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Author's profile photo Aydin Memioglu

Central Finance – Lessons Learned Tax Harmonization

Introduction

Having been involved in various SAP project implementations we all know how critical the learnings from a project are and how they can help us if we face the similar situation again.

We are a group of consultants at SAP dedicated to gather valuable lessons learned during CFIN projects and share within the external community. Our main objective is to elaborate on lessons learned in regards to Tax harmonization during a Central Finance project.

 

Central Finance and Tax Reporting

Companies are required to report taxes such as Sales & Purchase Tax, VAT (Value-added Tax), Withholding Tax and Deferred Tax to their local tax authorities.

When financial documents are reposted from source systems to a Central Finance system, tax-relevant data is also replicated.

From a Central Finance perspective there is a variety of criteria which have ultimately an impact on from which system tax reporting has to be carried out. Customers who are looking into implementing a Central Finance solution have to ask following questions in order to understand and determine the impact on tax reporting:

  • What is the specific use case of Central Finance? (e.g. shall CFIN cater as a financial reporting system versus operational system)
  • What kind of taxes are reported on? (e.g. VAT, Tax Jurisdictions, Withholding tax, Deferred tax, etc.)
  • Which countries are affected? (e.g. certain countries have more complex tax requirements and require heavy localization effort than others)
  • Are additional 3rd Party tax solutions present in current landscape (e.g. External Tax Engine, Add-ons such as Meridian, etc.)

If Central Finance is to be used as a merely financial reporting system where open items are still managed in the source ERP systems (payment and clearing of open items remain in the source systems) then tax reporting will remain in the source systems.

However, in an operational Central Finance scenario (Central Payment) where CFIN becomes the book of record, tax reporting becomes mandatory in CFIN under certain circumstances. In case a payment has an immediate impact on the calculation of taxes or are posted directly in the CFIN system tax reporting has to be carried out in CFIN (e.g. withholding taxes, cash discount, deferred taxes, down payment, etc.)

Although, tax reporting becomes mandatory you can still decide to use your existing tax reporting solution (e.g. 3rd party tax reporting tool) to generate your tax reporting. In such case the Central Finance system would become source system

To ensure that postings that are replicated to Central Finance are consistent for the purposes of reporting tax, it is necessary to make sure that the tax-related configuration settings of the source systems match the configuration settings in the Central Finance system.

If potential inconsistencies were not detected, it would lead to errors in tax reporting from the Central Finance system.

 

Tax Customizing Consistency Check

  • With Central Payments VAT/TAX checks are mandatory
  • Activation can be done per combination of Source System and Source Company Code
  • VAT config check can be activated without Central Payment as a preparation step for future central payment activation
  • Prerequisite: SLT real-time replication of source system customizing (SAP Note 2494127)

 

Real-time replication of Source Configuration to dedicated tables in CFIN allow on-the-fly check of replicated transactions. Mapping (MDG based Mapping or via BAdI) is evaluated before corresponding Data is checked

Example 1 (Full Equivalence Check – FEQ)

 

Example 2 (Mapped Equivalence Check – MEQ)

Key considerations & Lessons Learned

Tax relevant objects to be harmonized & transformed

  1. Tax calculation procedure:

a. Use source system reference tax calculation procedure

    • Customer should decide for each country which source tax calculation procedure should be used as reference procedure for creating in CFIN.
    • Same countries from other source system will be mapped to this tax procedure in CFIN.
    • Usually, the most exhaustive and robust tax procedure should be used as the reference tax procedure.

b. Use pre-delivered standard tax procedure in CFIN

    • Customer could decide to use the standard out of the box delivered tax procedure in CFIN.
    • Source tax procedure for the respective countries will be mapped to the tax procedure in CFIN.
    • Experience shows that mapping activity increases significantly if this approach is taken.

c. Following value mapping cardinalities could occur:

