Organizational growth is good for business but can be something of a headache for tax and IT teams. When cross-border transactions are high, with multiple parties based in different tax jurisdictions, managing and reporting VAT is far from straightforward. And although SAP ERP systems ECC and S/4HANA can deliver huge benefits for businesses, when it comes to indirect tax, this sits on the edge of these ERPs’ capabilities.
So, what is the solution? Manual workarounds and bespoke VAT solutions may have, on the surface, at least, worked for businesses in the past. But with workarounds often come corrections having to be made at the month-end. With new e-invoicing and SII regulations, real-time reporting is getting more of a necessity – and these new requirements don’t allow for corrections to be made at the month-end.
Many are looking to invest in specialist tax technologies that work alongside both ECC and S/4HANA, in order to add longevity to SAP ERP systems.
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VAT complexities are growing
We’re witnessing major disruption in the world of VAT. Tax and finance professionals are facing more complexity in the determination, management and reporting of VAT liability than ever before. For businesses with cross-border supply chains, managing tax across Europe has become particularly complicated as finance and tax teams try to ensure the correct VAT treatment across each leg of a transaction. Every country has its own tax rules and requirements for when VAT is applied and what the rates should be. Furthermore, it is now common to see a transaction chain with one or more resellers sitting between the original seller and the end buyer, with each party in the chain based in a different VAT jurisdiction. This, all in addition to EU directives to conform to and the numerous rules that are often subject to interpretation!
Tax authorities are also increasingly expecting real-time VAT reporting, in which indirect tax is reported at the time of each sale (or soon after). This removes the finance team’s ‘comfort blanket’ of the time to check VAT data before it is sent to the relevant authorities.
These challenges are just the beginning. As it stands, ensuring cross-border VAT compliance has become a minefield and miscalculating and misreporting VAT is all too easy, potentially leading to additional audits, fines and reputational damage.
Is specialist tax tech the answer?
Organizations trading across borders have to determine how best to comply with their tax obligations. And SAP users, whether they’re using ECC or S/4HANA, are realizing that they have access to limited in-built tax functionality. This functionality is more than adequate for organizations with simple supply chains, trading in just one or two countries, yet go beyond that and businesses can struggle. Indirect tax complexities are pushing the boundaries of even the market-leading ERPs, with organizations that are increasing their sales channels and markets facing considerable VAT complexities that SAP ERP systems can’t easily handle.
Making a bespoke system work smoothly against a backdrop of ever-changing VAT rules is, due to the complexity, not always the best way forward. Meanwhile, the result of workarounds to manage indirect tax across borders are either the tedious manipulation of data in the ERP system, perhaps also involving pulling transactional data out of SAP into a spreadsheet, which is manually intensive, error-prone and requires significant IT support, or the development of an in-house bespoke system that connects with SAP to manage VAT.
By asking a few questions, organizations can determine whether specialist tax technology is required:
Is cross-border VAT management getting more complex due to EU-wide or specific member-state regulations or other rule changes globally? A company trading across several tax jurisdictions may need the support of specialist tax tools.
Are multi-party transactions common, for example, involving one or more resellers between the original seller and the customer? If the answer is yes, are you able to easily manage this with the tax functionality you currently have in place?
Is the business equipped for e-invoicing? (With correct VAT data in your ERP system?)
Is real-time VAT reporting effectively supported by getting correct tax data out of your ERP quickly following each transaction?
Can the business keep up with new, temporary and permanent VAT rules, such as supply and install rules, VAT groups and special exemption schemes?
Can organizational systems be updated to keep pace with tax changes, or are modifications slow and tedious?
Integrated tax tech for SAP
SAP-integrated tax technologies have become highly sophisticated, so they can overcome these challenges while keeping up with digital tax requirements. Tax engines, for example, are becoming critical to electronically determine global tax liabilities and reporting obligations and for analytics and compliance automation. Such technologies, tightly integrated into SAP ERP, remove the guesswork and errors from tax determination. And as tax and IT teams aren’t continually battling with understanding and addressing tax legislation within new markets and jurisdictions, this reduces time-consuming admin.
However, a tax engine is only as good as the data it is supplied with and a correct understanding of how to handle that data. Processes can differ considerably from one organization to another and so it may not be clear which data needs to be pulled from the ECC and S4/HANA systems into the tax engine.
A ‘data mapping’ solution for SAP ERP systems, can provide a vital link between the ERP and the tax engine. A visualization tool, it captures the right data elements and associated documents in a ‘chain’ for every transaction, from sales orders, purchase orders, billing and vendor invoices through to finance postings. It then interprets and configures the data and maps it correctly into the comprehensive fields within the tax engine, allowing tax and finance professionals to more accurately calculate and report indirect cross-border tax while requiring minimal IT support.
Using migration to S4/HANA as a tax transformation trigger
Unfortunately, human nature dictates that it’s much easier to do nothing than to act, and when it comes to improving the tax functionality of an existing SAP system, tax and IT teams may not feel compelled to initiate change unless forced. With this in mind, it makes sense for organizations to use their migration from SAP’s ECC to the S/4HANA platform as a trigger to assess the business’s tax technology requirements moving forward.
With SAP stopping the support of the ECC platform in the next decade, the change to a new system is inevitable. This presents the ideal opportunity for organizations to consider which complementary SAP S/4HANA technologies can be used to ensure the organization’s indirect tax capability is future-proofed. Taking this approach will act as a springboard for indirect tax transformation, ensuring that the tax team can support rather than hinder the company’s growth ambitions.
Tax solutions – an essential part of the tech stack
For many businesses, realizing that tax technologies are an essential part of the tech stack alongside their SAP ERP is a gradual process, and it’s not uncommon for organizations to initially find sticking plaster solutions for their indirect tax problems. But as they scale up and tax and IT teams spend more and more resources on tax ‘workarounds’, it becomes clear that specialist tax technologies that work seamlessly with SAP are needed. Only once smart tax systems, such as tax engines and data mapping tools, are working effortlessly alongside their SAP ERP platforms can organizations expect to meet current and future tax complexity challenges head-on.
This is a sponsored article by Vertex
