If the aim of an organization is full VAT automation of AP and AR, it is important to understand what exactly makes standard SAP not functioning optimally from an Indirect Tax perspective. Only then it is possible to validate whether company’s objectives can be achieved with upgrading standard SAP functionality and/or implementing a tax engine.
For a correct VAT determination of a cross border chain transaction the VAT relevant data of company code A and B has to be linked real time as Standard SAP itself is only processing a transaction within one specific company code.
SAP and bold-on tax engines exclusively focus on transactions within a single company; it only assesses the underlying individual transactions and fails to link the current transactions to the VAT results of previous transactions. As a consequence, companies with VAT registrations in different countries cannot automatically comply with all VAT obligations.
To realize such ‘birds eye’ view the tax logic should be based and generated on a higher SAP’s hierarchy: at client level combined with implementing the basic tax rules into the logic. Client level includes all the company codes working on the same SAP platform.
Without that approach: the ‘Garbage In’ and ‘Garbage Out’ principle will apply.
The business models of many enterprises have radically changed over the last years and have become increasingly complex. SAP, however, has failed to keep up, which has resulted in the standard functionality of SAP being no longer sufficient for complying with VAT obligations.
Practical solutions must be found within the flexibility and static organization of SAP regarding indirect tax. Because of this, SAP Indirect Tax Consultants in the market can only patch up the existing SAP framework (e.g. ‘hard coding predefined VAT treatments’, see below).
- Cross-border chain transactions with third parties or within a group of company (intercompany transactions) have become the rule rather than the exception
- For example goods are sold twice but only are shipped once. Standard SAP VAT determination logic and functionality for VAT determination does not work for complex dynamic business models (e.g. Principal-Toller-Agent model) with for example multiple VAT registrations, pick up and drop shipments, chain transactions between legal entities (ABC / ABCD scenarios)
- Tax logic should in those circumstance be based and generated on a higher SAP’s hierarchy: at client level combined with implementing the basic tax rules into the logic. Client level includes all the company codes working on the same SAP platform
Below you a case study re cross border intercompany transactions. It is representative for overall Standard SAP weaknesses from an indirect tax perspective.
Hard coding predefined VAT treatments
One of the solutions is to work with assumptions and to implement these in the system (hard coding of transactions via a predefined VAT treatment). This means that a VAT treatment is no longer deduced using information present in the system. Assumptions may be incorrectly implemented during the actual execution or may undergo a change after “going live.” An incorrect VAT treatment is the potential risk.
If such solution is used, periodic audits as detective control need to be set up since the risks at hand will likely exceed the company’s risk tolerance. This results in extra man-hours, representing additional costs du to rework and retrospective corrections.
An important question to raise for sound business decision process is what tools are available in the market for still achieving full automation without making use of assumptions and determine the VAT treatment on real time data in the system.
From Global Indirect Tax Management by Richard Cornelisse and Robbert Hoogeveen