    • 1:1 – keep same tax procedure in CFIN as in source
    • n:1 – harmonization due to same country present across multiple source systems
    • 1:n – in case source has a “common” tax procedure (e.g. TAXEU) with multiple tax procedures combined. In CFIN tax procedure to be created for each country
  1. Account key and Condition type (FI and Logistics)
    • harmonization complexity/effort driven by tax procedure mapping
    • source for data profiling is BSET
    • careful analysis of account keys in case of n:1 tax procedure mapping where same account key has different properties across the source systems (T007A, e.g. posting indicator)
    • ensure any condition type which is part of a pricing procedure used for tax postings resulting from a logistics process is either included in the FI tax calculation procedure or mapped to an equivalent account key which is used in the FI tax calculation procedure
  1. Tax codes
    • consider limited number of tax codes available per tax country (two digit, alphanumeric, maximum 10 numeric, 26 alphabetic: 36×36 = 1296 tax codes)
    • careful analysis of tax codes in case of n:1 mapping where same tax code has different properties (T007B, e.g. tax type, Check ID, EU Code, etc.)
  1. Tax Jurisdiction Codes
    • some countries require use of TXJCDs e.g. USA, Canada, etc.,
    • harmonization maybe required if TXJCDs present across multiple source systems but with different classifications/naming conventions
  1. Tax relevant settings on company code level (VAT registration no., Tax Base Net, Discount Base Net, etc.)

6. Tax relevant settings on country level (FX-rate type, Tax Base Net, Discount Base Net, etc.)

7. Plants abroad active in source (yes, no, hybrid?)

8. G/L account determination (harmonization of CoA and respective VAT GL accounts)

9. Withholding Tax

    • Classic vs Extended Withholding Tax in source?
    • Withholding tax types (invoice, payment), Withholding tax codes, Recipient Types, etc.
  1. Localization

11. External Tax Engine

    • Is there any external tax engine active in source system (yes/no)?
    • Multiple different tax engines?
    • Central Finance to be connected to a tax engine?

 

Plants Abroad

  • Plants Abroad is relevant in case of EU countries. Activation happens on client level.
  • The following combinations are supported:
    • Central Finance system: Plants abroad active / source system: Plants abroad active
    • Central Finance system: Plants abroad active / source system: Plants abroad not active
    • Central Finance system: Plants abroad not active / source system: Plants abroad not active.
  • The combination
    • Central Finance system: Plants abroad not active / source system: Plants abroad active is not allowed and will lead to an error.

 

SAP Note – 2576252 Central Finance: Error in Tax Consistency Check, Related to Plants Abroad:

Plants abroad active in Central Finance

  • T005 settings are read based on the tax reporting country assigned to the tax code

Checks if plants abroad in source:

  • Is active, T005 settings will be read and compared to T005 in target
  • Is NOT active, T001 settings will be read and compared to T005 in target

 

Example: PA active in both source and target

 

Deferred Tax

  • Deferred taxes are taxes that are not reported during posting of incoming or outgoing invoices but after are recognized once the invoice is paid. This is a legal requirement in some countries (e.g. France)
  • Tax amounts are posted on a special deferred tax account and only after the payment is made, the tax amount is transferred from the deferred tax account to the corresponding normal tax account and reported to the authorities
  • Two reports used for deferred tax settlement: RFUMSV25 (old) and RFUMSV50 (new). RFUMSV25 uses BSEG and BSET tables, while RFUMSV50 is based on the new table DEFTAX_ITEM
  • Central Finance does only support the deferred taxes process based on report RFUMSV50 (for further details also check SAP Note 2787790).
  • Central Finance did not support deferred taxes during the initial load. For the releases SAP S/4HANA 1909 and SAP S/4HANA 2020 the SAP Note 2787790 will now enable deferred taxes during the initial load. This new function will allow you to move your tax reporting to the Central Finance system and will allow you to activate Central Payment for countries where the deferred tax process is required.
  • New features (SAP Note 2787790) include:
    1. Initial load of deferred taxes
      • Extraction of items type = ‘IN’ (invoices which include deferred tax codes).
      • New reference procedure (AWTYP) DTAX to help distinguish from normal open items (APAR)

