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Everything You Always Wanted to Know About VAT in SAP * But Were Not Aware to Ask

Everything You Always Wanted to Know About VAT in SAP * But Were Not Aware to Ask

25 September 2013

By Robbert Hoogeveen

If the aim of your organization is full VAT automation of AP and AR, it is important to have a clear understanding of your material risks at hand and your lowest performing processes in order to define the functional specifications for a solution.

The first step is to understand what exactly makes standard SAP not functioning optimally from an Indirect Tax perspective. Only then it is possible to validate whether companies’ objectives can be achieved with upgrading standard SAP functionality and/or implementing a tax engine?

In our blog “Case study: cross-border chain transactions and the weakness of Standard SAP” we made the core weaknesses of Standard SAP visible using a case study.

"We explained amongst others that for a correct VAT determination of a cross border chain transaction the VAT relevant data of company code A and B has to be linked real time as Standard SAP itself is only processing a transaction within one specific company code. That means a helicopter view is needed to make that happen. This is only possible if tax logic is based and generated on a higher SAP’s hierarchy: Client Level combined with implementing the basic tax rules into the logic. Client level includes all the company codes working on the same SAP platform."

SAP Solutions – Questions to Ask Before You Commit

If you know the underlying weaknesses of SAP, your own indirect tax risk areas that exceed your company’s risk appetite and your underperforming processes, it is important to get a clear understanding whether or not solutions that are available in the market are actually closing the spotted gaps.

The following is a non-exhaustive list of questions that could be raised during tax software vendor selection. For readability we use ‘Solution’ to refer to the product of the respective tax software vendors.

Use all VAT relevant data available in SAP to determine the VAT treatment

  • How does the ‘Solution’ retrieve VAT relevant data?
  • Are VAT relevant data gathered at SAP client level or at lower level in the SAP hierarchy (i.e. company code)?
  • Does the ‘Solution’ connect the VAT relevant data in chain transactions (sale-purchase-sale) in an automated way or are manual interventions required?

Determine the right VAT treatment

  • How many ‘tax procedures’ are used?
  • What VAT determination logic is used for the following type of transactions:
  1. Standard chain (ABC) transactions;
  2. Simplified chain (ABC) transactions: how are VAT registration in multiple countries taken into account?;
  3. Pick-up and delivered transactions;
  4. Supply of service: how are countries of establishment and type of services included? What if certain type of services are classified differently in EU/non-EU countries;
  5. Intercompany drop shipments, including the posting of the Intercompany invoice in Accounts Payable (iDoc/EDI);
  6. 3rd party drop shipments;
  7. Domestic reverse charge scenarios for foreign non established companies (sales and purchases).
  • Are VAT codes for sale and purchase in chain (ABC) transactions automatically linked by the Solution from VAT perspective?
  • Is the ‘Incoterm’ used as parameter in the VAT determination logic?
  • Can the ‘Solution’ handle multiple VAT rates for a single product in multiple countries?
  • Can the ‘Solution’ handle multiple VAT rates for a single product in multiple regions within a country (e.g. France/Corsica)?


Integrated Tax Control Framework

  • Does the ‘Solution’ contain an integrated Tax Control Framework (TCF)?
  • Will non-compliant transactions be identified and blocked for further processing? Example: are EU cross border transaction without valid customer VAT number or local transaction in country where company is not VAT registered blocked?
  • What are the options to release blocked transactions in case of business urgency? Are emergency releases logged?
  • Which material VAT risk areas (risk that matter) are automatically validated by the TCF?
  • Are “tax-errors” logged in a risk register by the ‘Solution’ and easily accessible for detailed review and resolutions?

Managing the correctness of SAP master data

  • Does the ‘Solution’ validate the VAT number against the VIES database when customer master data are added?
  • How are SAP tax classifications (customer/material/service) used by the ‘Solution’?
  • Are SAP tax classifications based on tax reporting country instead of departure, or destination country?
  • Will the ‘Solution’ provide a standard model for SAP tax codes?

