Tax Technology Series: Part 1
Understanding the Heart of Taxation: What Is a Tax Engine?

This article was published with Accountancy Today on 30 July 2024.

In the realm of global commerce, VAT is one of the most significant yet complex forms of taxation. With indirect tax regulations varying from country to country and frequent updates challenging businesses, the need for efficient tax solutions has never been greater.

In this article, Jun Miyake, Principal, Tax Technology, at Ryan, delves into the process of deploying a tax engine for indirect tax determination and the benefits it brings.  

What Is a Tax Engine?

A tax engine is a tax technology that calculates transaction taxes quickly and accurately, enhancing efficiency in tax operations globally.

The nerve centre of a company's tax compliance and management process, a tax engine is a “bolt-on” system that connects to an organisation’s enterprise resource planning (ERP), billing, or e-commerce system(s), takes transactional and master data from the source system, and returns the correct tax(es) and rates to be applied. Its primary objective is to ensure accuracy, efficiency, and adherence to tax laws and regulations.

When Is a Tax Engine the Right Solution?

Historically, when people set up accounting systems from a VAT perspective, they may have relied on an order entry clerk or a procurement entry clerk knowing how VAT works, or a process whereby finance contacts the tax manager, training is provided by the tax manager to the business, or a custom piece of code may have been built by the company to manage tax determination.

With the new real-time reporting mandates across many jurisdictions, it is critical that tax is determined correctly the first time that a transaction is processed. Opportunities to correct any errors after the fact are now becoming incredibly challenging. Additionally, with the move to the cloud, the traditional methods of automation using custom code are now no longer available.

Why Does Your Company Need a Tax Engine?

Deploying a tax engine has multiple advantages over “native” systems’ functionality, which are listed below.

• Tax determination logic is standardised in the tax engine across one or more source systems, making it less complex, with fewer support costs. If your organisation has multiple systems, these can be hooked up to the same single tax engine.
• If your company is multinational, a tax engine will be updated with the latest changes in tax rates, place of taxation rules, exemptions, etc., in all supported jurisdictions. An ERP-based automation requires internal teams to track and make changes, often too late after the event.
• Tax determination is a “core” function of a tax engine.
• Tax content is provided and updated by a reputable firm with an audited process, ensuring accuracy.
• A tax engine provides consistent tax data requirements.

What Are the Benefits of a Tax Engine?

• Accuracy and Efficiency: By automating determination processes, a tax engine minimises the risk of errors while enhancing operational efficiency. This accuracy translates into cost savings and improved compliance.
• Risk Mitigation: Noncompliance with tax laws can lead to severe consequences, including financial penalties and reputational damage. A tax engine reduces the risk of noncompliance by ensuring adherence to regulatory requirements.
• Enhanced Agility: A tax engine equips organisations with the agility to adapt quickly to changing tax landscapes, regulatory mandates, and business requirements.
• Resource Optimisation: With automation taking care of routine tax tasks, valuable human resources can focus on strategic initiatives, thereby driving business growth and innovation.

How Does a Tax Engine Work?

At the heart of every tax engine is its calculation prowess. A tax engine computes taxes across multiple jurisdictions, considering intricate tax laws, rates, exemptions, and credits. Whether it's sales tax, VAT/GST, or another levy, the calculation engine crunches numbers swiftly and accurately.

A robust tax engine seamlessly integrates with existing enterprise systems such as ERP, Customer Relationship Management (CRM), and financial software. This integration streamlines data flow, enabling real-time tax calculations and reporting without manual intervention.

Conclusion

If your company is operating globally and wants to become more efficient in calculating indirect taxes across multiple jurisdictions, a centralised tax engine is an automated solution that creates more robust and compliant tax processes.

If you’d like to explore if deploying a tax engine is the right choice for your business, I’d love to discuss this in more detail with you. You can contact me by filling in the form below.