Preparing SAP S/4HANA for Continuous Tax Compliance

Transcription

1 Preparing SAP S/4HANA for Continuous Tax Compliance How Tax Will Impact Key Processes in your S/4 Upgrade

2 Table of Contents Introduction 3 The Challenge of SAP-Native Compliance 4 Global Growth Brings Local Tax Challenges 5 Financial Impact of VAT 5 Maze of Sales and Use Tax 6 A New Era for Sales and Use Tax 6 The Rise of Real-Time Transaction Controls 7 Cloud-Native Purchasing Applications 8 Integrating Tax Compliance into SAP S/4HANA 9 Benefits of a Modern Tax Solution 10 Foster Collaboration Among SAP Users 11 Tax Compliance Solution for Growth and Scale 12 Tax Compliance Solution Evaluation Checklist 13 Sovos Helps Companies Navigate Global Tax Laws 14

3 Introduction As tax and finance teams look to support the future growth of their companies, many are faced with the reality that their SAP ERPs, such as R/3 and ECC, are ill-equipped to handle customized tax compliance requirements. A recent HCL-sponsored global study of large enterprises (over $1bn in annual revenue) found that on average respondents had five separate instances of SAP operating across their businesses. Thirty-nine percent stated they were running more than six instances. Given the growing complexities involved in globalization and compliance, that number is likely to continue to rise, and consolidation projects are already underway in best run businesses. ERPs are proving limited in their ability to scale with growing companies facing multifaceted indirect tax requirements, including value-added tax (VAT), sales and use tax and e-invoicing. The centralization of business processes, including continuous transaction-level tax compliance, is no longer a nice to have -- it is a must for continued growth, visibility into operations, reporting and archiving. ERPs are proving limited in their ability to scale with growing companies facing multifaceted indirect tax requirements including value-added tax (VAT), sales and use tax, and e-invoicing. From the United States, with its 10,000+ tax jurisdictions, to Latin America and Europe, where governments have legislated B2B transactionlevel reporting, neither SAP S/4HANA nor Central Finance alone will effectively address the challenges of a dynamic global regulatory environment. For senior finance, IT and tax professionals, tax compliance should be a key consideration of an SAP S/4HANA implementation, a move to Central Finance or cloud upgrade strategy. A single integrated solution supports indirect tax determination, e-invoicing compliance and VAT reporting for current tax compliance obligations, and evolves as businesses grow and requirements change to address regulations five, even 10 years down the road.

4 The Challenge of SAP-Native Compliance According to IDC, SAP S/4HANA has approximately 1,900 live customers and 2,900 in implementation. Analysts are predicting cloud ERP deployments to be the default by 2020, and SAP has announced a 2025 date to end mainstream maintenance on its legacy ECC software. Companies are planning now for these changes and beginning migration strategies to digitally transform while avoiding major disruption to the business, yet, tax compliance is often overlooked or its value underestimated within SAP. Country-by-country tools and custom workflows As global businesses move toward modern ERPs, like SAP S/4HANA, and cloud-based applications, local governments worldwide are introducing legislation requiring corporations to comply with detailed processes for invoicing, accounting and tax reporting, forcing businesses to further expedite digital transformation in every financial process from purchasing to general ledger. SAP S/4HANA and ECC both address compliance requirements by providing country-by-country tools to build custom workflows, which adds cost and complexity to SAP centers of excellence (COEs). In addition, compliance updates are handled through complex standardized code releases, forcing companies to adapt the code to their individual customizations. Tax compliance gaps Constantly changing requirements have come to be expected in the corporate regulatory environment. Global strategies set to roll out SAP updates on a set schedule mean companies that are hyper-focused on this calendar will fall behind in compliance. The major updates and testing required by e-invoicing compliance and all forms of continuous tax compliance interrupt the COEs calendar and can affect entire global operations. Companies that run an N-1 upgrade strategy are especially at risk, as their compliance measures won t be up-to-date with new requirements. SAP also doesn t account for local-level details like certain fields, naming architectures, codes and character limits. All of this equates to implementation nightmares and gaps in compliance measures. ERP-centric tax compliance administration To address these issues, tax compliance must be proactively managed within SAP S/4HANA to avoid the risks, fines and penalties that occur from data discrepancies and errors. But internal management of this process is no small feat; it requires major changes to the way global COE and shared service teams operate. Concurrently, the IT team is involved in these time-intensive IT projects and frequent updates for not only the ERP and billing system but other customer transaction and purchasing systems the business is likely to require with growth.

