Mitigate Indirect Tax Errors and Safeguard your organization
- May 21, 2021 | Manjula Muthukrishnan
For every enterprise, irrespective of the size, calculating and getting the indirect taxes right is vital and indispensable. Indirect taxes affect a company's cash flow and bottom-line. As companies expand in size and reach, indirect tax obligations and reporting requirements expand as well.
Businesses bear an obligation to track all relevant indirect taxes, make accurate calculations, and pay them on time. Any shortcoming in the process results in heavy fines and penalties, which sets in motion a cost-intensive process of re-evaluation and course correction that creates disturbances in other parts of the company. Companies become less responsive and agile as resources are diverted to address tax issues.
Inaccurate tax calculations have dire ramifications — it can impede an organization's market competitiveness; it incurs penalties that impact the bottom line and affect product prices. Taxation errors can affect a company's public perception, reputation, and customer loyalty.
Additionally, overpaid taxes cannot be reclaimed and cut short the revenue, which can otherwise be used in other developmental processes. At the same time, under-paying taxes have ill consequences like penalties and unexpected costs, which affect the balance sheet. Thus, companies should heed accurate indirect tax calculation, which is an integral part of a company's obligation..
Challenges With Indirect Tax Calculations
Tax calculation is one area where companies may face challenges and can encounter financial risk if not done properly. Additionally, accurate tax calculation demands enterprises to stay updated with changing legislative regulations, new rules, or shifts in rates, which is often an arduous task to achieve. Companies relying on basic accounting systems for tax calculations or even calculating them manually can exacerbate tax calculation errors.
Furthermore, taxation of goods and services is constantly shifting with changing reporting requirements that demand a new level of detail as tax authorities look to get closer to the source data and systems.
Indirect tax professionals are challenged to keep pace with the changes and need an expansive knowledge of the tax codes and regimes for accurate calculations. The dynamism and complexity of taxes increase the chances of calculation errors which lead to other ramifications.
Companies must track and report indirect taxes for almost all goods and services, including those in their supply chain. Additionally, different types of products and services have different tax rates. Companies conducting businesses in multiple countries must calculate and report indirect taxes for every transaction in each country. Thus, a supply chain involving numerous countries entails a large number of indirect tax variations.
Enterprises face an immense challenge to calculate the accumulation of indirect tax errors across operations. The very nature of indirect taxation will have a compounding effect on errors when handled inadequately. Businesses are thus resorting to technological solutions to manage their indirect tax calculations efficiently.
How To Mitigate Risks in Indirect Tax Calculation
Leveraging Indirect Tax technology is a great way to counter the errors in tax calculation. It offers a highly accurate automated tax calculation framework that not only reduces audit risk but saves time and costs. Indirect tax technology can handle several indirect tax functions, such as importing data from multiple ERP systems, consolidating and validating data, and populating tax returns and tax refund applications.
Modern tax solutions can cover all destination-based tax types and handle various hybrid sourcing rules. It can also keep track of changes in legislative regulations and automate the preparation and filing of tax returns.
Indirect tax differs based on price point, function, and other factors that aren’t immediately obvious. Tax solutions can calculate the correct rate for various circumstances, including product-specific tax rates, destination rules, and more. Tax solutions can streamline the process by automating calculation and tax-sensitive adjustments across all entities.
Enterprises engaged in exporting can incur many additional costs like excise duty, shipping charges, and sales tax or VAT, depending on the jurisdiction. Indirect tax technology offers a simplified solution that enables sellers to determine the duties, taxes, cost of goods sold, and shipping costs for global commerce transactions in real-time.
Following are some of the other advantages of incorporating technology in indirect tax calculation:
- Integration with ERP and other financial systems and facilities to export data from multiple business systems to determine the indirect tax on all financial transactions.
- Consolidates tax liabilities and reduces the efforts needed to prepare tax returns.
- It offers a secure and scalable means to calculate indirect tax even during high sales periods.
- Houses a robust API and works with multiple systems across departments that provide access to consistent, up-to-date information across teams.
Calculating indirect tax across several value streams and sources is a peculiar challenge to companies. The inherent complexity in the framework of indirect taxes and evolving tax regimes and reporting requirements contribute to erroneous indirect tax calculations.
Companies that rely on inefficient, error-prone manual processes for calculating taxes compound the errors in the process. Such methods require analysis and training to overcome the shortcomings. Companies resort to short-term workaround solutions to counter the time-intensive mistakes and incur considerable costs to the enterprise.
Companies have acknowledged the pivotal role of technology, especially in indirect taxation, for its overarching benefits, including but not limited to indirect tax calculation. Indirect tax technology helps mitigate risks and save time on corporate tax calculations by reducing errors in calculations. It allows tax professionals to move away from time-consuming error-prone methods and shift their focus to more value-add tasks. Digitized tax functions can help in the accurate evaluation of current tax processes and identify areas for improvement.
Incorporating indirect tax technology can result in increased speed, reduced costs, and improved accuracy in tax calculation. Automated compliance solutions allow tax professionals to focus their resources on devising strategies to generate revenue and cut costs. Digital tax reporting solutions will improve the accuracy of indirect tax processes and provide insights that can be used to inform decision-making.