VAT determination based on ‘hard coding’ (fixed assumptions)

  • Does the ‘Solution’ require ‘hard coding’ for VAT determination?
  • How does the ‘Solution’ check whether the actual transaction (‘as is’) corresponds with this ‘hard coded’ transaction (‘expected to be’)?
  1. Example how does the ‘Solution’ amend the VAT treatment when delivery suddenly takes place from another stock location from another country than expected?
  2. Which control measures are built into the ‘Solution’ or remains this the responsibility of the buyer to design and manually maintain?

SAP tax code structure

  • Does the ‘Solution’ use the standard tax code design of SAP and requires new tax codes in case of VAT rate changes?
  • Does the ‘Solution’ include functionality to avoid a ‘shortage’ of SAP tax codes in the future?
  • Does the Solution’ contain a time stamp design for the tax code structure by which naming convention of tax codes does not change when VAT rates increase or decrease?
  • What is the impact of VAT rate changes on existing IT and business (i.e. compliance) processes?

Structured and transparent configuration and end-user tools?

  • Is the configuration centralized in the standard SAP IMG module?
  • Is there an end-user VAT cockpit with all relevant VAT compliance and control transactions?

Invoice requirements

  • Does the ‘Solution’ include the required invoice text messages for zero rated VAT transactions?
  • Does the ‘Solution’ manage the correct determination of supplier and customer VAT numbers?
  • Does the ‘Solution’ handle the required sequential invoice numbering (number ranges per tax jurisdiction)?

After Go-Live Maintenance

  • How many VAT condition records per tax jurisdiction are required in the ‘Solution’?
  • Is it required to add multiple new VAT condition records in case of new VAT registrations in (foreign) countries?
  • What is the process in case of VAT rate changes? Is a complete SAP change management process required, including review of all VAT condition records? What are the total maintenance costs annually re VAT rate changes?
  • Is it possible to outsource maintenance to the ‘Solution’ provider? If yes what are the annual fees and who is responsible for the control of the maintenance (IT, Tax or Finance)?
  • How long does it take to change ‘hard coded’ VAT determination in SAP and what are the costs respectively labour effort needed (change management process)?

Client references

  • Is the ‘Solution’ previously implemented by other customers with comparable business models (multinationals)?
  • Is it possible to have a reference call with customers that have implemented the ‘Solution’’?

Take aways 

We combine technical knowledge with industry understanding and knowhow of technologically advanced tools and methodologies available in the market or developed by ourselves.

  • Focus on tax processes that could be improved
    • Manual process: same data requests are made by different stakeholders
  • As Is assessment
  • Anticipate future changes and the data needed
    • What are tax trends?
    • What is happening locally and what should be considered across jurisdictions where you operate?
    • Anticipate new stakeholders and their data needs or requests (internal and external)
  • Define scope and actions for short, mid and long term
  • Write business case for change
  • Realize sponsorship for implementation
  • What tax data is requested and by whom?
  • What tax process can be improved and what can be automated?
    • CIT, VAT, tax data warehouse
  • What is the Return on Investment?
    • Hard saving: process improvement
    • Meeting (new) tax requirement
  • What systems are in use: SAP, Oracle, etc
    • By which entities?
  • How many end-use computing tools (e.g. excel spreadsheet) do we have?
  • How do we avoid an ad-hoc solution?
    • Understand the bigger picture
    • Real problem and not the symptom

Technology-related tax risk: understand and address the potential harms and benefits of (new) technology.

Ascertaining proper IT support for ensuring efficient, timely and reliable reporting.

VAT should be considered in every aspect of the process, from concept through completion and beyond. Managing by design — looking at any process or transaction from end to end and factoring in all the requirements and controls essential to designing and optimizing a compliant VAT process.

We speak the language of the business and IT and no translation is needed.