Mostly Harmless, Part XVI
In the last post, the process of tax reclamation was defined and some of the complexity around tax reclamation was discussed. This post will address some of the challenges associated with tax reclamation, some best practices, and the benefits that could be expected from an appropriate e-Procurement solution with good tax reclamation support.
Common Challenges
- Tax Rate Verification
Is the rate being charged by the supplier the right one? This is tricker than it seems. In HTS, almost identical classifications can have greatly differing rates (which has led to lawsuits by retailers on the basis of gender discrimination, since they believe that gloves for a man should be taxed at the same rate as gloves for a woman). Some countries update tax rates on an irregular basis. (HST [Harmonized Sales Tax, a blending of the GST and PST in some provinces] increased in three provinces in Canada on July 1.) And sometimes a supplier is using an old database or makes a human error.
- Reclaimable Tax Identification
Can the organization recover the tax? Is it out-of-state? GST or equivalent? A VAT to which it is exempt?
- Tax Credit Identification
Is the expenses an eligible Research & Development expense that can be credited against taxes payable (such as the SRED in Canada)?
Best Practices
- Automatic Tax Rate Verification
It’s amazing how many AP clerks will accept the tax calculation as valid, without even a cursory glance, once they have verified the items have been delivered and the rate appears to be in an acceptable range.
- Automatic Exemption Flagging
To simplify recovery efforts, any taxes that the organization knows it is eligible to recover should be automatically flagged by the (rules-based) system. In addition, the system should also flag any tax payments that the organization might be able to recover and that should be manually reviewed.
- Automatic Flagging of Suspect Taxes for Manual Review
Any taxes that are not in the system should be flagged. Any calculations that are not consistent with internal calculations should be flagged. And the invoice / taxes SHOULD NOT be paid until manually reviewed.
Potential Benefits
- Prevention of Overpayments
Automatic verification of taxes (to insure they are valid) and rates (to insure they are current) can prevent significant overpayments.
- (Over)Payment Recovery
A good tax tracking system can simplify overpayment recovery when such payments are made (which will sometimes be unavoidable, especially if a 3PL or broker handles imports and screws up a filing), and can simplify recovery of taxes the organization is eligible to recover on a quarterly or annual basis.
- Future Credits and Savings
The ability to flag payments that might be (partially) eligible for tax credits can greatly simplify the process of claiming tax credits in an acceptable manner. This can reduce corporate taxes and lead to considerable organizational savings over the long term.
Once the taxes are reclaimed, the actionable part of the procurement cycle is complete and it’s time to analyze performance, which is the subject of the next post.
Next Post: Analysis, Part I