Indirect Tax Technology e-book - Thomson Reuters

THE JOURNEY OF A TAXOLOGISTHow automation through technology can maximize indirect tax process efficiency

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EMBRACING INDIRECT TAX TECHNOLOGY AND BUILDING YOUR BUSINESS CASE

MUST-HAVE CONVERSATIONS WITH IT ABOUT INDIRECT TAX TECHNOLOGY

ENSURING A SUCCESSFUL INDIRECT TAX TECHNOLOGY IMPLEMENTATION

THE JOURNEY OF A TAXOLOGIST

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EXECUTIVE SUMMARYIn today’s world, managing indirect tax is a tough job. Choosing to embrace technology, however, can transform the way you work each day.

In this eBook, we’ll show you how technology enables you to move away from time-consuming manual tasks by automating your indirect tax processes. It’s a move that will revolutionize your tax department and allow you to focus on strategic activities that will bring real value to your organization.

Your journey starts with understanding the rationale for embracing indirect tax technology and tips on building a business case for the investment. From there, you’ll learn the importance of partnering with your IT department and how to tackle critical conversations with them. Lastly, you’ll get a glimpse into best practices that will ensure a successful tax technology implementation and set the stage for your tax department as value center within your organization for years to come.

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01EMBRACING INDIRECT TAX TECHNOLOGY AND BUILDING YOUR BUSINESS CASEIf you work in a tax department, you know that the challenges of effectively managing indirect tax are becoming more and more complex. With ever-evolving legislation, tracking and researching tax rates and rule changes is a never-ending task. Your day shouldn’t be filled with bandaging issues and creating work-a-rounds for inconsistent, manual processes—from manually preparing tax returns and compiling audit reports to manually accruing use tax on inventory movements and managing paper exemption certificates. Further, you over-rely on IT for continual updates to tax codes, and working with other business organizations, like finance and accounting, is inefficient because your data management systems don’t talk to each other.

But your ultimate tax vision is in reach. You can make your vision of planning and providing a strategy that lowers tax liabilities and takes advantage of incentives a reality. You can conduct internal reverse audits to uncover hidden cash and reduce audit cycle time. You can work collaboratively with the finance and IT teams to streamline existing processes and improve efficiency. Most of all, you can be a valued and trusted partner to the overall business.

While at times these goals may seem unreachable, they can become a reality if you automate your indirect tax processes through the use of technology. That’s what the best-in-class tax departments already know. The most successful indirect tax professionals are “Taxologists”—individuals who excel in the use of technology to maximize tax process effectiveness. And in today’s world of regulatory complexity, growing globalization, increased scrutiny, and internal pressures of “do more with less,” the importance of embracing technology couldn’t be more important.

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Imagine this. While you’re working on an internal reverse audit to uncover risk and overpayment, an automated indirect tax process supported by the latest technology is working in the background to automatically record sales tax, record exempt transactions with exemption certificates, validate vendor tax, and accrue use tax on A/P invoices and inventory movements.

Then, when it’s time to begin working on tax returns, you simply go into your software and run various reports for reconciliations—including ERP reconciliations, state summaries and tax authority details. Once your reconciliation is complete, the software is ready to generate tax returns. You can then e-file or print and remit signature-ready state and local returns.

In virtually no time at all, you have completed your state and local returns and can get back to pulling together your reverse audit findings into a compelling presentation for senior leadership. Sound good? Of course it does. Here’s how to make it happen.

BUILDING A BUSINESS CASE FOR INDIRECT TAX TECHNOLOGY

So, how do you start building a business case for the investment in indirect tax technology? Well, it’s no secret that the complexity of today’s tax landscape demands that tax departments evolve beyond manual and time-consuming processes. Technology is essential in managing increased regulatory complexity, the escalating level of risk, electronic audit trail requirements, the need for greater transparency, and in calculating accurate tax results quickly.

The investment in the right technology has the ability to catapult an organization to the next level of cost reduction, automation, and overall operational efficiency. To build a compelling business case for indirect tax technology, consider these seven critical points.

Indirect tax technology results in:

1. VASTLY IMPROVED ACCURACYToday’s indirect tax technology includes geographical information systems that define jurisdictions with pinpoint accuracy and amazing speed. With address validation and cleansing, you can get a precise “roof-top” tax location (situs). Complete jurisdiction coverage includes not only state, county and city authority taxes but also district taxes, such as police, transportation, mall, cultural and scientific taxing authorities.

