Accounts payable (AP) automation is supposed to save SAP customers money, but developments in digital tax may well make it a source of penalties and supply chain interruptions. With tax authorities all over the world seeking to increase revenues and close tax gaps, AP is becoming a new target for audits.
Many SAP customers probably think of accounts receivable (AR) processes when they create plans to ensure tax compliance — and rightly so. The supplier of goods or services carries the most important indirect tax responsibilities, such as properly clearing an invoice or accurately charging indirect tax.
In most countries with indirect taxes — such as value-added tax (VAT), goods and services tax (GST), or sales and use tax — however, a much greater challenge arises in the AP process. In its capacity of a buyer of goods or services, a company must verify that its diverse supplier ecosystem sends compliant invoices, which it can confidently book into its ERP systems and use as a reliable basis for tax reporting. It’s often the buyer that carries the largest risk, as noncompliance, in addition to penalties and fines, can lead to denial of input tax reclaim in certain cases.
Supplier Errors and AP Proliferation
Companies might trust their suppliers to deliver the goods they have ordered, but can they trust them enough to risk losing a significant portion of the invoice value in irrecuperable tax because of supplier errors in the invoicing process? Miscalculation of indirect taxes, improper handling of electronic invoicing (e-invoicing), and non-compliant VAT reporting can hit cash flow and operations in multiple ways.
Complicating the situation further is the diversity and proliferation of AP systems themselves. Most SAP customers employ multiple types of systems, each of which is tuned to deal with a different supplier or category of supplier. Each of those systems may require a different approach to tax compliance, increasing the potential for errors and corrupt data.
Understanding how to manage AP processes is critical for SAP shops that want to maximize their investment in AP automation and ensure that their AP systems are saving them money, and not costing it.
Indirect Tax Determination
There was never any doubt about the importance for trading partners to determine the right taxing jurisdiction and to apply the right tax rate for every item in a supply chain. However, in an increasingly real-time tax control environment, getting invoices right the first time becomes vitally important for supply chains to keep moving. When a tax administration needs to approve a company’s invoices before that business and its trading partners can proceed with the next step in the transaction — including physically dispatching the goods in many cases — having the wrong tax rate on invoices doesn’t just expose the company to fines but can damage operations substantially.
Most of the attention for sales and use tax falls on the “sales tax” side of the house, as the seller is responsible for accurately assessing tax on goods sold. But AP processes play a big role in indirect tax compliance, and tax on purchases is often low-hanging fruit for auditors. In the US, for instance, states and the IRS continue to digitize efforts at tax collection and enforcement.
The Wayfair Supreme Court decision on state sales taxes has complicated this process for many suppliers that may not have worried about properly calculating tax in the past. With new economic nexus standards, sellers need to figure out if they are getting it right, while purchasers need to make sure that they are. With the potential for error, regulators will be looking increasingly at not just how much companies charge for sales tax but also how much they pay.
Globally, paying too little in indirect tax can trigger an audit, so AP departments must be able to verify that their suppliers are calculating and assessing tax correctly — and, for those purchases where the supplier may not charge tax, have solid processes and technology in place to accurately self-assess use tax where applicable.
The risk goes beyond audits, however. While paying too little in indirect tax can lead to regulatory trouble, paying too much can dent profitability and negatively impact cash flow. Again, blindly relying on suppliers to determine indirect tax rates correctly is not a sustainable plan. SAP shops need to ensure that their AP systems are tuned to provide clarity and accuracy on tax rates paid as well as on rates charged.
Outside the US, particularly in Latin America and increasingly in Europe, SAP customers are dealing with massive new government initiatives to enforce VAT compliance through e-invoicing. In a growing number of countries, the government steps in directly to validate an invoice before a buyer and seller can complete a transaction.
Again, much of the practical responsibility of compliance in that scenario falls on AR, but the buyer often carries the highest risks. Companies that purchase goods can recoup VAT expenses after transactions are complete, but to do so, they need to prove their VAT deductions are compliant. If an SAP customer can’t substantiate a deduction, the company might not get its money back. Furthermore, if an invoice upon receipt from a supplier turns out not to be compliant in a country that requires real-time clearance, AP can’t accept the invoice and may have to trigger a variety of complex correction processes.
