VAT System Audit

Harmonise VAT with ERP and eliminate non-compliance

Your investment

When you have invested a significant sum in an Oracle R12 or Fusion solution you want to avoid unwelcome surprises resulting from a VAT audit. Bearing in mind that the consequences for noncompliance could involve heavy fines in addition to interest on unpaid VAT you would be faced with a potentially huge – yet avoidable – cost and embarrassment to your business.

You depend on your ERP system to ensure that the correct VAT treatment of the transactions has been taken into consideration and ensuring optimal reporting capabilities. In our experience however, standard Oracle ERP systems do not necessarily determine all VAT transactions correctly; we often find a:

  • lack of control over the business processes involved in VAT imposition.
  • failure to implement the correct tax logic with respect to the relevant parts of a VAT transaction.
  • a manual approach when a fully automated solution is possible.

The consequences can be expensive both in terms of time spent dealing with tax audits and the inevitable costs incurred. There is a way to ensure that VAT is aligned with Oracle ERP and have the peace of mind from knowing that your VAT solution is the best it can be by allowing eBiz Answers to conduct a system audit.

Why you need an audit

With a wrongly or a misaligned implementation of the VAT system, companies run the risk of making errors they are not even aware of until they are discovered by the tax authorities. VAT compliance risk in the ERP system can come from several different sources including:

  • changes in business structures.
  • growth through mergers and acquisitions and geographic expansion.
  • registrations to new country VAT regimes.
  • changes in logistics flows.
  • lack of tax training to new users.
  • policy changes by tax administrations.
  • legislation changes at jurisdiction or European Commission levels.

Key issues which an audit would be able to address

Manual solution

It is a maxim that we ‘reduce user error by reducing user interaction’, however the vast majority of the clients we visit have a manual VAT tax solution in place. This is the process of defaulting the tax rate code from sources including items or customer sites and then allowing the end user to override it whether it is correct or not. Allowing an untrained user to potentially select a wrong tax rate could go undetected until a VAT audit. Any solution that relies on user intervention to ensure the correct tax is almost certainly exposed to error. With a complex tax situation do you want to rely on the under-qualified payables clerk deciding if the tax rate should be exempt, zero rated or out of scope? Instead, a solution should apply additional determining factors in combination with the user-entered data to determine the tax. In this way, the onus of the determination is on the tax logic installed and not on the decision of the user.

Not automated

An effective Oracle indirect tax solution should be fully automated with minimal manual intervention. This is particularly true for inter-company and receivables transactions where all the information is at hand to correctly determine the tax. For payables transactions it is often impossible to be 100% automated as purchases may be using an exempt or reduced rate or there could be VAT rounding differences. Tax logic should still be used to determine the majority of the tax rates with only the exemptions requiring any sort of controlled manual intervention.

Limitations of defaulting the tax rate

Many poor solutions will default a tax rate from a static source, for example, from the customer site. This poses problems: defaulting permits only one value to be set and the tax rate could be different for the same customer under varying conditions (sale of goods or services). A further issue arises when the tax rate changes and a new one replaced it with every location where the old tax rate was stored having to be updated manually.

Missing or poor configuration

Missing, poor or inaccurate configuration is a frequent issue. A typical example is that the seeded EMEA VAT setup has not been carried out so all the rich reporting capabilities designed for Europe are simply not available. Often, configuration may have been performed in an unprofessional way that not only fails to meet all current requirements but renders the solution extremely difficult to maintain or expand.

Knowledge

The Oracle Tax module is vast and extremely complex and’you don’t know what you don’t know’ is often the case when VAT in Oracle is set up. The consultant implementing it may have limited knowledge of the eBTax module and this coupled with limited understanding of VAT legislation results in a poor solution. A user who then has to maintain the tax or enter transactions will only know what they have been told – often by the consultant – and simply has to accept it regardless of whether it is right or wrong. Who and how can they challenge this?

Global solution

If your VAT accounting is based on an upgraded oracle 11i solution it is most likely that the structure is going to be impractical, difficult to maintain and even more challenging to try converting it into a fully automated solution. In almost every case the tax rates have been set up on a country-by-country basis rather than with a structure that is designed to be global. It is better to have a consistent design for your tax structure using a common naming convention and recycling tax rules to ensure ease of maintenance and issue resolution. These are all matters that can be highlighted in our review.

We recognise that some customers simply don’t want an automated solution and while there is a higher risk, a manual process can remain in place.

What can you expect from an ERP tax audit?

Our System Indirect Tax Audit will analyse your existing solution and clearly identify what you have and what is missing but most importantly: propose practical ways in which you can move forward. We will take a completely unbiased approach to this task, taking into consideration all relevant factors before making recommendations. Furthermore, we can work with your tax partner to ensure that the VAT on all transactions is being correctly determined. Our tax audit will comprise the following:

  • Analysis of existing setup of all tax regimes.
  • Review of existing VAT issues (resolution if appropriate).
  • Understanding of user requirements.
  • Review of requirements from modules where tax can be influenced: Projects, Depot Repair, Oracle Contracts, etc.
  • Invoice formats and VAT.
  • VAT reporting (including country specific reports such as the European Sales Listing).
  • Interface review to see how the tax is imported into and out of Oracle.
  • 20-plus page report available within 72 hours of audit.

Quotes

1. The EU VAT system is in a mess. It is a dizzying mix of rates with a huge number of exemptions and special cases across its 27 countries. The VAT gap is now a stunning €100b which is steadily rising due to fraud resulting from the fact that there is no taxation on EU cross-border purchases by businesses.

2. We found one company claiming VAT on purchases at 23% when the correct rate should have been 21% – thus the company was unintentionally committing VAT fraud. As this had taken place over a six-month period the subsequent audit, correction payments and penalties would have been substantial had we not spotted the problem. This was all due to the reporting being carried out incorrectly, a process that was easily discovered in our audit.

Should you wish to contact us to discuss a VAT audit, Oracle R12 and Fusion tax configuration or any other eBTax related issues please contact eBiz Answers directly.