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Why a European tax engine is now essential for US businesses

As a global business based in the US, it’s likely you’re already using a tax engine to determine tax on domestic transactions.

After all, with 50 states that all control tax independently and apply different rates and rules on a state, city, postcode or even street level, it would be almost impossible not to.

But is your business one of those that while accepting the clear operational efficiencies and advantages of using a tax engine in the US, believes such a solution would be wasted on your European activities?

You’re not alone. For many of the tax professionals I speak to in the States, a tax engine for Europe simply isn’t a priority.

‘Rates don’t change that much.’

‘The rules are easy to manage over there.’

‘We can get by using traditional methods.’

I’ve heard it all. And more.

But the reality, in my experience, is very different…

While VAT regimes in Europe are characterised by relatively few rate changes and regulatory updates compared with the more volatile Sales & Use Tax systems in place across the US, they still present a selection of different challenges.

If you’ve ever had to deal with any of the following…

  • Cross-border transactions
  • Triangulation
  • Drop shipments
  • Chain transactions
  • Intercompany sales

You’ll know exactly what I mean!

All these everyday processes in European VAT make it harder for your ERP to correctly determine and apply tax.

So why does a tax engine add value when it comes to trading in Europe?

A tax engine is the most comprehensive and sophisticated solution on the market.

Ultimately it gives you a tax code for a transaction – much the same as an ERP will. But the difference is that a tax engine has the intrinsic functionality required to tackle every possible scenario. It will not buckle, it will not produce inaccurate results.

I often say to clients there are three key reasons to deploy a tax engine to manage your tax liabilities in Europe:


  • While your ERP might creak under the strain of determining VAT when faced with more complex scenarios, a tax engine most certainly will not. It’s been designed and refined for the most nuanced, niche yet necessary transactions your tax team will be required to manage. A tax engine removes not only complexity, but also risk, from tax management. When implemented correctly, it can act as an insurance policy to protect your business against errors, incomplete data and ultimately non-compliance.


  • ERPs may be mighty machines, but they often consume a lot of time and budget when it comes to day-to-day maintenance. Indeed, many of our clients have told me about the maintenance of an ERP becoming a drain on resources that hampers their ability to modernise and progress in other aspects of tax performance in the medium to long term. But in SAP, for example, you can transfer many of your processes to a tax engine for super-easy and cost-effective maintenance.


  • If your business runs multiple ERPs, you’ll inevitably have to maintain determination individually across each of them. In most cases, determination lacks documentation, consistency and standardisation between the systems. But with a tax engine, you maintain all rates and rules in one place; creating consistency in your determination processes, thus delivering superior results.

How does managing VAT compare to Sales & Use Tax?

Well, let’s just say the two taxes are very different and come with varying complexities and challenges that you’ll need to overcome.

With Sales & Use Tax in the US, tax is applied only once – at the end of a transaction. This means a seller simply collects the tax that is paid by the consumer. It might sound easy, but you’ll have to follow certain steps, such as issuing exemption certificates to parties in a supply chain that aren’t required to pay the tax.

In Europe, VAT is applied at every stage of the supply chain. For example, this can mean VAT being paid when raw materials are sold to a manufacturer, again when a product is sold to a wholesaler, again when an order is made by a retailer and once more when the final consumer buys it.

VAT might initially seem more formulaic in comparison, but it can quickly get complicated when your business owns multiple stages of a supply chain or when you have to track your tax liabilities across different entities, subsidiaries and systems.

The truth is both Sales & Use Tax and VAT come with different nuances and requirements and, if they aren’t managed adequately, have the potential to become a headache for your tax team.

How you manage tax throughout its lifecycle and how you determine the correct tax for each jurisdiction you sell in will influence your ability to remain compliant.

So when it comes to VAT in Europe, it’s worth recognising the scenarios in which it can be incredibly difficult to manage via traditional methods. In these instances, I typically advise using the power and precision of a tax engine to ensure optimum performance.

What are your options?

I’d never try to diagnose your weaknesses or limitations without proper investigation and analysis, so there is no one-size-fits-all solution. But the good news is that there are several state-of-the-art tax determination solutions on the market – such as those from Vertex, Avalara, Thomson Reuters and other ERP plugins – and one will meet your needs.

As a large organisation with a tax engine in place, it may be a relatively simple journey to maximising the potential of that tax engine by configuring it for Europe; either by investing in a new content pack or upgrading your contract to cover more transactions or jurisdictions.

But even if you don’t have a tax engine or you suspect yours may not be the right fit for managing VAT in Europe, I’d love to hear from you to help set you on the right path.