What is a Tax Engine?

What is a Tax Engine?

• A Tax Engine is a technology solution designed to automate and simplify the process of calculating taxes. It determines the correct amount of indirect taxes for a transaction, like Sales Tax in the US and Value Added Tax (VAT) or Goods and Services Tax (GST) in the rest of the world.
• The determination of the tax treatment of any given transaction is based on logical rules set up in the tax engine - and these rules are abstracts of tax legislation and regulations that consider relevant transaction variables to get to the desired outcome.
• It uses a combination of tax logic, tax rules, and tax rates that are continuously updated to maintain accuracy and stay ahead of changing tax regulations.
• A tax engine is sometimes embedded in companies ERP system, but more often is a dedicated (cloud-based) tax software with specific functionality.
• A tax engine is important on the accounts payable/procurement side, but even more important on the accounts receivable/sales side of business operations

⛔️ Problems it solves

Global businesses face complex challenges when it comes to calculating taxes on every transaction, such as:

• Determining the appropriate jurisdiction for taxation
• Calculating the correct type and correct amount of tax to charge to customers and report to tax authorities

This challenge is made even more complex due to:

• The ever-evolving international tax legislation that requires constant monitoring and updates to systems
• Different tax laws that apply to customers and sellers in different countries: every country has its own tax rates (standard, reduced, super-reduced - depending on the type of transaction). The US alone has more than 11,000 unique jurisdictions. Tax exemptions may apply in some countries and on some transactions, but not all
• The various factors that impact correct tax determination, such as the type of service or good, customer qualification (B2B or B2C), value, currency and marketplace or platform involvement to name a few

A company can be held responsible for the collection of tax in countries, even without a physical business presence, purely by selling into countries.

In a nutshell, a tax engine automates the complex determination and calculation of taxes that apply to help businesses comply with constantly evolving tax laws and regulations, minimize risk, save time, and enhance efficiency in tax operations.

❗️Consequences of not using a Tax Engine

Undercharging tax

• Negative consequences include tax audits, tax collection shortages, fines, penalties, profit erosion, and inaccurate cash flow forecasting.
• This can impact financial statements, requiring the provision of unrealized tax risks in the P&L, reducing profitability.
• Outstanding tax risks must also be disclosed in the case of acquisition or an IPO, potentially decreasing the company's value or deterring investors.

Overcharging tax

• Decrease in margin - overcharged taxes often still require remittance to government.
• Poor customer experience.
• Class action lawsuits.

Reputational risk

• Many countries have “naming and shaming” practises, meaning perceived lack of tax compliance by companies is publicly disclosed by tax authorities. With often severe local business consequences.
• Some countries go even further, blocking company website access or criminally charging (local) company directors.

Without a tax engine, tax operations range from inefficient to impossible, as the manual process of calculating taxes by tax departments takes up a significant amount of time and resources that could be better spent on other areas of the business and or are simple impossible given real-time business transaction volumes (e.g. e-commerce).

Any manual process of tax calculation is prone to human errors, especially when dealing with complex tax laws and regulations. A tax engine eliminates these risks by automating the calculation process, ensuring that the correct amount of taxes is calculated every time.

Finally, not having dedicated tax technology makes tax reporting and filing accurate tax returns a lot harder. Where tax determination is critical for daily business needs and understanding the business impact of taxes, accurate tax filings and compliance is a cornerstone of effective tax management for today’s international businesses.

FAQ

What countries do you cover?

• Fonoa is available around the world, and expanding to new countries all the time. If you don't find the country you're looking for in the countries we cover, please don't hesitate to contact us directly. We are always open to discussing our coverage.

Do you integrate with PSPs?

• Fonoa is data source agnostic, and our API can easily consume transaction data from any major PSP or other source. We have seen this in practice with PSPs, and some clients even link multiple PSPs to Fonoa.

What is the average latency for tax calculations?

• We process transactions for the largest volume technology companies globally in real-time. Our tax calculations take less than a second on average.

What data does your Tax engine require?

• In most scenarios, tax determination requires basic transaction data like, for example, the tax status of customer and supplier (i.e. B2B vs B2C), type of product/good or service being sold, the date of the transaction, the countries/regions where supplier and customer are based, if it's a direct to customer or marketplace/platform operator transaction or not, if the price includes tax or not.

What is the output of your tax engine?

• In the output, you will receive comprehensive information on what taxes apply. For example, where the tax liability is due and who is liable for collecting and remitting the taxes. This includes a detailed breakdown of the tax calculation, including line item tax rate and tax amount breakdown.

How is your tax engine different from other tax engines?

• Fonoa’s tax engine is built for flexibility, with the scale and performance requirements of modern day companies as the baseline. It offers unparalleled (human readable) transparency on the tax logic applied to transactions in a way that tax and finance professionals instantly understand.
• Traditional tax tools require full upfront identification (referred to as “mapping”) of each business scenario, with the corresponding tax tules, tax codes and tax implications matched to those scenarios. The consequence of this approach is that it requires a lot of manual, time-consuming upfront work to set up and integrate such tax tools, often leading to rigid and quite static automation outcomes.
• Fonoa offers a modern technology for Sales tax, GST and VAT determination that uses an intelligent and dynamic approach in which defining and collecting business requirements becomes fast and more intuitive, and setting up or changing tax logic becomes simple.