Several countries in Europe, but also in other regions, voted to change their VAT rates in reply to the economic impact of the Coronavirus pandemic crisis. Whether a VAT rate change (either increase or decrease) is a proper tool, especially when it is temporary (like in Germany, Austria, Belgium, Cyprus, Czech Republic) is not yet clear. This article will instead focus on the ERP considerations that a tax function should keep in mind in case of a VAT rate change.
From a non-tax professional point of view, changing a VAT rate may seem a routine task. An ERP update, however, has several steps even for a “simple” VAT rate change and these should be planned properly.
Many countries applying a new VAT rate as of Q2/2020 decided to end the temporary VAT regime at the end of 2020 or in Q1/2021. This means that many companies have been busy adjusting their ERP systems recently. The temporary VAT regime is a phenomenon specific of these times, which means that all changes should be reversed after a short period. A temporary drop in VAT could also be relevant in combination with operational changes in supply chains, modifications of go-to-market terms and/or agreeing new vendor conditions. These aspects will have to be re-considered at the end of the temporary regime period.
Multi-national companies operating a global ERP platform that have a central IT (tax technology) support team should first understand which jurisdictions are impacted, secondly which business units are in scope and finally which ERP modules, tax engines and software / applications will be affected. Other, just as important, elements of the planning are:
After the scoping, the company’s (in-house, outsourced, co-sourced) tax function should define the tax rules and the logic informing the VAT determination for all identified business cases and contracts - alone or with the help of an external provider. The VAT (tax) function should collaborate with all business unit leaders, team members of order management, indirect tax technology colleagues and, ideally, pull it together with the help of a project manager officer (PMO). The bigger an organization is the higher the need to have a PMO to support the tax function’s coordination, as this is a vast task in larger corporations.
One of the challenges during a system adjustment is to find a stable and sustainable systematic solution instead of dealing with manual workarounds where the potential for human error is great. This challenge is much more difficult if a tax regime change is temporary because building a sustainable environment may take longer than the timeframe of the regime itself (for example, 6 months). Companies could naturally use a manual workaround, but what is key is to still have the entire process under control. Why a business unit selected an exceptional workaround, the factors considered for decision making and who are the parties responsible for the steps needed to be documented internally (we recommend preparing a KPI, RACI, or at least a simple responsibility matrix).
Once the project team is ready with the scoping, deadlines are clear, the project team has agreed on the meeting schedules, the VAT (tax) function of the organization should closely track all discussions and stand by for consultation. It is advisable to prepare a comprehensive document describing the logic of the timing of the VAT rate change in detail with examples. The wording of such document has to be straightforward because the reader of such a document may not be a tax professional but
The latter is a sensitive topic as contracts have to properly define whether the price includes VAT or not. In such cases the legal department may also suddenly become a part of the VAT rate change project because contracts need to be analyzed from a civil law perspective
How should transactions be categorized? In Germany, for example, companies should focus on transactions like recurring deliveries; partial deliveries; advance payments; price adjustments due to transfer pricing and/or rebate schemes; long-term contracts; employee car and eBike programs; differentiating the supply of goods from that of services, imports, intra-EU acquisition of goods, replacements etc.
Once you have listed all your transactions and categorized them according to the VAT law logic in that given jurisdiction, the tax function should state a driver that can be coded into the invoicing process. What triggers a taxable event? When does the old VAT rate and when the new VAT rate apply?
Once the logic of VAT rates has been defined, reviewed and approved, the changes should move into production. Ideally, the tax technology team should test the changes with the help of IT beforehand. If available, testing should take place in a testing environment (multinational companies with global landscape likely have such parallel environment) or if it is taking place in the live environment with real-time cases where the testing just focuses on some preselected key areas. The testing is properly executed if it covers all the possible cases which are in project scope. The test cases should be built up based on the input of the tax function, order/vendor management and IT team. All departments should define what they would like to test, otherwise the testing will not deliver the desired control functions.
It is recommended that the VAT department / tax function be in close contact with the project team, actively answering questions raised either internally or externally. This is especially advisable if the changes had an impact on more business areas and the project team offered a 2-3 months hypercare* period.
*Hyper-care means that the project team does not disappear after the go-live. Instead they have pre-approved number of hours which can be used for post-implementation corrections.
Before the go-live, the department or function responsible for the preparation and submission of the VAT returns should be informed upfront of the new VAT rate(s), the new VAT code(s) (e.g. if FI/SD modules of SAP is touched) which need to be mapped to the VAT reporting codes (e.g. with the standard or tailored RFUMS report in SAP) so that the ERP extraction can properly capture the amounts booked with the new VAT codes. If the VAT report is directly uploaded with the help of a macro or other uploading application from the company’s ERP system or from the desktop of the VAT return preparer, it should not be forgotten that that software also requires a fine-tuning.
Our Indirect Tax Technology Services (ITTS) team helps bridge the gap between Tax and IT departments during an ERP implementation (like the migration into S4/HANA) or upgrade, efficiently identifying areas where Tax can bring value to an overall ERP project (e.g. during a supply chain transformation). It has the knowledge and experience to efficiently incorporate indirect tax requirements (such as in the case of a VAT rate change explained here) without adversely impact the planned design.
Our KPMG experts can help your organization interpret and implement a VAT law change into your ERP environment. We can help identify and list the impacted transactions, collect user stories from different stakeholders, summarize the requirements and submit a design plan. During the ERP coding our specialists interact directly with your IT department to help during the implementation and testing.
The Indirect Tax Technology Services (ITTS) team also offers assistance services, such as our VAT Health Check (VAT coding, business mapping, accounting entries etc.) and DataAnalytics solution (Tax Intelligence Solution, “TIS”) allowing you to check the correctness of your indirect tax processes.