Tax authorities around the world are becoming more sophisticated, aggressive and cooperative in enforcing regulatory compliance within their jurisdictions. In particular, they are taking a long, hard look at businesses that appear to be reporting and paying lower taxes than expected.
Look no further than recent high profile cases like that of Amazon in the United States where the company is now required to charge and report sales tax in many more states. Similarly, the Starbucks UK Financial team had to answer questions from the British Government regarding their corporate structure and tax liabilities when it became public that they weren’t declaring profits in the UK. Amazon was also in hot water in the UK regarding the zero-rated VAT treatment of electronic books delivered to their Kindle Reader based on their regional eBook facilities being in Luxembourg.
With well-known companies such as Amazon and Starbucks attracting such public attention from authorities, finance teams around the world are increasingly looking to avoid compliance risk by providing greater transparency within their financial statements and, critically, their tax reports and submissions to local authorities.
Transparency for indirect taxation requires that a business be able to clearly demonstrate the calculation methods and source of taxable values as reported on its tax returns. For many businesses, running traditional ERP systems, this is much harder than it might seem.
Indirect and transactional taxes such as Sales Tax, VAT/GST and Witholding Tax are typically based on six criteria:
- Who is doing the selling – is the business a for profit, non-profit or other form of organization that has some specific treatment for indirect taxation purposes?
- Who you are selling to – as above, does the customer you are selling to fall into one of the special categories?
- Where you are selling/shipping from – the location from where you are selling your goods or service will drive certain tax behaviors (for example, if you are not in the same State or Country as your customer)?
- Where you are selling/delivering to – similarly, the location of the customer will also determine certain taxable treatments and which tax rates are applicable?
- What type of item/service you are selling – certain types of item attract different rates of taxation over and above any of the other criteria; children’s clothes are exempt from VAT in the UK, for example. Another example is that products deemed to be Luxury Goods are taxed at a higher rate in some US states than others?
- Last but not least, the tax that is being charged may itself have some specific properties; perhaps it is only valid for a certain date range or, it is calculated on a basis other than the actual item price.
Given such complexity, it is no wonder that many businesses find calculating indirect taxes challenging in the first place. Beyond that, being able to clearly justify those calculations and demonstrate the audit trail after the fact can be even more difficult with traditional point solutions.
NetSuite’s integrated business system approach carries over to how we have developed our Tax Reporting capabilities. From the top level tax report for each country of operation (Nexus) the finance team can drill down to successive layers of detail to clearly demonstrate how those tax reports are constructed. So, a quarterly VAT100 Return report – as required for VAT registered businesses in the UK – enables a drill down from the total values for each ‘Box’ to the sub-total by Month. From there further drill-down is provided to the monthly totals by Tax Code and from there to the individual transactions from which those values are derived.
That’s not the end of the story, however, as users with the appropriate permissions can drill-across from the transaction in order to see details of the Customer – their business type, their business address, VAT Registration No., etc. - the Item(s) that they have purchase and even the attributes of the Tax Codes themselves. The ability to drill-down from the summary level all the way down to this level of granularity is something that NetSuite has offered its customers for more than a decade. Yet, to this day it continues to be beyond the capability of most other ERP systems that require manual data entry, separate reporting tools and excel spreadsheets to compile tax reports.
The degree of Transparency that NetSuite provides to finance departments in support of their tax reports has reduced the time and effort required to both submit accurate tax reports in the first instance and further reduces the stress and complexity of justifying those tax reports during audits and tax inspections for thousands of companies around the world.
Beyond transparency, NetSuite also assists businesses in addressing the need for simplicity, automation and control and consistency that are key to strong compliance in your business systems. I will provide further insights into how NetSuite can help you in these areas in my next post.
-CRAIG SULLIVAN | SVP, INTERNATIONAL PRODUCTS