B2B Payments

Procure-To-Pay’s Tax Conundrum

Corporates’ biggest procure-to-pay challenges often center around the friction of streamlining data flows and the movement of money, from sourcing and purchase order submission to invoice payment and reconciliation. Yet, as supply chains expand across borders, a new burden has landed on procurement teams’ shoulders: compliance.

That burden can come in many forms. Expansive supply chains mean organizations must not only address the risks they face directly, but the risks their supplier bases face as well, including compliance with labor, money laundering, Know Your Customer (KYC) and other regulations.

One of the largest challenges for procurement chiefs today, according to Sovos VP of Strategy Christiaan Van Der Valk, is tax compliance, and it can easily trip up organizations as regulations become more complex — and as regulators’ strategies to ensure tax compliance become more sophisticated.

“Over the past few years, governments have begun using Big Data and technology to digitize existing and new tax regulations in an attempt to reduce value-added tax (VAT), and sales- and use-tax gaps,” he told PYMNTS in a recent interview. “As a result, tax enforcement will soon be an integral part of — and often pre-approve — every business transaction as it happens.”

Electronic invoicing requirements are one example of markets’ heightening focus on tax compliance. While eInvoicing can promote the goal of seamless data streams, and increase access to important information for procure-to-pay processes, eInvoice mandates emerge as the result of government efforts to heighten visibility of trade and transactions, and to ensure taxes are being paid.

Today, he said, half-a-trillion euros are lost in the global VAT gap as a result of fraud, error and tax evasion. Van Der Valk pointed to Italy’s recent eInvoice mandate to address its gap in VAT payments, worth more than $39 billion. The initiative involves mandating the use of standardized, electronic invoices, as well as integration with online tax platforms to automate the exchange of buyer and supplier data.

Corporates’ traditional compliance solutions, he said, were not made to handle such complex technological requirements.

The ‘Third Trading Partner’

The result of these intensifying tax mandates means organizations must approach tax authorities as, what Van Der Valk described as, the “third trading partner,” a figure that is now a critical part of the procurement process, and of the buyer-supplier relationship.

To support that addition to the supply chain, though, data integration is essential. Van Der Valk said the market is moving toward the requirement of real-time tax checks in many areas of the enterprise, including accounts payable, enterprise resource planning (ERP), order-to-cash, procure-to-pay and supply chain management systems.

“Now, all of these systems and processes must be in perfect alignment to ensure there are no gaps or discrepancies that will trigger government scrutiny, or stop supply chains from moving,” he said.

The constant fluctuation of tax authorities’ specifications and regulations makes achieving this level of data integration, and tax compliance overall, even more difficult.

Globalizing supply chains adds an extra layer of complexity, of course. Today, organizations will often approach this challenge by enabling local authorities to link into vendors’ systems directly — in essence, letting their suppliers handle the compliance burden. Van Der Valk warned that this could backfire, leading to a “patchwork” of siloed processes and local systems.

Audit Targets

The digitization of procure-to-pay processes, and of tax authorities’ regulatory efforts, has cracked open organizations’ compliance risk exposure even further.

“Think about all of those invoices that companies have digitized over the past decade,” said Van Der Valk. “They are now audit targets.”

Tax regulators can trace organizations’ financial activity back years, and impose penalties that range from fines to forced shutdown of company operations, he added. Due to the awareness of the full risk of tax noncompliance in the procurement process, businesses are facing major risks — including the threat of “losing control over their own digital transactions.”

These tax mandates are, in essence, forcing organizations to move forward in their digitization efforts by adopting eInvoicing and electronic data capabilities. While that can be viewed as a challenge, businesses can see that requirement as an opportunity.

In the case of cross-border tax compliance, for instance, taking a global approach means a business can deploy real-time data integrations and controls over their financial information to not only maintain compliance across borders, but to further their own digital transformations, said Van Der Valk. Tax burdens also present an open door for organizations to knock down siloes and promote cross-department collaboration, too.

Today, and in the years ahead, there will be a “mission-critical responsibility” to take a proactive stance on tax compliance, or face financial and operational losses. Yet, beyond maintaining compliance, this “paradigm shift,” Van Der Valk noted, presents the chance to transform procure-to-pay operations for the better.

“Tax should not be dictating how you run your business,” he said.

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