Category Archives: Procurement Innovation

A Hitchhiker’s Guide to e-Procurement: Tax Reclamation, Part I

Mostly Harmless, Part XV

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Tax reclamation is the process of applying for and securing tax refunds and rebates due to the organization. In many circumstances, a buying organization may be eligible to reclaim some or all of the taxes that it pays to a supplier. For example, in the US a buying organization can often reclaim out-of-state sales taxes (if the organization has no presence in that state), in Canada an organization can reclaim GST (Goods and Services Tax) paid, and in the UK, sometimes an organization can reclaim VAT (Value-Added Tax). In addition, a company can almost always reclaim tax overpayments if a filing is made in a timely manner, especially if the organization has an APA (Advance Pricing Agreement) in place.

Taxation is a tricky subject in just about any country. For example, in the US, while intangible assets are not subject to property taxes in most states, they are in some. The same holds true of electronic downloads (software, books, etc.). There’s the LKE, which allows capital gains tax to be deferred when the sale of an asset is being used to generate cash to buy new, or similar, assets to replace the asset which is being deprecated. Then there’s the tangled web called the Harmonized Tariff Scheduled (HTS) which determines import taxes, where classification mistakes are easily made and where a simple misclassification (ladies sleepwear vs. ladies lingerie) can result in a large difference in assessed taxes. (My favorite is imported printers. Leave the cartridge out, the tax rate can be 0. Put the cartridge in, that’s a “value” tax of about 5.5%.) And of course, there’s the issue of foreign taxes, which the organization can get credit for, and in essence reclaim, if properly recorded and reported.

Canada has similar complexity. Out-of-province purchases may not be subject to a provincial sales tax if the company does no business in that province. There’s the GST (Goods and Services Tax) which must be charged by the seller on all non-exempt purchases, but which a buying organization is able to reclaim in full on an annual, or quarterly basis (as the tax is designed so that the ultimate bearer of the tax is to be an individual). And then there are special tax credits, such as the SRED (Scientific Research & Experimental Development) tax credit that can be accrued on up to 75% of all eligible R&D expenses and used to offset (federal) taxes owed by the corporation.

And then there’s the EU, where every country, despite a common currency, still has it’s own complicated tax structure. There’s so much to keep track of that a number of businesses are built around the provision of taxation databases and regular updates to their customers, as some of these businesses are able to charge thousands a year just for database access. The EC (European Commission) Taxation and Customs Union site alone has 14 different databases indexed (and these are just the EU tax systems), including:

  • AEOAuthorized Economic Operators
  • EBTIBinding Tariff Information
  • QUOTATariff quotas and ceilings.
  • SEEDSystem for the Exchange of Excise Data
  • SUSPENSIONSAutonomous Tariff Suspensions
  • TARICIntegrated Community Tariff
  • Taxes in EuropeThe EC’s on-line information tool covering the main taxes in force in the EU member states.
  • VIESVAT Information Exchange System

As a result, tax reclamation is an involved and difficult process that requires really good e-Procurement support to get right. However, considering that it can save a large organization millions of dollars a year (or more), it’s worth it.

Next Post: Tax Reclamation, Part II

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A Hitchhiker’s Guide to e-Procurement: Payments

Mostly Harmless, Part XIV

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Reconciliation challenges and best practices.

A payment is the transfer of wealth from one party to another. The payment is usually cash or cash equivalent, such as cheque, money order, or electronic funds transfer. The payment must be recorded, tracked, reported and assigned to an invoice. Despite all of the focus on e-Payment (P2P, EIPP, etc.), it’s actually the simplest part of the e-Procurement process. The AP clerk simply sends a cheque or instructs a payment to be made, and then records the debit. All of the complexity comes before (which should now be apparent after reading this far in this series) and after (which will become clear). Nevertheless, there are still some challenges to be addressed, some best practices to streamline processes, and some benefits to getting it right.

Common Challenges

  • Paying on Time

    For even a moderately sized company with hundreds of payments to process every week, it can be hard to keep track of which payments are due and which payments are approved. While the organization might choose to make some payments late, others may need to be made on time to avoid penalties.

  • Automating Payments

    If a contract specifies a regular, recurring payment, if a payment can be automatically approved, or if the organization has chosen to pay off a debt in an instalment plan, the payments should be automated.

Best Practices

  • Rules-Based Automation

    The system should allow one time, limited-time recurring, and regular (repeating) payments to be automatically queued according to whatever rules the organization has in place.

  • e-Payment / Accounting System Integration

    e-Payments generally need to be made through bank systems, or through accounting systems that are integrated with, and authorized to use, bank systems. As a result, the system should be capable of being integrated with these systems. This integration can be as easy as exporting a (differential/update) XML file at an hourly interval (with information to be propagated to the accounting system) and importing a (differential/update) XML file at an hourly interval (with information to be propagated [back] to the e-Procurement system).

Potential Benefits

  • Cost Reduction

    Without good system support, payment processing is a very time consuming, and somewhat error prone, task. A good system that automates payment processing saves time (and processing costs), prevents late payments (that generate penalties), and reduces the chance of human error (that can lead to more penalties or costly recovery initiatives).

  • Increased Savings

    Automating payments not only reduces costs, which contributes to savings, but allows payments to be scheduled in a manner that allows for early payment discounts, which increases the savings available to the organization.

Once the payments are made, it is time to try and recover the tax payments that can be refunded to the organization, which is the subject of the next post.