As a result, AP processes in the e-invoicing scenario have a direct effect not only on cash flow but on supply chain efficiency. Again, ensuring both compliance and data purity in AP e-invoicing processes is critical — and each country that mandates e-invoicing has a different set of rules, penalties, and deadlines. The complexity involved is significant.
VAT reporting has undergone significant change in recent years and continues to quickly evolve. What once was a largely paper-based process has moved almost entirely online in many countries, and the advent of digital reporting is creating even more complexity. The first natural step from paper to electronic reporting was e-filing, which involves using a standardized electronic form for filing periodic tax returns with other income data filed electronically and matched annually to identify differences with previously filed information.
The move from paper to e-filing strengthened tax authorities’ VAT reporting enforcement capabilities, reducing the potential for fraud and boosting the case for more thorough and frequent audits casting a spotlight on incorrect information. Digital tax reporting takes that concept to another level. With digital tax reporting, companies submit accounting data to support filings in a defined electronic format and in a defined timetable, enabling real-time audits.
A growing number of EU members use the Standard Audit File for Tax (SAF-T) standard for this type of reporting. Still, there are many different approaches with variations in reporting frequency, granularity, scope, and responsibility for data reported to tax administrations. Latin American countries such as Mexico and Brazil use standards of their own, adding to the complexity of the process.
The general trend is for tax administrations to collect transaction-level data with greater frequency, and ideally as close as possible to the actual data interchange — and then to use this information for triangulation and electronic VAT auditing. Governments access additional data and begin to match data across tax types, and potentially across taxpayers and jurisdictions, in real time. The tax authority can then aggregate data and register it in the government’s central database.
With that data, the government can subsequently trigger, substantiate, and prosecute audits; validate deductions; and assess penalties for non-compliance, late registration, and invoicing discrepancies. As such, VAT reporting can have a major and immediate financial impact, potentially leading to penalties for lack of compliance and cash-flow issues due to loss or delay of VAT deductions. AP departments cannot simply rely on their suppliers to provide correct invoicing information; they have a responsibility to ensure their own compliance in reporting payments.
The Importance of Compliant Archiving
Archiving is the element that centralizes original transaction evidence, such as digital invoices, and creates a searchable repository to protect against audits and risk of non-compliance. Compliant archiving has historically been viewed as important for SAP customers to prove compliance in countries where the taxpayer still carries a large part of the burden to prove that transactions that are reported and accounted for have really taken place.
Interestingly, the market is also adopting robust archiving methods in countries that are rapidly moving to “e-assessment,” whereby tax administrations send taxpayers statements, instead of the other way around. In such markets, it becomes even more important to have strong evidence if you want to challenge a payment request that the tax administration has calculated from your real-time transactions. With governments turning to such extreme digital methods to boost tax revenues, compliant archiving will only grow in importance.
Globally, e-invoicing compliance is changing rapidly, with governments increasingly requiring invoices in structured electronic formats for compatibility with real-time clearance. The e-invoice archive should serve as the basis for an SAP customer’s entire e-invoicing compliance strategy. Most countries that require e-invoicing also require an e-archive, so it’s in the SAP customer’s best interest to go beyond simple document storage and pursue an enterprise-wide evidence strategy.
Supporting AP and AR Processes
SAP customers need to cover their bases across the globe. That means integrating disparate AP systems with SAP software so that companies can manage multiple e-invoicing and digital reporting mandates in countries across the world and still maintain full control of tax-relevant AP data.
SAP shops also need to be able to move at the pace of regulatory change as mandates shift and develop, rather than trying to keep up with new regulations through resource-intensive in-house updates. AR processes might get more hype in terms of compliance, but failure to properly address AP compliance also exacerbates the potential for risk of audits and negative financial consequences.
Christiaan Van Der Valk is Vice president, Strategy, at Sovos. Elected a World Economic Forum Global Leader for Tomorrow in 2000, Christiaan is an internationally recognized voice on e-business strategy, law, policy, best practice, and commercial issues.