The effectiveness and efficiency of VAT compliance could be measured by the amount of time and resources it takes to produce your VAT return. Automation of a company's VAT compliance process can reduce risks or optimize tax planning (e.g. working trade capital, refunds, bad debts, etc.). Designed or implemented badly, it can burden and result in rework ('hidden factory') within an organisation.
Below is a SAP example, but we are also experienced in other ERP systems and tax engines. For a successful implementation in most cases the specific technical elements (SAP, Oracle, PeopleSoft, JD Edwards, Microsoft Dynamics AX) are not most important. The interpretation of a company's business model and translation of the VAT requirements to a correct functional model is the first critical success factor.
SAP VAT Implementation - introduction
For nearly every company, the accuracy and efficiency of local-country VAT compliance is nearly completely dependent on the functionality of the underlying ERP system.Operational malfunctions in a system that is used to manage VAT compliance can lead to substantial financial risks.
There are countless examples of the mismatching of VAT treatment of purchases and sales in chain transactions, double payments of VAT and "forgotten" manual adjustments to the VAT filing, all attributable to shortcomings in SAP’s automated VAT solution.
Errors in the basic VAT configuration of ERP can also carry consequences for an organization. Without the proper VAT rules, many systems are incapable of processing transaction information correctly, so that transactions may become blocked. This has a great impact on logistics processes, invoicing processes and financial processes.
SAP VAT history
The SAP VAT determination logic was developed a long time ago (1980’s) and except for the “plants abroad” logic SAP’s VAT determination logic has not changed. This in contrast with the VAT rules and business models. A brief overview of some of these changes:
The EU VAT laws have been more harmonized (EU VAT directive)
Substantial increase of cross border transactions
Businesses are registered for VAT in multiple countries
Businesses are operating more often under complicated principal structures
Increased number of (integrated) intercompany and supply chain transactions
As a result, there has been a huge increase in the complexity for the SAP system to meet all VAT requirements, which leads to necessary modifications to the standard SAP VAT for many multinational businesses.
Modifications of already very complicated SAP systems create a risk for maintenance and half-hearted solutions. At the same time, tax authorities across the world both sharpen their focus on non-compliant taxpayers and increase their focus on reviewing ERP systems as a source of VAT compliance risks. Businesses have to ensure that the VAT determination logic in the SAP systems is correct, easy to implement and remains VAT compliant.
Our distinguishing capability
Phenix possesses practical experience and understands ERP's possibilities for tax, but also its limitations and thus the capability to free up resources, reduce manual activities and manage tax risks.
With respect to the possibilities, we can express the wishes to the external ERP consultant in his own language and we can demonstrate how these can actually be achieved in SAP. In practice, we note that certain functionality intended for the support of indirect tax objectives does not get used - due either to reluctance (not within budget) or to a lack of knowledge in this area.
From an indirect tax standpoint, the realization that you are part of a larger team in which each of the participants have other priorities is key. This means that effective communication and agreements are essential. Instructions must be understandable and so short and compact that they can also be used as a reference framework and material for the tests.
In practice, Excel is often used to record all transactions and to indicate what the VAT treatment, etc. We developed our own normative decision trees for effective communication resulting in effective workforce and less risks.
What we offer
We combine technical knowledge with industry understanding and knowhow of technologically advanced tools and methodologies available in the market or developed by ourselves. We identify risk areas and sustainable planning opportunities for indirect taxes.
Reporting accuracy and efficiency are achieved via well designed VAT function into Enterprise Resource Planning (ERP) systems, tax engines or third party compliance software.
Roadmap SAP VAT functional designs
VAT SAP material