It is obvious that ERP systems play a pivotal role in business operations, and tax processes are incorporated into it. Based on our experience the development of a well-working, reliable and efficient tax workaround within an ERP system is not a routine task. Similarly, to all other business areas, considerable implementation effort is needed to meet this objective. The success of the proper implementation of tax requirements depends on the expert knowledge involved, especially when the issues become more complex. In order to efficiently manage all the complex situations in these fields the different financial modules, data warehouses, applications (built-in or add-on), tax engines and customs management systems should properly be fed with appropriate data. Moreover, a tax determination logic has to be developed carefully to reflect the business operation and comply with legal requirements.
International organizations operating in different markets or expanding into new markets are facing rapidly changing legal requirements. KPMG support clients in identifying local and legal requirements using regulatory databases across countries worldwide. Regulatory complexity and the need for higher tax revenues are still on the agenda. Furthermore, the change in customer habits or in the general business environment (e.g. product lifecycle, competitor behavior, market maturity) is also forcing companies to adapt to new business models, the tax and customs implications of which must also be reflected via customization in the ERP system.
If a company is operating on a domestic market, the indirect tax landscape is less complex compared to an international organization operating on a global level. However, complying with the domestic indirect tax requirements requires also attention in the fields such as digital reporting requirements (real time VAT reporting), invoicing regulations (eInvoicing in B2B or B2G), tax point date determination (e.g. selling, renting, leasing), domestic reverse charge rules, VAT deduction, differentiating B2B from B2C business models, VAT rate determination (standard, reduced, exempt, temporary regime, out of scope), customer incentives, etc. These rules can still vary from country to country, even within the European Union where the VAT rules are harmonized by the VAT Directive.
As indirect tax is a transactional tax, the risk of a wrong configuration can easily spread and lead to a potentially high penalty and interest. In many countries the limitation period is between a minimum of 3-5 years which further broadens the risk range. However, an ERP implementation is more than risk mitigation. When a company decides to upgrade for example from SAP R3 to SAP S4HANA, tax and other impacted departments have the opportunity to rethink their target operating model, validate outdated processes and create a new basis for the internal compliance framework. Therefore, indirect tax experts have to be involved in such a project in a timely manner so that they can address their requirements and those requirements could be harmonized with the demand of other stakeholders. Our experience is that investing at the beginning of an ERP implementation project into indirect tax planning is, in the long term, much more cost effective than building the ad-hoc exceptional solutions later.
The upgrade to S/4HANA can support indirect tax functions in several aspects:
- validate and finetune earlier unknown indirect tax relevant SAP processes
- harmonize indirect tax databases
- enhance automation, reporting efficiency and thus decrease certain risk patterns
- standardization and reducing of manual interventions
- extension of data analytics possibilities
As a result of an ERP migration project, the focus of the tax department from the processing of tax-relevant figures can be shifted to the actual source of those figures. In this way, the tax department has the chance to influence the tax-relevant process from the beginning and use its expertise at the tax determination stage.