Top 10 Tax Compliance Pitfalls to avoid in 2024
Frank Sinatra famously sang, “Regrets, I've had a few; But then again, too few to mention”. In this vein, we asked our colleagues to mention and explain the mistakes they made when building and buying indirect tax compliance solutions.
Here’s our top 10:
1. Vendor Lock-In
The pitfall of vendor lock-in occurs when a business becomes overly dependent on a single supplier for products or services, making it difficult or costly to switch to another vendor. This can arise from proprietary technologies, specialized software, or contractual constraints. Businesses should carefully consider the terms of engagement with vendors and regularly evaluate the market for alternative tax solutions. Ensuring contract flexibility and seeking interoperable systems can mitigate the risk of vendor lock-in.
2. Custom Maintenance
Custom maintenance issues arise when a bespoke tax compliance solution requires ongoing, specialized support. This can lead to a situation where only a few individuals understand the system, creating a single point of failure. To avoid this, companies should ensure that their custom tax solutions are well-documented (see below) and that knowledge is shared among team members. Regular training and cross-training can also help reduce dependency on a few key individuals.
3. Poor Documentation
A common pitfall in implementing tax compliance solutions is inadequate documentation. Without proper documentation, maintaining and updating the system becomes problematic, especially when staff turnover occurs or specific expertise is lost. Comprehensive documentation should be an integral part of any tax compliance solution, detailing processes, operations, and troubleshooting methods.
4. Skewed ROI
Misjudging the return on investment (ROI) of building or buying a tax compliance solution can lead to financial strain. This skewed perception often results from underestimating the long-term costs of a tax solution or overestimating its benefits. A thorough cost-benefit analysis, taking into account both direct and indirect costs, as well as realistic benefits, is crucial in avoiding this pitfall.
5. No Future-Proofing
Failing to consider the scalability and future adaptability of a tax compliance solution can render it obsolete as the business grows or as tax regulations change. Future-proofing involves selecting tax solutions that are scalable, flexible, and adaptable to future technological advancements and regulatory changes. It also involves being aware of your businesses plans and evolution (geographical expansion, business model changes, etc) to ensure that the solutions your deploy today can still service you tomorrow.
6. Misaligned SLAs (Service Level Agreements)
Misaligned Service Level Agreements (SLAs) can lead to misunderstandings and unmet expectations regarding the responsibilities and services provided by the tax compliance solution provider. Businesses should ensure that SLAs are clear, concise, and aligned with their specific needs and expectations. Regular reviews and updates of SLAs can also help in maintaining alignment.
7. “That's Out-of-Scope"
The "That's out-of-scope" trap occurs when businesses fail to fully understand the scope of services provided by their tax compliance solution. This lack of understanding can lead to unexpected costs or gaps in service. To avoid this pitfall, businesses should clearly define the scope of the project and maintain open communication with the service provider to ensure all parties have the same understanding. It also helps asking your provider to tell you upfront exactly which services, in their experience, will not be covered.
8. Liability Issues
Determining liability in the event of errors or compliance issues is a significant consideration. Businesses must clarify who is responsible for various aspects of tax compliance, including error resolution and the financial or legal repercussions of non-compliance. Clear agreements and contracts outlining the responsibilities and liabilities of all parties involved are essential.
9. Audit Responses and Controversy
Handling audit responses and controversies is a critical aspect of tax compliance. Businesses should establish clear procedures for responding to audits and ensure that their tax compliance solution includes support for audit processes. Additionally, they should adopt practices to minimize the risk of triggering costly audits, such as prudent refund claims.
10. Exit Fees and Switching Providers
Closely connected to vendor lock-in, exit fees, and the challenges of switching providers can be a significant hurdle. Businesses should understand the terms and conditions associated with changing providers, including data access, data migration, and statutory storage requirements. Negotiating favorable terms before entering into an agreement can save significant time and resources in the long run.
Conclusion
Dealing with tax compliance software and solutions doesn't have to be overwhelming. Just be mindful of these pitfalls and do your best to avoid them.
By choosing the right tax technology tools and providers, you can make this process a lot smoother. Remember, it's about finding solutions that work for your specific needs, whether it's handling VAT compliance, automating process flows, or simply keeping up with tax regulations.
It's all about making these tasks easier so you can focus on what you do best in your business.
How can Fonoa Help?
The above pitfalls are why we built technology to help our clients avoid them.
If you want to learn more about our capabilities and how they can help you understand exactly how we remove vendor lock-in issues or help mitigate Single Points of Failure, just reach out to our teams. We can provide you with more information and demonstrate the tax solutions we have built and deployed for global multinationals.
