Growing businesses often struggle to remain VAT compliant everywhere they invest and trade. They face a confusion of local regulations, practices and rates in which nothing stays the same for long. How can they use ERP localisation to tame today’s complex VAT compliance risks and prepare for the even bigger challenges ahead?

In VAT compliance, change seems to be the only constant.

Global crises – first the pandemic, then supply chains, now energy costs – have destabilised rates, rules and admin burdens as governments use VAT systems to deliver targeted support for struggling sectors. There were more than 60 rate changes worldwide in 2021 alone.

For companies trading or transacting between the UK and EU, Brexit has made VAT compliance significantly more complicated in the present, as well as uncertain for the future.
With many governments struggling to close tax gaps, VAT has become a critical source of revenue. Enforcement is becoming tougher, and penalties more severe, just as accelerating digitalisation makes compliance regimes increasingly unforgiving.

Global trends like tax digitalisation and e-invoicing are meant to deliver simplification and convergence. But local implementations reflect local political, fiscal and commercial priorities, so the result is more variety and more complex, not less.

A case in point is e-invoicing. Competing models and local sectoral priorities (B2G, B2B, B2C) can greatly complicate cross-border VAT compliance. In Italy e-invoicing is now mandatory for cross-border B2B transactions, and is likely to become the basis of VAT returns in due course, contributing to a significantly more complex business environment (as TMF Group’s Global Business Complexity Index 2022 reveals).

E-invoicing projects are complex challenges for any government. Constant change, revised expectations and shifting timelines are the norm. Much of the official focus has so far been on the issuing of invoices. But governments keen to maximise compliance are now beginning to look at reclaimed VAT and the processing of incoming invoices. Again, approaches differ widely between jurisdictions.

More importantly, invoice digitalisation is really only the beginning of a much more profound transformation. The global, technology-driven trend – which the OECD calls ‘Tax Administration 3.0’ – will continue to bring VAT reporting and payment closer and closer to the taxable events themselves. Eventually corporate ERP systems will be expected to have built-in tax compliance processes operating in real time, with little or no human intervention. The increased certainty and reduced compliance costs will be welcome, but the price will be no more leeway to retrospectively correct data and refine calculations. It will become vital for all corporate ERP systems to be properly, comprehensively and consistently localised – kept up to date and correctly configured at all times in strict accordance with local VAT rules.

This is nothing short of a revolution in the making: now is the time for companies to prepare themselves for it.

How to prepare for a new age of VAT compliance in ERP localisation projects

So, what does all this mean in practical terms for the VAT processes and ERP systems of a growing cross-border company? All over the world, TMF Group helps such companies create calm global VAT assurance out of the teeming local compliance demands of numerous, very different jurisdictions. We find the same four success factors are present time and time again:

1. ERP selection and set up

There are lots of different ERP solutions on the market and many different factors to consider when making your selection: data accessibility, translation issues, transactions volumes, critical functionality, the ease (or otherwise) of integration with existing systems – to name just a few.

It is very unlikely that any one ERP system will provide all the functionality you need to achieve compliance everywhere. Nor is it likely to connect seamlessly with every official tax system – there are too many and their requirements are too varied.

Start by being crystal clear about the operational specifics of the business and what they mean for critical ERP system functionality. It is good practice to audit the functional needs of each department in turn and construct a definitive checklist of requirements. On questions of VAT compliance, always consult with your finance and tax teams, or the third-party service provider if you have outsourced accounting and tax. Carefully establish the ‘must haves’ and make sure these are integral to the ERP systems you are considering. Non-mandatory requirements can then be weighted and prioritised according to the business benefits they offer.

Knowing a system’s limitations is vital to understanding what other solutions (if any) you might need to meet particular local compliance requirements. So systematically identify functionality gaps and system incompatibilities (which may also vary from jurisdiction to jurisdiction) and then consider what additional or standalone systems are needed.

• Are you expected to keep records and file VAT returns digitally (as in the UK)? Then you may need an application programming interface system (API) to allow your ERP to communicate with tax authority platforms.
• Or might a workaround be sufficient? Perhaps you could use bridging software to connect non-compatible applications (like spreadsheets) directly to tax systems?
• Might it be possible that you don’t need full-blown digital tax capabilities at all at this stage? Much will depend on the nature of your business in a given jurisdiction.

A similar situation arises with electronic invoicing. Some ERPs will have dedicated functionality built in, others will need a separate add-on solution.

Of course, tailoring, adapting and augmenting your ERP to meet the needs of local accounting and tax compliance means more than simply choosing the right system. You will need the resources to keep track of local legislative changes in real time, as well as the expertise to make sure they are adapted to, and accurately embedded in, your ERP system. If you do not have the resources in-house, consider appointing external subject matter experts. You can read more about our own dedicated ERP localisation services here.

2. Clean data and healthy decision trees

It’s often said of humans that ‘we are what we eat’. The same is true of ERP systems and the data we feed them – especially when it comes to VAT compliance.

Unlike other taxes, the rules governing VAT compliance must be embedded in the logic of the ERP system itself so that calculations can be made automatically for each transaction. As a business grows, and its tax environment evolves, it is easy for these ‘decision tree’ processes to fall behind.

• Review both the master vendor (supplier) and customer data files. Are they complete, accurate and up to date? A missing VAT number is enough to cause a VAT error on a B2B supply.
• Check VAT rates, structures and thresholds across all jurisdictions. With many more short-term rate and rule changes today, it’s easy to miss something.
• Check that all decision tree (or VAT logic) processes are still appropriate. Amend them or design new ones, as appropriate. Not all decision trees will be automated, so check that manual processes are still fit for purpose and up to date.
• Finally, don’t treat this review as a one-off exercise. Because local VAT rates, procedures and compliance requirements are always in flux, the ‘review-and-refresh’ process also needs to be continuous.