5 An ERP-centric approach to tax compliance administration can lead to multiple different ways of calculating tax across the business, which can lead to errors and increased difficulty as companies try to evolve for new opportunities or expand into new geographies. This quickly erodes IT s time for other projects and innovation, causing missed opportunities to drive more effective compliance. These challenges are most prevalent for companies operating multinationally. In Latin America, for example, 10 countries currently mandate e-invoicing compliance and/or tax reporting. In this region, global ERP upgrade strategies simply do not work. Companies doing business in Latin America need to understand the limitation of ERP systems and look for solutions that provide local expertise, support and flexibility. Global Growth Brings Local Tax Challenges With more companies focusing on global integration, cross-border supply chains and expanding ecommerce, governments across the globe are employing more sophisticated technology, and introducing new ways to enforce tax rules on sales taxes, gross receipts taxes, excise taxes, shipping taxes and taxes on profits. The evolving global regulatory environment produces unique tax determination and reporting challenges in the United States and around the globe. These regulations can interrupt operations and impede growth for unprepared businesses. As manufacturers increasingly sell direct-to-consumer, countries throughout the Middle East and Asia expand their VAT requirements and governments worldwide employ sophisticated technology to keep pace with ecommerce and e-services, companies face new and varying VAT requirements at every turn. While some ERPs handle basic VAT needs effectively, the ability to respond to the pace of quickly evolving rules in different jurisdictions is a severe shortcoming, leaving companies with a patchwork of local providers, solutions and business process inefficiencies. Ashland Global Holdings Inc. Ashland gained standardization, efficiency, accuracy and tailored service in 40 VAT regimes and two shared services centers by turning to Sovos VAT Reporting. READ THE CASE STUDY Financial Impact of VAT VAT, in particular, poses a major risk to a company s bottom line and reputation if it is not claimed, collected and settled properly. Although companies often view VAT as nothing more than an administrative task, they fail to consider how much VAT is running through the company at any given time and the real financial impact if there are inaccuracies or mistakes in VAT filings. The measurement of the VAT at risk within an organization is called throughput. EY defines VAT throughput as VAT/GST on gross turnover and taxable purchases. It combines input tax and output tax (rather than netting them off as is done for calculating VAT/ GST payable), and it includes national standard rate VAT/GST for exports and exempt or reduced-rated sales as those non-taxable treatments must be proved. On average, this throughput totals about 20 percent of sales and purchases combined, meaning global businesses are managing billions of dollars of VAT every day. 5

6 Maze of Sales and Use Tax In the United States, 45 states and the District of Columbia each have unique tax laws and reporting requirements. Identifying and applying the appropriate sales and use tax by states can be a maze of confusion that can incur fees and penalties for businesses if not constantly tracked, updated and managed. Colorado, in particular, is exceedingly challenging. The state assesses a base tax, in addition to more than 220 local jurisdictions that also assess sales taxes, some of which are state-administered and others are collected by those local entities. This local tax structure creates a nightmare of overlapping tax jurisdictions that makes it difficult for businesses to know exactly which taxes apply at a given address. A New Era for Sales and Use Tax Further complicating sales in the United States, Nexus rules and legislation are changing at a an accelerated pace to address remote sales. Now that the Supreme Court has decided in favor of South Dakota in South Dakota v. Wayfair, giving U.S. states the freedom to amend their rules to impose sales tax based on economic presence, businesses should pay close attention to any states moving to tax remote commerce where they have more than $100,000 worth of sales or more than 200 transactions. Companies still using manual processes, disparate instances of ECC and other tax data-related technologies, will not be prepared to scale up the number of jurisdictions in which they are required to register, collect and remit sales tax accurately within the requisite timelines. Additionally, tax teams must be ready to extract and provide transactional data to regulators across the country. Without good software, it would be impossible to adjust to the quickly changing VAT reporting obligations. We would not be able to meet these new regulations on time without Sovos. Anna Buchnowska, EMEA VAT manager, Ashland 6

