Tax software in a finance stack does two different jobs. Indirect tax engines calculate sales tax, use tax, VAT and GST on every invoice and purchase as it happens. Corporate tax tools prepare the income tax provision in the financial statements and the returns that follow. Some vendors sell both; most specialise.
What it does
An indirect tax engine receives a transaction from a billing system, ecommerce platform or ERP, works out which jurisdictions apply from the ship-to and ship-from addresses, decides whether the product is taxable there, and returns the rate and amount in milliseconds. It keeps the rules and rates current, stores exemption certificates, and prepares and files returns. In the United States the number of places where a seller must collect grew after the Supreme Court's decision in South Dakota v. Wayfair, Inc., docket 17-494, where the judgment was vacated and the case remanded on 21 June 2018. Outside the United States, the same engines handle VAT and the e-invoicing mandates that require invoices to be reported to tax authorities.
Corporate income tax software takes the trial balance after the close and computes current and deferred tax for the provision, by entity and jurisdiction, under the applicable standard, such as IAS 12 for IFRS reporters. It also supports transfer pricing, country-by-country reporting and return preparation.
Information reporting is a third, smaller job: US payers file forms such as Form 1099-NEC, and several tax vendors prepare and file them.
Who uses it
The tax director and tax managers own it. Accounts receivable and billing teams rely on the indirect engine without seeing it. Controllers review the provision. Engineering teams integrate the tax engine into checkout and billing systems.
The parts a typical product has
- Tax determination: jurisdiction, taxability and rate per transaction
- Exemption certificate management
- Returns preparation and filing, and remittance
- E-invoicing and real-time reporting to tax authorities
- Tax provision and deferred tax calculation
- Transfer pricing and country-by-country reporting
- Information returns such as 1099s
Where it meets other categories
The indirect engine is called by revenue recognition and billing systems on sales and by accounts payable and procurement on purchases. Results post to the ERP. The provision draws on the close and feeds financial reporting.
Questions to ask a vendor
- Which billing systems, ERPs and ecommerce platforms do you integrate with out of the box?
- How are rate and rule changes delivered, and how quickly after a law changes?
- Which countries' e-invoicing mandates do you support?
- Do you file returns and remit tax on our behalf, or prepare them for us to file?
- How are audit trails kept for each determination?
- For the provision, how do you take in the trial balance and handle uncertain tax positions?