2. Correction report (RFINS_CFIN_CORR_DEFTAX_ITEM)

      • needs to be executed after initial load is complete. This will add missing entries PA (payment), RL (tax transfer) in the DEFTAX_ITEM table.
      • By default only during initial load only the IN entries are replicated into CFIN
      • This report ensures that DEFTAX_ITEM table has the same information in Central Finance as in the source system

 

Withholding Tax

  • With activation of Central Payment, documents are being posted centrally with tax impact in the Central Finance system. Subsequently, tax reporting must occur in the Central Finance system. This applies to all taxes including withholding taxes
  • Central Finance supports Extended Withholding Tax only (Extended Withholding Tax must be activated in the source system)
  • Withholding taxes are calculated in the source system and transferred to the Central Finance system exactly as they are posted in the source system. They are not recalculated in the Central Finance system.
  • Once Central Payment is active, withholding tax works without restrictions for countries where deduction takes place at the point of invoice posting as well as countries where deduction takes place at the point of payment (accumulated withholding tax data is not available in the Cfin system for WHT at time of invoice).
  • During the replication of FI documents with withholding taxes to the Central Finance system, the system checks the withholding tax configuration.
  • Withholding tax checks are activated in the Central Finance system together with the VAT checks. you need to implement the required content in SLT as described in the SAP note 2668261
  • The following Customizing tables are compared in the source and the Central Finance system for withholding taxes:
    • T059P (Withholding Tax Types)
    • T059Z (Withholding Tax Codes)
    • T001WT (Company Code Spec. Information per WHT Type)
    • T001RWT (Rounding Rules for Company Code and WHT Type)
    • T059MINMAX (Minimum and Maximum Amounts for WHT)
    • T030 (Standard Accounts Table)

External Tax Engine

  • External tax engine is only supported for USA, Canada and Puerto Rico (SAP note 1497956)
  • External tax engine must be certified for Central Finance Scenarios in S/4 HANA.
    1. Thomas Reuters: ONESOURCE Indirect Tax Integration
    2. Vertex Indirect Tax
    3. Taxware
    4. Sovos Global Tax Determination
  • External tax engine should be identical between source system and Central Finance system.
    • Technically you can connect multiple Tax engines in CFIN: exactly one tax engine per supported country (country and tax procedure is 1:1 or n:1 cardinality)

  • Pilot Note – 2991071– allows to bypass the checks if the external tax system is not the same in source and target system
    • g. jurisdiction code checks
  • Pilot Note – 2750495 & 2458325 – allows to bypass the call to external tax system
    • The connection of an external tax system to the Central Finance system is not desired – CFIN used for reporting
  • SAP is not responsible for ABAP add-ons that have not been developed by SAP but have been certified by SAP. SAP does not provide support for these solutions. Note 2226759
    • g. Meridian

 

Localization

  • Some countries have specific requirement in terms of tax calculation and reporting, which arises the need for Localization of tax configuration
  • g. Brazil
    • Legal requirement to issue Nota Fiscal with all business process e.g. goods movement or credit memo
    • Nota Fiscal is also the basis for tax declaration.
    • Has its own country specific calculation routines
    • Most complex withholding tax – can be due at time of invoice or at time of payment
    • There are WHT taxes that are only withheld under certain circumstances, in others they are collected by the vendor
  • CFIN does not support replication of Nota Fiscal, also Tax reporting is done externally.
    • Minimum Config required in CFIN.
    • g. Business Place, Certification Numbering, PAN number, etc.
  • Localization experts are required if CFIN to be used as accounting box in future and to be used for Advance Compliance Reporting.

 

We hope the above concepts, valuable experiences as well as lessons learned which we gathered from various projects and teams across our organization will help you to tackle your tax harmonization effort and overcome similar challenges which you might face during your projects.

You can also find more lessons on other topics by utilizing assets from CFIN Activate Roadmap. To learn more on CFIN Activate Road map, please refer to blog – Release of SAP Activate Roadmap for SAP S/4HANA for Central Finance.

We invite you to post any feedback, ideas, or tell us how this content was helpful for your project.

 

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      Author's profile photo Kishore Marodia
      Kishore Marodia

      Good comprehensive view of direct/indirect tax handling within CFIN Reporting/Records environment