7 The Rise of Real-Time Transaction Controls Tax authorities globally are spearheading the digital transformation of public administrations and law enforcement. The countries in Latin America were the first to introduce the concept of real-time transaction controls and electronic audits. The success of these models to narrow the VAT gap, which amounts to hundreds of billions USD per year globally, has inspired European Union member states and countries worldwide to announce similar radical changes to their VAT, GST and other indirect tax controls. In this model, the local tax administration places itself at the heart of a transaction between a supplier and a buyer. These systems, also known as clearance models, allow tax administrations to monitor end-to-end business transactions as they happen. The transition toward such real-time tax control regimes globally will be chaotic, and it comes at a time when companies themselves are going through major changes in their adoption of modern information and communication technologies. These simultaneous revolutions in the public and private sectors mean that the coming decade will be characterized by major strategic dilemmas as to how to take advantage of automation in your business processes while also meeting hundreds of tax mandates for complex data exchange processes with tax jurisdiction-specific electronic control platforms. Europe and other post-audit countries today and tomorrow In Europe, as in many countries around the globe, the current situation is still that electronic invoicing and archiving are optional and can be adopted by businesses on the condition that integrity and authenticity be guaranteed for a decade or longer. In parallel, these countries are also adopting new ways in which periodic indirect tax reports (often called returns ) must be submitted to the tax administration. A common first step is to require summary reports to be uploaded manually via a website. After some time, we see countries introduce requirements to make such electronic reports more frequent and the data more granular. Today, many countries require reports of individual transactions based on structured data of each invoice that is sent or received, and such data may have to be sent automatically to the tax administration within only days, or even hours, after the transaction. During the mandatory storage period of the original electronic invoice, tax administrations may audit companies to verify that each booking in their accounting system corresponds to such verifiable e-invoices and match those with electronically reported data. These post-audit regimes are now slowly morphing into fully fledged clearance environments where invoices cannot be validly exchanged between trading partners until the tax administration has received and approved them. Italy is the first example of a European country that has mandated e-invoice clearance, starting January 1, Clearance regimes from LATAM to a global trend The example followed by Italy and other European countries toward clearance mandates is Latin America. In most of these countries, such government-orchestrated e-invoicing processes are now mandatory for all businesses. Every country that has gone down this path has a different take on the specific ways in which businesses should implement these systems, and often they include requirements for the clearance of other commercial data, as well as the controlled printing of, for example, transport documents to allow every step in the flow of goods and money to be audited in real time. In addition, these countries have adopted their periodic reporting requirements to include additional information, such as inventory, immovable assets, HR and other data. 7

8 Cloud-Native Purchasing Applications Companies have in the past decade often prioritized accounts payable processes as a critical component of their digital transformation journey. Supplier relationships often vary significantly across different categories of spend, and the introduction of standardized processes to replace massive diversity in the way purchasing is handled can quickly create major financial and process benefits. The emergence of cloud and associated technologies has allowed specialized vendors to gain significant market share with different AP automation services that cater to the full spectrum of types of supplies. These services often manage complex transactions in a procurement cycle on a platform or even a fully fledged many-to-many business network that interacts with but is otherwise independent from the trading partners ERP systems. Examples of cloud-native purchasing systems include Electronic Data Interchange (EDI), supply chain management, strategic sourcing, procure-to-pay, electronic AP invoicing, travel & expense management, and AP scanning and workflow solutions. Even if these different types of AP automation systems leverage similar technologies to automate supplier relationships, they cater to very different business processes that are often managed by disparate teams. The one thing they have in common, however, is that these systems all come under pressure as indirect tax law enforcement becomes more focused on real-time integration with invoicing and other business transaction flows. Another complexity that is introduced on the process by e-invoicing compliance is the need to acknowledge the reception and validity, or rejection, of vendor invoices received within a government defined period of time. Some governments have reduced that timeframe from 30 to just eight days. ERPs, and even business processes, are not adapted for such aggressive response times. This increases the need of a tax compliance platform that is flexible enough to be able to adapt to the increasing data requirements imposed by governments. Manufacturers are the most affected by global tax initiatives due to a patchwork of exemptions and exclusions. Manufacturers are among the most affected by global tax initiatives due to their often-complex supply and distribution chains. Indirect tax requirements vary state to state and country to country, and can quickly become tricky. Multinational manufacturers face a web of these global tax law issues that further increase the complexity of compliance and drive the need to integrate tax compliance into the core platforms on premise or cloud-based that businesses use to exchange transaction information with trading partners. Taking a tactical approach to regulatory compliance is not the most optimal solution, as it can limit the ability of organizations to scale with growth. The pressure from affiliates and local teams to adopt local vendor approaches to panic-fix short-term digital 8