2. A REPEATABLE, SCALABLE PROCESSTax technology supports real-time tax automation for both sales and purchase transactions. That means no more manual nor external batch processes. Through seamless integration with your existing ERP system, the latest indirect tax technology enables transaction data and attributes to flow through—and that data is used to make consistent, repeatable and scalable tax determinations, calculations and even post tax collections and accruals automatically to the general ledger.

Top performers are 3.3x more likely to have automated workflows for tax preparation, filing and remittance/recovery. 1

Aberdeen’s research finds that organizations with cloud tax solutions report more accurately, have driven greater efficiency in business processes, have seen greater improvements in the cost of audits, and have done a better job of mitigating risk. 2

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3. IMPROVED TAX COMPLIANCE AND AUDIT DEFENSE CAPABILITIESWith hundreds of signature-ready returns, numerous canned tax reports, as well as electronic filing and ad-hoc reporting, tax technology enables you to complete returns and respond to audits faster and more accurately. Further, you can access detailed audit reports each month for visibility as well as Sarbanes-Oxley compliance through web portals. Lastly, that additional transaction data sent for tax determination can be used for personalized and targeted reporting.

4. DECREASED COST TO BUSINESS (LESS PENALTIES, AUDITS AND TIME)Consider this: According to third-party market research, any single business process is predicted to have errors occurring between 1% to over 6% of the time, on average. With errors like this applied to tax data and decision points, your business could easily be subject to significant tax accuracy risks. For example, it has been estimated for every $100 million in transaction value, with an average US sales tax rate of 7.50%, there could be anywhere between $75,000 to $450,000 of tax errors occurring within a single business process, on a year-over-year basis. Hidden process errors can quickly compound into unknown operating costs, and if left unmitigated, contribute to significant profit and performance erosion. These estimates do not take into consideration any additional costs like audit penalties, interest, or staff and consultant time spent gathering and analyzing data to defend audits. In addition, they do not take into consideration inefficiencies with non-tax business processes including low customer satisfaction, unnecessary day’s sales outstanding or lost allowable vendor payment discounts. Tax technology virtually eliminates the potential for these costly errors by providing an end-to-end solution for sales, use and value-added tax management. Finally, tax automation can provide comprehensive indirect tax process lifecycle management which automates research and content maintenance, tax determinations, reporting for audit defense and the tax compliance process.

The average annualized cost to manage sales and use tax is over $63,000 for small companies, over $67,000 for midsize companies, and over $393,000 for large organizations. This is why top performers do all they can to reduce the burden.3

Top performers are 72% more likely to have real-time updates to tax regulatory changes.

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MANUAL SALES & USE TAX COST

for every

in transactions

approximately

is wasted intransaction tax costs

This may be an understatement according to Six Sigma

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5. THE ABILITY TO STAY AHEAD OF TAX CHANGESWhen it comes to indirect tax technology, the significance of continuous tax updates supported by trusted researchers with industry experience cannot be overlooked. Only a few of today’s best of breed technology providers have in-house teams comprised of CPAs, tax lawyers and former auditors—with tax research processes annually certified and compliant in SSAE 16 Type II and ISAE 3402 standards.

These automatic updates enable you to stay ahead of global tax legislation and updates, without spending time on research and code adjustments. It’s all done for you. Instead, your time can be spent on more value-added activities, like tax strategy and analysis.

6. IMPROVED IT INFRASTRUCTUREWith the latest tax technology offering cloud-based solutions, your tax team can increase collaboration and access information anytime, anywhere. And, whether you choose cloud-based or on-premise software, your indirect tax technology provider can help you decrease your dependence on your company’s IT resources, and instead, utilize their dedicated team of professionals to assist you with inquiries around the clock.

7. A RENEWED FOCUS ON VALUE-ADDED ACTIVITIESStandardizing indirect tax processes with technology presents an opportunity for tax departments to focus less on mundane, manual tax work and more on the value-added, forward-looking activities that increase staff satisfaction, elevate the visibility of tax within the organization and positively impact the bottom line.

Not only does automating indirect tax with technology create more rewarding and impacting tax work, it also strengthens cross-functional relationships. With flexible integration options for multiple systems, including e-commerce, flat file/batch and other ERPs, tax, finance and IT professionals can work seamlessly, resulting in increased productivity across numerous disciplines.

