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Standard SAP itself is only processing a transaction within one specific company code and the consequence is that standard SAP VAT determination logic and functionality for VAT determination should therefore only work for:
Any standard SAP gaps could be resolved with limited adjustments the overall VAT determination improved via standard design of VAT condition tables, access sequences, tax codes, tax sensitive master data, configuration of customer VAT registration number.
When is Standard SAP insufficient?
However, standard SAP VAT determination logic and functionality for VAT determination does not work for complex dynamic business models (e.g. Principal-Toller-Agent model) with for example multiple VAT registrations, pick up and drop shipments, chain transactions between legal entities (ABC / ABCD scenarios).
The reason is that both standard SAP as bold-on tax engines focus exclusively on transactions within a single company; it only evaluates the underlying individual transactions and fails to link the current transactions to the VAT results of previous transactions. As a consequence, companies with VAT registrations in different countries cannot automatically comply with all VAT obligations.
Additional functionality need to be added to standard SAP to give it its Birds Eye overview. That is the real problem that needs to be solved in order to remediate all the symptoms in a structured way.
SAP and bold-on tax engines exclusively focus on transactions within a single company; it only assesses the underlying individual transactions and fails to link the current transactions to the VAT results of previous transactions. As a consequence, companies with VAT registrations in different countries cannot automatically comply with all VAT obligations.
Further explaining the root cause
The SAP VAT determination logic was developed a long time ago (1980s) and except for the “plants abroad” logic, SAP’s VAT determination logic has not changed much. This stands in con-trast with the VAT rules and business models as these have changed significantly.
The VAT landscape and rules have gone from fairly simple to rather complex. Cross-border transactions changed from solely export to a new category within the EU: Intra community transactions (goods and services) with distinct rules and new formalities to manage.
New business models have resulted in an increase of intercompany transactions, the use of chain transactions, drop shipments and pick up transactions. These are causing IT bottlenecks to implement as Standard SAP VAT determination logic and functionality do not work for these complex dynamic business models.
The root cause is that both Standard SAP and bold-on tax engines exclusively focus on transactions within a single company; it only assesses the underlying individual transactions and fails to link the current transactions to the VAT results of previous transactions.
When more than 2 parties are involved, the VAT treatment depends on the VAT treatment of the prior transactions:
When we take the first bullet as an example of the complexity, one could think of the possibility that the invoice flow and physical flow of goods have a mismatch.
That could be the case if party B request party A to deliver the goods directly to party C in another Member State (i.e. see below drop shipments). Standard SAP will determine the VAT qualification based on the ‘ship-from’, ‘ship-to’, ‘material’ and ‘customer tax classification’ information in SAP.
It will for instance not take into consideration the multiple VAT registrations from party B. That would mean that not only the transaction A-B but also B-C cannot be derived correctly. From a legal perspective only one transaction can qualify as a zero rated intra-EC supply. In such ABC cases, one of the 2 transactions should be charged with local VAT.
An exception exists - second bullet above - when the supply chain fulfills all requirements of the simplified triangular. Under these strict conditions both transactions could be zero VAT rated.
The supplier is responsible for ensuring that all the conditions for applying the zero VAT rate are met. If not the supplier does not meet the conditions for using the zero VAT rate, the tax authorities will seek to recover tax due from this supplier via a levy of a tax assessment.
If the applicable VAT rate is 25%, the tax assessment will be 25/125 of the consideration charged and thus impacts the business KPI EBITDA (profit margin erosion). This assessment has to be increased with interest and penalties to determine the total tax burden.
Without adjustment of Standard SAP setting, an incorrect VAT treatment would be determined causing non compliance risks.
Specific areas of attention
Specific considerations about triangulation
Result: wrong VAT treatment with potentially twice an 0% rated intra EU supplies
Root cause: Standard SAP is not able to link the VAT treatment of AP and AR as data is gathered at company code level and cannot be linked to AP and AR
Specific considerations about drop shipments
Specific considerations about export/import
Specific considerations about customer pick up
Specific considerations about services
For a training or organize a workshop see our SAP VAT Course
Contact Richard Cornelisse
We combine technical knowledge with industry understanding and knowhow of technologically advanced tools and methodologies available in the market or developed by ourselves.
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.