The Value of Supplier Information Management: The Tax Credentialing Use Case
Continuing from our related posting, let’s consider a scenario that can demonstrate the value of supplier information management – tax credentialing.
Based on the IRS mandate, organizations making payments relating to U.S. source income are required to maintain accurate IRS documentation for ensuring the correct tax-withholding rate is being applied. For any one that is involved with the process as a payee organization, collecting W8/W9s is certainly not a fun activity. It is a tedious task that requires several hundreds, if not thousands of reach outs to suppliers.
While the collection of these forms is usually once for W9s in the case of adding a new supplier, and every three years with the W8 series, if a vendor’s information changes like an address, a new form is also required to be on record. Furthermore, deciding on which form is needed may not be that easy. With the W9 it is one form. But with the W8 there can be up to six different forms. These include following –
- W-8BEN, the form used to lower withholdings from dividends, from foreign nationals.
- W-8ECI is used by foreign entities to certify that all income on the form is associated with trade or business within the United States.
- W-8EXP is filled out by foreign governments, international organizations, banks of issue, tax-exempt organizations, private foundations, and governments of US possessions.
- W-8IMY is filled out by foreign financial intermediaries
- And now a W-8BEN-E, the new form all foreign entities a new requirement under the Foreign Account Tax Compliance Act (FACTA)
What this all translates into is the need to potentially reach out to your entire supplier base over the course of a supplier lifecycle to avoid the risk of miscalculating withholdings to your payees (i.e. suppliers). And in the case for W8s this includes the irksome task to ensure proper treatment (e.g. if the vendor is eligible for a withholding reduction or an exemption) based on the various tax treaties the U.S. has with over sixty countries.
Yet for many organizations, collecting this information is often an after thought in terms of process. And in the case of W8/W9s, it becomes something ultimately handled by Accounts Payable because proper supplier onboarding procedures were not in place for ensuring that these documents were collected. In this regard, think about the typical activities for collecting this information –
- Calling a vendor and leaving a message for the information
- Getting the exact entity name so a U.S. tax identification number (TIN, EIN or ITIN) can be validated
- Managing form expirations in the case of W-8s without a U.S. tax identifying number
- Ensuring the supplier is filling out the proper tax form
- Performing a treaty analysis to determine withholding reduction or exemption for foreign entities
- Emailing the vendor for information updates prompting the collection a new W8 or W9
The question in the end is, what’s it costing your business to manage these processes, and what’s the value of adopting a supplier information management to improve it? Perhaps the best way to think about time and value is through an example.
XYZ Inc., a U.S. based company, has an accounts payable department of six (6.0 FTEs) working on W8/W9 collections at various times. The average cost of a fully burdened salary is $80K. On average these resources spend about 8% of their collective time on this activity. In crunching the numbers, this provides an average cost to manage this process of $38,400 annually.
XYZ also has kept record of the number of W8/W9 related incidents (i.e. miscalculations on withholdings) that have occurred annually. It is estimated that of the 17,500 suppliers XYZ has in their vendor master, 30% or 5,000 suppliers have a change in their profile annually that requires the collection of a new W8 or W9 form. Assuming a probability of 20% that an incident can occur and the average cost of an incident per supplier is $100, XYZ has estimated that these type W8/W9 incidents cost the company $100,000 per year.
Based on early scenario planning, XYZ assumes that a supplier information management (SIM) solution they are considering will provide efficiencies in automating the onboarding process where all new suppliers need to fill out a W8 / W9. The SIM system allows for annual questionnaire of their suppliers for changes in their profile that would prompt the supplier to fill out a new W9 form and validate data collection from the supplier to ensure proper withholdings.
The system also automatically tracks the expiration of the W8 every three years, that upon expiry, prompts an outreach to their Foreign-based suppliers. In each case, those approving the process also run a tax identifier check through the system to ensure the right number U.S. and non-U.S. tax identification numbers is affiliated with the supplier master.
In the end, based on the functionalities of the solution, XYZ expects an 85% decrease in the time to collect W8/W9s and time to validate a tax identification number, that’s almost a $30,000 savings. It’s also expected that the SIM solution can reduce the likelihood of improper withholding and allowing the ability to cure IRS related issues with suppliers due to under/over withholding by at least 80%. These efforts translate into a $80,000 savings.
In this case, XYZ found the potential of $110,000 of savings could be established through a SIM solution for tax credentialing alone. But this is just the tip of the iceberg. Isolate hard and soft costs related to other supplier data collection activities like certificates of insurance, diversity or corporate social responsibility/code of conduct, and the numbers really start adding up.
While this just is just one example of SIM efficiencies, savings are clearly dependent on the SIM functionality and the success of the implementation. Nevertheless working out the possibilities of savings based on the existing costs like for XYZ helps build a more accurate picture of where savings and expectations for SIM technology managing these processes.
Furthermore, in light of this being an ongoing point of discussion, HICX Solutions is preparing a detailed analysis on the value of supplier information management topic in the coming months. Based on scenarios similar to the blog posting, we will provide a white paper with a guideline of measureable savings areas that can be utilized to assess if it is time to consider an alternative to today’s “business as usual” in supplier management.