MODERATOR'S NOTE: This blog post, originally published in 2019, contains information related to an older version of this 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...
Typically in ERP, the tax determination & calculation logic is integrated within the application (e.g., condition based tax calculation). When you have multiple applications, such an inbuilt logic can result into following complications
1. Increased maintenance & higher TCO- the effort to maintain tax determination & calculation logic individually in every application is cumbersome, effort intensive and prone to manual errors
2. New applications in scope- The situation becomes complicated with growing cloud solution portfolio (eg. SAP Ariba) which generate tax relevant data and which may need to be shared with another downstream application. This sometimes result in dual maintenance of the same determination & logic
3. Need for SME's in Indirect Tax area- You need SME's who understand tax related changes applicable for individual countries & regulations and can advise update(s) to the applications
4. Increased risk of non-compliance- Periodic legal updates with individual implementation in each application can lead to inconsistency & increase the risk of non-compliance
SAP has chosen to address these issues with SAP Tax Service which is an independently consumable business service on cloud platform for tax determination & calculation.
In a nutshell, Tax Service is an API (Application programming interface) which is cloud based ( multi-tenant) that gets tax relevant data from the applications ( ERP, S/4HANA, Sales, procurement, customer apps), performs the determination & calculations of indirect tax and then returns the result ( calculated tax amounts) to the source applications.
SAP Tax service has following features
1. Pre-delivered content for 120+ countries. This tax content includes tax types, tax rates, deductibility, exemptions etc
2. Taxes are computed as per local tax guidelines & the logic/rates are updated for the changes. Therefore the content is always latest and fully compliant with regulations
3. Tax service is offered as RESTful API on SAP Cloud platform
4. Via single API multiple applications can be connected to central tax calculation in SAP Tax Service
5. Security is provided using oAuth protocol, authenticating the service request from the initiating system
6. The Tax service includes a partner framework that allows you to integrate partner solutions. e.g use partner tax engine for Brazil
Let us now understand Tax service architecture & calculation logic. The individual components of SAP Tax Service are as follows
1. API Tax service: API connects customer application, which provides tax relevant documents, to Tax Service. This Tax Service API invokes the application to determine & calculate applicable country-specific taxes for a business transaction, which is triggered from consumer application, with the help of Tax computation engine
2. Configuration Service: Helps partners & customers to do their own additional configuration on the cloud platform. The tax configuration API helps to manage tax relevant master data attributes that enable you to influence the determination & calculation of tax according to business-specific legal requirements. You have to use "Code Provider for Tax Attributes" API to get the codes & identifiers used by tax service to denote the customer specific master data
3. Tax Computation engine: The actual calculation of tax happens in tax computation engine. Tax decision tree, which is core of tax computation engine, along with default tax content is used for the same
4. Default tax content: This is the pre-delivered tax content for 120+ countries. This tax content includes tax types, tax rates, deductibility, exemptions etc. Tax computation engine makes use of the default tax content to calculate the tax and tax code
5. Tax Partner Framework: This framework connects external tax engines (by partners) with the tax service API to operate like a tax engine hub, in order to increase the functional and country scope of the tax service. It essentially provides users the option to choose different tax engines. This allows you conduct business operations in countries that are not yet supported by the standard Tax Service or to use partner tax engine instead of SAP Tax engine
Now that we have seen what constitutes Tax Service, let's have a look how Tax Service operates at high level
The actual tax determination & calculation happens in Tax computation engine. Let's have a closer look how this is actually done
Tax calculation happens in Tax decision tree, which is core of Tax computation engine. Input to the tax decision tree are the tax parameters sent by consumer application. With the input parameters Tax decision tree determines for example
• If it is sales or purchase order
• What country
• Tax types
• Tax types event etc
These attributes are then applied to the pre-delivered tax content, which will return tax code & tax calculation e.g. event is an intra-community supply and not VAT is applicable (i.e. 0%). This result is then sent back to consumer application to complete the business transaction.
Let us round up with benefits of SAP Tax Service
1. Central Framework- There is one central tax computation engine to calculate indirect tax for all your consumer applications. This eliminates discrepancy and always delivers consistent tax results for all your applications
2. Global Coverage- SAP Tax service comes up with pre-delivered content & specific rules for 120+ countries and thus allows for rapid deployment and ensuring speed for market. For countries not supported, one can use partner integration framework to make use of available partner tax engines for that country
3. Cost Savings- Via Tax service, you have moved the complex tax calculation logic out of individual consumer applications to cloud. This leads to reduced maintenance effort on consumer applications and project savings
4. Regulatory Compliance- Since Tax service is consumed as a business service, it is responsibility of SAP to always keep the content updated as per latest regulations and ensure compliance. The indirect taxes will always be calculated as per local tax guidelines updated for the latest changes
5. Audit compliance- Tax service stores all requests sent to and responses received from, thus ensuring tracking logs for audit purpose
6. Automation- Tax service helps to automate parameters & configuration and hence ensures consistent computation result. Being a service on cloud, there is greater potential in future for machine learning & artificial intelligence to further improve quality & accuracy of output
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