MODERATOR’S NOTE: This blog post, originally published in 2018, contains information related to an older version of the SAP Tax Service product. For information about the latest version, please see Integration with External Tax Calculation Engines – New Concept for SAP S/4HANA Cloud and SAP S/4HAN...
One of the question in SAP world, to which one seldom get a satisfactory answer is “What is your cost (or effort) for Indirect tax reporting?”. This is one of those KPI’s, which is rarely measured & managed. Thought this might get included somewhere in a generic category of “Compliance & Legal” costs but is not often subjected to evaluation & optimization. As per APQC the median spend on the function “Manage taxes” is $2.39 for $1000 revenue. For the bottom performers this is more than twice at $5.13 for $1000 revenue. Of course function “Manage taxes” will include all direct & indirect taxes but it is safe to assume that Indirect taxes ( VAT, GST etc.) by data volume & complexity will be the major part of this function.
With the new tax regulations coming up all over the world ( eg. e-invoicing and e-reporting in multiple countries including EU)-things are becoming increasingly difficult to be managed in the "old way". According to SAP, 80% of countries today demand electronic data extraction to perform tax audits and 25% of countries require submission of transaction level data, which is only bound to increase. From application perspective this means following
- High volume of data to be transferred to authorities
- Depth of the information i.e. transactional level details desired which has all required granularity and details
- Frequency of reporting has also gone up. Eg. Few countries demand tax data to be sent every working day instead of at month end
With all these intricacies being mandatory changes, the cost of indirect tax reporting will only go north. Organizations today are slowly waking up to streamline and optimize the process of validating the tax data and ease of reporting as the legacy & piecemeal approach is not going to provide desired yield.
How can SAP help you?
The values stages for indirect tax calculation can be visualized as below. The aspiration value for the client would be to reach the strategic tax management level.
In the S/4HANA world, SAP promises improvement in following value drivers which are related to indirect taxes
- Reduce the cost to support tax accounting & reporting
- Improve tax compliance FTE efficiency
- reduce audit cost ( indirect tax is a sub-component of this)
Before we move to the solutions for above value drivers, it is important to understand how typically indirect tax reporting process is performed in ERP today and how is it inefficient
In order to have an optimum and most effective solution, it is important that each of the above process steps are addressed for their inefficiencies. Apart from the improvement brought by S/4HANA data model and HANA as a database, SAP has following 4 solutions especially geared towards improving the indirect tax life cycle by minimizing and in some cases completely eliminating the inefficiencies inherent to the above processes. These four solutions are part of the SAP Global tax management portfolio
1.SAP Tax Service: This cloud based service addresses the "Tax calculation capability" in the "Post transaction data" element of the indirect tax process. In today's ERP, the tax calculation logic is either within ERP or managed by external tax calculation engine (eg. Vertex). For customers having multiple ERP's, the solution to maintain tax calculation logic individually in every application is cumbersome, effort intensive and prone to errors. Additionally any change to the logic will need development and effort for the regular update to tax conditions due to regulations further compounds the maintenance costs. SAP chose to address this by introducing SAP tax calculation as a service which can be consumed by ERP and S/4HANA (both On premise and as well as cloud edition). SAP Tax service ensures correct and consistent calculation of tax with a single tax calculation engine, reduces the maintenance effort and ensures compliance with legal change updates. Being a cloud based service it is scalable solution irrespective of the number of backend ERP's you have and ensures speed to market.
For accurate & fast reporting, you need to ensure correct data is created in first place, SAP Tax Service address this need.
2. SAP Tax Compliance: This HANA based solution, which is a component of assurance and compliance software, acts as a control check mechanism for the tax data. For accurate reporting it is paramount that the underlying data on which the report is created is correct, consistent and has all the dimensions. Today, typically these checks to validate the data sanctity are carried out manually or via customer development before the report is prepared at the month end, and due to the time pressure for reporting, often the corrections are directly performed in the final report and then retrospectively carried out in source application. SAP Tax Compliance is a HANA based solution and hence for ECC ERP or in cases where there are more than one Finance systems (both SAP and NON SAP)- it will operate in a side car or SAP Central Finance scenario. SAP Tax Compliance comes with their own sets of checks and allows flexibility to define customer specific checks & scenarios. Once checks are carried out, exceptions are highlighted and corrective action initiated, tracked and status reported. This way the control checks & required corrections can be carried out every day rather than struggling with voluminous data at the period end. Additionally SAP Tax Compliance provides machine learning capability to learn from the manual decisions on validation of exceptions, thus helping to achieve next level of automation and save valuable man hours.
For getting the indirect tax report right in first instance, one needs correct data and SAP Tax Compliance ensures compliance by transaction screening and automatic correction measures
3. Advance compliance reporting: In most cases legal reporting (final report creation and transfer to authorities) is done outside SAP. Typically the data is exported out of SAP and transformed to create final report (output file), which is then transferred to authorities. This is a manually intensive process and since data transformation happens in disparate system(s), there is an overall lack of traceability and transparency. Considering that 4 out of 5 countries today demand electronic submission of information and that number is only going to increase, there is an urgent need for a simplified & homogeneous legal reporting platform within the transactional system. Advance compliance reporting (ACR) is legal/statutory reporting platform in S/4HANA which addresses this critical need. Today ACR delivers ~140 preconfigured reports (including indirect tax reports) and provides flexibility to define your own reports. Technically one can create any legal report by utilizing existing CDS views/tables within SAP and defining the required output format. This output can be sent directly to authorities using either ACR's established integration with agencies or customers own integration platform. Alternately the file can be downloaded and uploaded as well. ACR provides complete audit traceability including changes done directly in the output file and helps to ensure compliance with its unified dashboard and embedded analytics.
ACR simplifies the final report creation and direct submission to authorities in a completely transparent and scalable platform with a reporting view which provides real time information on compliance
4. SAP Document compliance: A growing number of regulations (eg. E-invoicing in Europe, Brazil Nota fiscal) mandate exchange of electronic documents with government authorities, which in some cases may have to be done real time and with all the data granularity. It is cumbersome to maintain country format mapping, integrations with respective government agencies and associated monitoring of this information flow especially when multiple countries and multiple document types are involved. SAP document compliance solves this problem by providing a scalable solution to communicate transactional information in real time to legal authorities worldwide and provide efficient operation, monitoring and update for the same. This is a solution on SAP cloud platform and needs to be consumed as a service. SAP document compliance comes with its e-document framework which gathers and creates information in required format and then connects to government agencies/tax authorities via communication platform (SAP Cloud platform) where authentication and digital signatures can be executed. The communication is two way and the e-document framework within ERP is updated with the interim & final status (sent/accepted/rejected by the authorities etc.)
SAP Document compliance service helps to simplify the e-document exchange by seamlessly connecting to your application, gathering and transferring the data to tax authorities and provides efficient monitoring of the entire process
These four solutions mentioned above, positively impacts, improves and simplifies the indirect tax reporting process chain as below
In my next blogs, I will delve deeper into each of the above solutions. Thanks.
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