Next Post: Tax Reclamation, Part I

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A Hitchhiker’s Guide to e-Procurement: Reconciliation, Part II

Mostly Harmless, Part XIII

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In the last post, reconciliation was defined as the process of comparing and matching figures from the accounting records of one system with the accounting records of another system. This meant that records in the system not only needed to match up, but match any associated records in the inventory system, the human resources system (if temp labor was procured), and the records in the supplier systems. This often requires a number of challenges to be overcome. This post will address some of the challenges of reconciliation, some associated best practices, and a few of the benefits that could be expected from an appropriate e-Procurement solution.

Common Challenges

  • Manual SKU Assignment

    If a line item can not be automatically matched with a purchase order line item and a corresponding price, then it can be difficult to match an item with the proper item in the buyer’s system.

  • Overpayment Identification

    As explained in the previous post, sometimes overpayments will slip through the most controlled system, especially if it’s difficult to match a conditional discount against a line item or if a contract is late being entered into the system.

  • Tax Verification

    Is the tax rate correct? Are the items being taxed subject to taxation? Is the organization exempt? Is the organization eligible to recover (part of the) tax payment? These can all be difficult questions to answer.

Best Practices

  • Flagging of Manual Assignments

    The system should automatically flag any manual assignment, and queue any manual assignments above a certain value for supervisory review.

  • Automatic Identification of Potential Overpayments

    The system should automatically identify any off-contract payments for goods and services that relate to existing contracts with suppliers in case the goods or services were covered by general discount clauses or in case the opportunity arises to negotiate them into a (future) contract revision.

  • Automatic Tax Rate Verification

    The system should automatically verify that the tax rates used are correct, that each tax the organization knows it has to pay is included, and that any taxes it gets to reclaim are appropriately flagged.

Potential Benefits

  • Overpayment Detection and Recovery

    Good reconciliation support will increases the number of overpayments that are detected and increase the chance of full and timely recovery.

  • Tax Recovery

    Good reconciliation support will increase the chances that recoverable tax payments are identified.

Once the reconciliation phase is complete, it is time to reclaim any tax payments to which the organization is due, which is the subject of a future post.

Next Post: Payments

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A Hitchhiker’s Guide to e-Procurement: Reconciliation, Part I

Mostly Harmless, Part XII

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Reconciliation is the process of comparing and matching figures from the accounting records of one system with the accounting records of another system. In e-Procurement, it generally refers to the reconciliation of the invoice and associated payments against goods receipts, purchase orders, contracts, and / or tax records.

While reconciliation should be done at each step of the process — as the purchase order should be matched against the approval and a contract, the goods receipt against the purchase order(s), and the invoice against the goods receipt(s) and the purchase order(s), there should be a separate, (semi-)manual reconciliation phase as not everything can be reconciled automatically and there will always be new situations and exceptions not accounted for in the automatic rules.

If there is an error in a SKU or other identifying attribute, it may not be possible to automatically match one or more invoice line items against the purchase order(s) they correspond to. In this situation, the e-Procurement system would flag the invoice for manual review, at which point the individual who (first) processed the invoice would do a manual match. If the amount is significant, this match should be rechecked at a later time, because if there were two similar items in the procurement system (catalogs) and the match was made to the wrong, off-contract item, the organization might end up paying a higher price.

A review should also be made of all purchases against a supplier’s account for which there are no contract prices if there are contracts in place with the supplier. For example, a contract with an electronics vendor might be such that the organization gets 10% off of list price for all items for which a contract price is not specified or that the organization gets 15% off of all purchases once it has purchased One Million Dollars worth of goods and services. These situations may not be caught by the system automatically as it might not be easy to encode which goods or services are covered, especially if items are being ordered / purchased not yet in the system.

In addition, a review should be made of all tax payments. Is the tax rate correct? Are the items being taxed subject to taxation? Is the organization exempt? Is the organization eligible to recover some of the payments (such as GST in Canada)? This is a difficult subject and a manual review will be required to ensure that the right taxes are being made at the right amount and that the organization is capturing the right information that will be required for tax reclamation, which is the subject of an upcoming post.

Next Post: Reconciliation, Part I

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Hackett, Hast Thou Forsaken Us?

I was very disappointed after reading this recent article on “process matters too” in the CPO Agenda which discussed the recent findings of The Hackett Group with respect to P2P transactional channels as well as their recommendations for procurement organizations wanting to improve overall source-to-settle performance. If the article is to be believed, Hackett has fallen for the classification trap.

According to the article, Hackett says that a company must:

  1. Possess a unified spend category taxonomy.
  2. Define a rationalized set of transactional purchasing and payment processes that are then explicitly mapped to spend categories and/or associated suppliers.
  3. Ensure that individual P2P transactional channels balance cash, cost and stakeholder satisfaction.
  4. Integrate a channel strategy selection and implementation plan into the category management process.

In reality:

  1. A single taxonomy is not enough as each business unit will need its own in order to be effective. Moreover, taxonomy is irrelevant. The only thing that is important is that the spend is captured and available for analysis. Every department and user will want to see the data rolled up differently. This is the classification trap, and those who fall into it never advance to real data analysis, which is where true savings are discovered.
  2. While the company must define an accepted set of purchasing and payment processes, and while spend must be associated with the appropriate suppliers, the mapping should not be made to an explicit fixed category. Assignments must be able to change as needs change (spend by supplier, spend by commodity, spend by category).
  3. Channels must balance cost and stakeholder satisfaction, but the amount of cash flowing through is not relevant. If the cost of maintaining the channel is too high (relative to the value), the channel must be abandoned.
  4. This is good advice. Planning greatly increases the chance of success.

So, if you really want P2P success:

  • Come up with a channel plan.
  • Implement the appropriate channels and insure all spend goes through an approved channel.
  • Make sure all of the spend data is accessible from each channel.
  • Analyze the data in a true data analysis tool to determine which channels are performing well, which aren’t, and adjust the plan over time as necessary, and
  • allow each business unit to use their own taxonomy.

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