9 tax mandates can be significant. The fragmentation and lost opportunities that arise from the resulting patchwork of e-invoicing, reporting and B2B transaction automation systems drives significant cost and risks as they torpedo company wide attempts to standardize on strategic solutions and approved best practices. According to a recent Sovos article by Christiaan van der Valk, vice president, strategy at Sovos, business processes and IT systems around the world are coming under impossible amounts of pressure to deal with these constant multi-layered changes and aggressive time frames. Globally, businesses no longer own the innovation agenda. All their resources are being spent to keep up with the avalanche of diverse technological requirements that stem from the innovation driven by tax administrations. This revolution is also transforming the world of procurement, and it s doing it in a way that is more granular and fundamental than anyone could have predicted. Think of it this way: the central paradigm of a procurement system is that there are two parties to each transaction-a supplier and a buyer. Schematically, with the emergence of real-time tax controls, data flows must be orchestrated around the needs of three parties: the supplier, the buyer and the tax administration itself. The complexity behind this fundamental shift is staggering. Integrating Tax Compliance into SAP S/4HANA The transition to SAP S/4HANA is accelerating for a number of factors including: Customer-driven IT modernization. Enterprises are moving to modern ERP systems and applications that can scale across human resources, supplier management, e-commerce, customer relationship management, distribution, service and many other areas to address new customer-driven business models. Increased mobility. Manufacturers supply chain, distribution, selling and service channels are becoming more complex to support new business models, and mobility is critical to supporting scalability across entirely new selling channels. Centralization. A single, centralized management solution brings business processes and transactional data together for greater visibility and control to ensure compliance across operations. Global integration. While a global ERP integrates departments and locations into one business system, it s most valued for regulating business processes across multiple geographies. With global expansion, companies not only open themselves up to financial growth, but also exposure to the complex tax regulations of other countries and municipalities. As governments across the world employ better technology to track fraud and collect taxes, a cloud ERP integrated with an always up-to-date cloud tax compliance solution will enable tax departments to not only keep pace but stay ahead of future tax regulations. An integrated cloud solution will support increased communication and collaboration among teams, such as tax, finance and IT, that are closest to tax compliance management and centralize disparate processes across the business. Sun Chemical Consolidates Tax Compliance Efforts Across All Its Latin American Markets with Sovos for SAP Sovos made multinational e-invoicing compliance reporting simple for Sun Chemical, allowing it to consolidate its compliance efforts across Argentina, Chile, Mexico and Brazil. READ THE CASE STUDY

10 SAP has enabled companies with a valuable mechanism to centralize and streamline processes, but the pace of change and breadth of complex obligations will quickly outgrow the capabilities of ECC and S/4HANA. Both platforms require patches and extensive manual support from tax and IT teams just to scratch the surface of tax compliance. With a tax compliance-integrated SAP S/4HANA deployment, companies create a safety net that supports continuous compliance: Proactive tax compliance management empowers the tax team with the most up-to-date e-invoicing workflow requirements, tax rates and rules, but also takes the compliance burden off of IT. Manual management requires significant upfront investment, and generally results in missed updates and doesn t allow for the opportunity to drive more effective compliance. An automated tax compliance solution keeps pace with changes from major shifts in requirements to daily fluctuations in rates across multiple countries and jurisdictions. Automated e-invoicing compliance as governments begin expanding its use to close VAT collection gaps; have mandated electronic signature rules, including proof of authenticity and origin across six continents; and require invoice archiving for audit purposes. Centralized tax reporting includes automation of summary and transaction-level reporting of tax and taxpayer information to governments for tax enforcement and collection. Centralized business processes and simplified audit defense for tracking and reporting, and visibility into all parts of the company, including accounts payable. It is essential to establish a single source of information, as tax teams need a single source of truth to identify trends and ensure accuracy of sales and use tax charges on vendor invoices. Benefits of a Modern Tax Solution Global growth gives companies the confidence they can achieve compliance - no matter where or how they do business. There are thousands of jurisdictions around the world, and cloud-based tax compliance can accurately determine taxes within all transaction processing systems for accounts receivable, accounts payable, POS, purchasing, web stores and more. Automation improves the processes and workflows for more efficient tax determination and reporting. With access to real-time data and reporting, tax teams can streamline workstreams, eliminate manual data entry, reduce errors and ensure compliance with complex tax laws across the globe. Scalability, as cloud platforms have matured, they now have the ability to provide stable, high performing and secure solutions. With flexibility, security, performance, and extensive functionality, a cloud platform helps a tax team to manage regulatory demands and provides support well into the future eight to 10 years out, as the company continues to grow. When evaluating cloud solutions, make sure the provider has a mature cloud infrastructure and demonstrated performance. 10

