from audits averaged over $1.65 million for some companies.
- Each employee managing tax and reporting requirements spent 46.7 hours on compliance per month, on average.
Manufacturers have historically been hampered by rigid, manual and disconnected regional technologies and processes, resulting in tax penalties and fines, exhausting internal resources and IT teams to stay in compliance, and hampering their ability to quickly expand into new markets and geographies. As more countries look to improve tax collections by adopting their own disruptive tax requirements, manufacturers should proactively take advantage of technology-driven efficiencies to help reduce the burdens and costs associated with these measures.
Step 1: Centralize data
Tax and reporting audits are increasingly rapid-response, with enforcement quickly shifting to the transaction level for manufacturers. That means errors and delays have nowhere to hide, as the pace and complexity of regulatory changes erupts around the world. The first step manufacturers should take in managing the complexities of compliance is to centralize data and tax reporting processes, creating a single source of truth in the event of an audit.
The days of managing multiple tax reporting and compliance solutions are over for several reasons. First, as regulations expand across the globe and become increasingly complex, a piecemeal approach becomes too time consuming and expensive to manage. Second, having data in several systems creates a tax reporting nightmare. Regulations are increasingly zero-ing in on the increasing number of cross-border transactions, and decentralized solutions leave too much room for error as manufacturers now have to report transactions and tax liabilities in several countries in which they operate.
Centralization, on the other hand, gives companies visibility into every transaction and a global view of tax liability. Integrating compliance solutions with native ERP infrastructure provides a centralized system of record ideal for manufacturers to manage proactive compliance on a global scale. Centralizing tax information and transactional data ultimately streamlines reporting and audit defense processes, giving employees and management direct access to updated, accurate information and creating a solid audit trail.
Step 2: Automate tax-related processes
In today’s compliance environment, manual, decentralized processes will no longer suffice, as human intervention leaves too much room for error, creates inefficiencies and increases associated costs. The good news is that the required digital processes that give tax authorities visibility into business transactions ultimately allow manufacturers to automate and speed up workflows.
For example, e-invoicing is required in many countries in Latin America. These invoices are often approved by both the government and the buyer before goods are ever received. This paves the way for automating accounts payable, since the purchase order, goods receipt and supplier’s invoice can be automatically matched and invoices can be approved to pay if there are no discrepancies. Further, in many countries that require e-invoicing, these invoices must accompany each shipment. This can eliminate manual data entry at the warehouses, empowering inbound receiving teams to use a quick scan-and-click process and eliminate manual data entry.
Automation is essential, since inaccuracies in real-time reporting can literally prevent goods being shipped, disrupting supply chains and manufacturing timelines. Plus, process automation creates significant internal efficiencies that will free up employees’ time while maintaining accuracy. This makes it easier to manage and submit the increased volume of information to report and respond to audits in real-time to mitigate supply chain disruptions.
Step 3: Take a strategic approach to compliance
As tax authorities crack down on inaccurate payments and reporting, it’s critical that manufacturers take a strategic approach to this wave of disruption. Tax reporting and compliance is only going to become more challenging and affect more business processes in the coming years, so companies need a plan to scale and globalize their efforts to ensure their businesses keep running smoothly.
The shift toward transaction-level reporting means authorities will now require information down to the line item for every business transaction – from raw materials purchased to what’s left in inventory. With this level of visibility into each and every transaction made between suppliers and buyers, manufacturers will continue facing increasing risk and costs associated with audits, penalties and business disruption.
Manufacturers must develop new processes to collect and record this information, and automate these processes to protect against errors.
Maintain Supply Chain Efficiency, Lower IT Costs and Optimize Cash Flow
There are several benefits to a centralized, automated, intelligent approach to compliance. Companies can lower costs and risks by taking advantage of technology and automation to enhance their internal processes – from tax reporting to accounts payable and receivable to inbound receiving. Such an approach reduces the risk of errors, and therefore audits, enhancing cash flow by ensuring that tax payments are accurate and refunds are timely. With added visibility into the supply chain and the ability to streamline accounts payable approvals, payments can be made faster – optimizing cash flow and enhancing supplier relationships. All of this adds up to more effective, streamlined operations and supply chains.
Ultimately, by approaching compliance through a global lens and adapting internal processes to focus on ongoing efficiency, manufacturers can accelerate tax compliance operational excellence.
ABOUT THE AUTHOR
Steve Sprague, general manager, E-invoicing and VAT, Sovos
Steve Sprague’s electronic invoicing and tax compliance expertise stems from nearly 20 years of experience in the industry. As general manager of eInvoicing and VAT products at Sovos, Sprague helps multinational companies around the globe reduce the risk and cost of compliance, empowering them to automate government standardized e-invoicing and fiscal reporting to improve supply chain efficiency and optimize cash flow.