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Peter Boerhof, VAT Director at Vertex, reports on research into the challenges of trading into new territories, and advocates for digitalisation.

Introduction

Financial decision makers have certainly earnt their keep over the past few years, with many navigating their business through the turbulence of the pandemic, ongoing supply chain disruption, and a fragile global economy. Whether they are sitting behind the glare of the computer screen analysing countless spreadsheets and tightening the purse strings of the company budget; understanding emerging technologies to help gain efficiencies and make pragmatic decisions; or even spending hours in meetings with C-suite to discuss the future direction of the business. It’s been a tough and relentless period. However, despite the chaos and firefighting most senior finance and tax professionals have experienced, it appears that this has not impeded their plans to expand into new territories and take advantage of the e-commerce boom.

According to our research, two-thirds of businesses that currently make online cross-border trade transactions have increased the number of countries they sell to since the start of 2020. This has positively impacted revenue as eight out of ten businesses report increases of up to 50%. Yet, respondents also reveal that one hurdle with the potential to slow down business growth is managing the indirect tax requirements of each new territory.

Indirect Tax Traffic Jams

We interviewed over 700 financial decision makers in businesses that sell their goods and services online to learn about the challenges they face in relation to business growth. Aside from the threat of financial crisis, respondents believe indirect tax liability and financial process inefficiencies pose an enormous risk to scalability. So, what’s causing these roadblocks?

1.  An Ever-Evolving Tax Landscape

54% of the senior finance professionals surveyed agree that the indirect tax complexities of entering new markets and geographies could prevent growth and diversification for their businesses over the next year. While the rise of online shopping and access to a greater variety of buying channels has allowed companies to expand their offerings and enter new markets, more and more tax authorities are introducing new legislation to collect revenue and ensure a level playing field for domestic brick and mortar sales. As a result, half of the respondents believe that changing tax rules and rates make compliance more difficult, especially in countries where they previously haven’t traded.

2. Indirect Tax Requirements

In addition, tax authorities are also updating reporting requirements; this includes real-time reporting obligations and e-invoicing mandates. This means businesses need to ensure tax determination is applied correctly and all data files are accurate at first instance. Otherwise, they run the risk of non-compliance and hefty penalties and fines. This has made indirect tax management and compliance burdensome, with 46% of respondents claiming growth will slow down as a consequence. Specific tax challenges include the increasing need to perform VAT/sales tax calculations at the digital point of sale, difficulties related to accurate and timely sales reporting, managing multiple filing deadlines, and ensuring VAT compliant invoices.

3. Inefficient Manual Processes

Despite six out of ten financial decision makers stating that new technologies will provide opportunities for business scalability, the research indicates that manual processes are still being used for indirect tax management, and this is becoming increasingly unsustainable at the rate sales continue to grow. This is not surprising since finance and tax teams often use multiple systems to handle their indirect tax obligations. Many rely on native tools in their Enterprise Resource Planning (ERP) system (51%) and manual processes and spreadsheets (41%). According to 47% of respondents, this is problematic as their indirect tax capabilities are not equipped to handle the increasing requirements of the tax landscape. Subsequently, when using manual processes and basic tax functionality within their ERP, tax teams must carry out extensive research into tax jurisdiction requirements, which is a drain on resources and bears significant risk of data errors and reporting delays.

More about the Research

The research was conducted by Sapio Research UK on behalf of Vertex. 730 financial decision-makers (c-level, directors, and managers) working in businesses selling cross-border products and services online were interviewed, across the EMEA (420), North America (250), and South America (60). Respondents were identified from a pool of B2B and B2C businesses reporting an annual turnover between $20m and $400m (or, £14m and £295m).

A Smooth Journey to Frictionless Tax

With 83% of senior and tax professionals becoming increasingly involved in growth conversations, they must help the business stay on track to ensure the indirect tax function supports scalability. For over half of the respondents, improving indirect tax management to deal with growing VAT complexities will enable them to achieve this. At the same time, six out of ten also state that the digitalisation of core financial processes will enable the business to respond with more agility to change.

Investing in a tax engine that fully integrates with ERPs, procurement tools, and e-commerce software can ensure business objectives are supported. Best-in-class tax technology can handle the changing requirements of the tax landscape, apply correct tax determination and calculation rules to online shopping baskets in real-time, and help make sure data is error-free and audit ready. This frees tax teams up to provide valuable strategic insights to move the business forward, but it also means new territories can be entered confidently.

While the complexities surrounding indirect tax management can cause barriers when it comes to frictionless trade, financial decision makers can harness tax technology to bypass the congestion for a green light to business growth.

To learn more about the indirect tax barriers which are impacting business growth, download the latest report by Vertex.