“Previously my IT team spent roughly 15 hours a month to refresh rates in the middleware application. With web-hosted indirect tax technology, tax rates are automatically refreshed, saving time and money.”Finance Director Online Self-Service Printing Company

ORGANIZATIONS WITH CLOUD TAX MANAGEMENT SOLUTIONS ARE:

62% more likely to have centralized management of tax information

72% more likely to have real-time access to tax regulatory changes

38% more likely to automate workflow for tax preparation, filing, remittance and recovery

38% more likely to have streamlined sales order tax calculations based on tax rates

2x as likely to have automated verification of tax accuracy based on customer location

… As compared to all others. 5

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02MUST-HAVE CONVERSATIONS WITH IT ABOUT INDIRECT TAX TECHNOLOGYThe most successful Taxologists have built a solid relationship with their IT department because they know an automated indirect tax process isn’t possible without input from technology professionals. They understand the importance of collaboration and know when it’s time to engage IT in the decision-making process.

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CHOOSING A DEPLOYMENT METHOD

As you plan to implement indirect tax technology, both the tax and IT departments must work together to determine what type of deployment method is best for your organization as there are a variety of factors to consider. Whether you are a large organization or a smaller company, there are three primary options to choose from.

1. CLOUD-BASED SOLUTIONSIf you deploy a tax technology solution using the cloud, your technology provider will own and maintain the hosted solution. To ensure the best security is in place, your provider should be ISO 27001 certified compliant and receive SSAE 16 certified compliance annually to ensure Sarbanes and Oxley requirements are met.

Major advantages to this type of solution is that your technology provider will have personnel dedicated to the hosted solution around the clock together with state-of-the-art fire suppression, back-ups, and power redundancy.

Why companies choose this: • Less money spent on hardware and IT management• Software & tax content updates applied automatically• It’s always on—and provides disaster recovery and related support

2. PRIVATE CLOUD-BASED SOLUTIONSWith a private cloud-based software solution, your technology provider hosts the solution, but you have dedicated hardware and software for your business. It’s like living in a single family home verses an apartment building.

Why companies choose this:• Dedicated hardware and software• Software & tax content updates applied automatically• Disaster recovery support

3. ON-PREMISE SOLUTIONSOn-premise solutions may be preferred by companies that want complete control over their hardware due to contractual obligations with customers. Traditional on-premise installation takes place at the company’s own datacenter and utilizes the company’s existing IT personnel and resources.

Why companies choose this:• Control over hardware • Ability to roll into an existing IT environment • Contractual obligations with customers

Top performers are 57% more likely to utilize a cloud solution for financial management. 6

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IT BEST PRACTICES FOR MANAGING AUTOMATION

Indirect tax calculations are a critical part of many company’s core transactions as they are imbedded in every sale. While we often remember to think about rate changes, taxability rules, and compliance in our preparation, we often overlook the importance of testing, planning and establishing a base line.

In an effort to spark continued conversation between the tax and IT departments, consider these IT-related best practices for managing indirect tax automation.

1. TESTINGLoad testing against environments by replicating high transaction volumes is a best practice. Testing high volume traffic will ensure your customer will not experience more than the expected three second delay or worse, downtime.

Knowing your limits in managing online traffic is important as well. Actively managing traffic and effectively creating the equivalent of a “line outside the store” may be a temporary fix until any unplanned capacity issues are resolved.

You should also perform a self-audit and verify your tax calculation processes and procedures. Sales tax audit exposure can add up quickly when sales taxes are not calculated correctly–especially on your largest sales days. Performing a review is a good preventative practice.

2. PLAN FOR PEAKS AND VALLEYSHighly qualified IT professionals can help prepare your business for peaks and valleys. You also need to know what to do if things do not go as planned. Even when you have prepared, tested and validated your systems, things may go wrong. As such, you must devise an action plan that includes:

• An internal communication plan. Know who to contact if there is an issue within your organization. Make sure you have access to the people that can fix the issue.

• An external communication plan. Always have your service provider’s contact and support system information available. Make sure that the people who are monitoring the system also have access and have been set-up with an account in case you are not available to help.

• Quick troubleshooting tips. Your team will need this so they can provide your service provider with the necessary information to resolve issues.

• Failover plan. Have a Plan B. Both you and your service provider are responsible for this step so you are ready for issues at any point in the tax call. Most indirect tax solutions come complete with failover and disaster recovery.

“We’ve developed determination standards for our indirect tax technology solution and our ERP systems. By driving these standards using the technology’s central engine, we significantly reduce support costs and compliance risks.”Director, Global Tax Department Multinational Conglomerate

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3. KNOW HOW TO TEST THE TECHNOLOGYSet up a series of tests with your technology provider and IT staff to understand how long it takes for a round trip tax call to your service provider. Here are the questions you’ll need to answer.

• How long does it take for a transaction to leave your firewall? You can test this by performing a ping test from your financial system server to your border.

• How is the internet impacting your performance? Running a trace route will provide visibility into how many hops a tax call takes before reaching your service provider.

• How long does a round trip call take to your service provider? Running a ping test to the calculation end point will provide you with this information.

Collect and share this information with your provider, and if concerns arise during any step, work with your provider to resolve.

4. ESTABLISH A BASE LINEEstablish a baseline during the load test. For example, if you achieve 90% of your tax calculations return in fewer than 700 milliseconds, you can use this information when monitoring for slowing calculations.

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03ENSURING A SUCCESSFUL INDIRECT TAX TECHNOLOGY IMPLEMENTATION

You’ve done the background work, evaluated the technology and built a winning business case for the investment. With the green light from your leadership team, you are ready to implement the technology that will catapult your tax department to the next level of productivity, visibility and value within your organization.

But to ensure your implementation is a success, you must understand what to expect. Successful tax technology implementation is about partnering closely with your technology provider to design and build a technology platform with the right mix of software and services to meet your tax department’s needs.

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General phases of a successful implementation:

1. Project initialization and kick-off

2. Technical and tax requirements

3. Installation and configuration

4. Test, test and test again

5. Testing sign off

6. Production migration and go-live

7. Post go-live monitoring and transition to business operations

PRE-PROJECT PLANNING

Like any project, automating indirect tax processes through technology requires a thoughtful approach as you work toward implementation.

To ensure that your indirect tax technology implementation is a success, consider these project planning tips.

• Determine the scope of the project and identify which areas you want to automate. For example, is your project a US sales tax project, an EU VAT project or a global sales and purchasing project? Once you’ve determined the answer, you can specifically identify which areas you want to automate with technology.

• Understand technical pre-requisites and make sure they are met. Make sure you know what version of the ERP you are running and whether or not the vendor supports it—and make sure to collaborate with IT on internal reviews, analysis and software policies.

• Know your purchasing and approval process. Determining your vendor selection process is part of this step. Make sure you know what key stakeholders should be included in the decision making and involve them in the selection process.

Once you have this information, you’ll be ready to begin discussions with the business around timing and impacts. Then, it is time to acquire the software and move on to the implementation project.

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IMPLEMENTATION PROJECT PLANNING

Implementing indirect tax technology is a complex project, however, there are several best practices to follow that will ensure your implementation is a success.

1. DEDICATE TIME AND RESOURCES UPFRONTThe best way to dedicate the proper time and resources is by assigning an internal project lead who knows the ins and outs of your tax department. Choose someone with an intimate knowledge of your day-to-day processes, existing technology and the tax department’s relationship to the broader organization. Make sure they have enough time to dedicate to the project by removing some daily tasks. This person will be the first point of contact for your tax technology provider as the implementation moves ahead, so give them the authority to make executive decisions when needed to keep the implementation on track.

Having a dedicated internal project lead involved from start to finish can also have benefits once it’s time to train your tax team on the new technology. Because the internal project lead has experience with your existing processes, the new technology, and the differences between the two, their knowledge will be extremely beneficial in training your tax staff once you go live. The hands-on experience during the configuration of the technology is invaluable.

Secondary departments involved in the implementation, such as Finance, Accounting or IT, should also be made aware of any time commitments upfront. If necessary, dedicated resources should be appointed from these departments and utilized as needed.

2. COMMUNICATE YOUR GOALSIs your ultimate goal to better manage compliance or minimize risk? More accurate data or streamlining data flow? Make sure that the members of your tax department involved in the implementation understand these goals. As you begin work with your technology provider, communicate these goals and revisit them regularly to make sure the project is on track.

3. ESTABLISH A TIMELINEBecause each company is different, there isn’t a standard amount of time it takes to implement tax technology. Factors such as size, legal entity structure, and global nature factor into the time it takes to get tax technology up and running. Work closely with your technology provider to establish a timeline for implementation. Communicating blackout dates early on, such as quarterly earnings periods, will help determine a timeline that is realistic.

Questions to consider as you kick-off the implementation project:

• Is your project included in an active ERP project? If so, be sure to align the two projects.

• What is the optimal go-live date for business (e.g., end of month close)?

• What are the business drivers and expectations on a timeline (e.g. website launch or new line of business)?

• Are there any competing projects? What are the impacts there?

• What are the blackout dates (e.g. Black Friday, holiday rush code freeze, etc.)?

• What are the interdepartmental dependencies?

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4. DISCUSS TRAINING UPFRONTThere’s no question that the more involved your tax team is in the implementation, the less time you’ll need to dedicate to training in the future. However, your team has day jobs and dedicating a large number of staff to your implementation may not be realistic. Work with your technology provider to come up with a plan for resources, training, and support upfront.

Product verses process trainingWhen it comes to training, it’s important to be aware of “product training” vs. “process training”. Typically, product training is a prerequisite to implementation. Your technology provider will demonstrate the functionality of their offerings early on—and you will receive some general training on these tax solutions prior to implementation. Applying that technology to your specific processes, however, comes later. This process training is critical. Only when your tax department is fully trained on using the new tax platform in their day-to-day processes will you see the desired increase in efficiency.

5. DECIDE ON THE BEST METHODS OF REGULAR COMMUNICATIONTypically, your technology provider will initiate an introductory meeting to kick-off the implementation project. This gives both parties an opportunity to get to know each other, discuss the goals, timeline, resources and preferred methods for regular communication and meetings going forward. Your provider will put together an initial work plan that will guide your regular meetings. This work plan is a living, breathing document that will evolve and change as the project progresses.

It’s also important to establish regular methods of communication with key internal stakeholders within your own organization. While your leadership team won’t need to be closely involved in the day-to-day implementation activities, they should be made aware of key milestones achievements, setbacks and budget adjustments. Regular check-in meetings to inform them on the status of the implementation is recommended.

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RECIPE FOR CONTINUED SUCCESS

While automating indirect tax through technology is the foundation for success in today’s complex tax landscape, there is much more needed to guarantee continued success.

1. CROSS-FUNCTIONAL COLLABORATIONWith hosted technology taking much of the burden off of the IT department for custom updates, an opportunity arises to reshape the relationship between your IT and tax teams. Let technology spark a new conversation around how both departments can work collaboratively going forward.

Further, the ability for tax technology to bring together multiple systems also presents an opportunity for a renewed relationship with the finance team. Discuss ways you can make your relationship more efficient and productive on both sides. You will find technology to be the foundation for a mutually beneficial work environment.

2. PLANNING YOUR FUTUREWith manual processes virtually eliminated, it’s time to plan strategically for the future. How will tax be organized going forward? What will the priorities be? There is now a pathway for tax to become a trusted partner and valued strategic advisor to the overall organization. How will you capitalize on that opportunity?

Many organizations who deploy tax automation solutions find that more than their tax process gains efficiency as many non-tax processes are transformed as well. Some billing and collection organizations have seen improved customer relations due to a significant reduction in Days Sales Outstanding (DSO), all because the proper tax rates or exemptions were applied correctly to the first issuance of their customers’ invoice. Likewise, when it comes to their procurement and payment processes, many organizations have seen over and under payments improve by double-digit percentages, thus speeding the vendor payment process and enabling the recognition of timely payment discounts.

3. SUPPORT PLAN AND MODELTo ensure support going forward, work with your technology provider to understand how issues will be addressed and where you should turn for support.

“Our indirect tax and VAT solution significantly assists our accuracy and speed of filings, making effective use of our IT and work process resources.” Finance Director Multinational Chemical Company

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1 The Cost of Compliance: Strategies for Automating Tax Management in the Cloud and Avoiding Hidden Costs, Aberdeen, January 2015






TAKING THE NEXT STEP

If you’re ready to say goodbye to time-consuming, inefficient tax processes and hello to becoming a trusted and strategic partner within your organization, it is time to assume your role as a Taxologist and automate your indirect tax process with technology. Not only will you realize your long-overdue goals of streamlined tax processes and improved efficiency, you’ll also foster a better work environment and enjoy a renewed focus on tax strategy and analysis. It’s a move that will solidify the value of the tax department within your organization for years to come.

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