11 Foster Collaboration Among SAP Users An additional by-product of melding tax compliance with other transactional systems is that it encourages cultural changes within companies by breaking down silos between departments and processes that need to be more tightly aligned. The structures commonly in place can lack flexibility and ease-of-use when it comes to managing workflow processes. However, a KPMG survey found that the most effective, highly valued tax departments manage tax risk and compliance while adding value through core tax management skills and proactive collaboration with all parts of the business in advancing overall objectives. Tax leaders that work cross-functionally with various lines of business, such as finance and IT, bring visibility and elevate the importance of tax-related issues. Tighter communication and partnership between IT and finance departments is essential to establish and maintain common controls and provide accurate data to ensure compliance for tax collecting and reporting. Bringing together key departments such as tax, IT and finance to evaluate tax compliance solutions is a good starting point for opening up communications. Initiating a process that aligns internal talent to unify and establish a centralized, proactive compliance strategy can improve efficiency and accuracy to safeguard businesses from compliance risk and burdens. The combined expertise and experience of these teams are ideal for determining the best tax compliance solution to seamlessly integrate with SAP S/4HANA and supporting transactional systems to ensure visibility and uninterrupted workflows, while providing stability, constant up-time and the ability to scale as operations grow. Tax Compliance Solutions for Growth and Scale To manage compliance In Latin America alone, a business requires five to 11 full-time employees with SAP expertise whose salaries can range from US $80K to US $150K dollars. Cloud-based technology saves companies upfront investments in IT hardware and servers, maintenance and support, and offers faster deployment. Brown-Forman Brown-Forman selected the Sovos e-invoicing solution to simplify its compliance efforts in Brazil and Mexico. The company sought a solution that could help it cut down on human resource capital and technology investments, and Sovos SaaS platform allowed it to accomplish that goal. READ THE CASE STUDY Because Sovos provides the network upgrades as well as the SAP ERP configurations, we have been able to work with one vendor across multiple countries and confidently manage the changes to Brazil s Nota Fiscal and Mexico CFDI s legislation. Randy Isdahl, Director SAP Process Architecture at Brown-Forman 11

12 When initiating an SAP S/4HANA project, tax compliance should be at the forefront of the decision to aid companies in navigating the complexities of global tax laws. Consider the following functionality when evaluating solutions: A steady stream of compliance updates to prepare companies in advance of regulations; Data visibility for a central source of truth to ensure an understanding of all tax liability and avoid errors and unnecessary data manipulation across a patchwork of systems. Visibility empowers tax teams to easily find data without burdening IT, to streamline audit defense, greatly reducing maintenance costs; Automation to reduce manual entry and ensure accuracy while meeting deadlines across geographies and compliance obligations; Seamless workflows that remove IT involvement and enhance operational efficiency across the business; Modern, flexible and comprehensive APIs to make applications easily available in your specific set of financial systems and workflows - and enable your systems to communicate to governments in the unique and changing data formats they require; and Reporting and analytics to enable tax teams to quickly identify and reconcile tax transactions with the general ledger and spot trends, discrepancies or flows in transactions that reveal consistent errors creating challenges and gaps. There are three ways to handle tax compliance in SAP S/4HANA: SAP Customization: A custom solution is built to the business specifications but can be complex and costly, and requires manual intervention each time regulations change. SAP Bolt-On: On-premise software is purchased and installed on the company s servers, often times requiring mass customizations to traditional ERPs and ongoing maintenance and updates managed internally. SAP Frameworks: A cloud-based solution (integrated with SAP s tax framework) managed entirely by the provider, who takes on responsibility for the compliance updates, the innovation of the applications and the investment and maintenance of the infrastructure. Unlike the first two options, cloud-based tax determination and compliance offers savings in cost and manpower, delivering updates automatically. Royal Philips Royal Philips eliminated unnecessary manual infrastructure maintenance and improved its reporting process by implementing the Sovos e-invoicing solution. READ THE CASE STUDY 12

13 Tax Compliance Solution Evaluation Checklist Choosing a new tax compliance solution may seem like a daunting endeavor, but with the pre-planning work completed and a strong exploratory team in place, companies will find the search less challenging. Here are some questions to consider when evaluating cloud-based tax compliance for your ongoing SAP upgrade projects: Does the solution have a certified integration with SAP S/4HANA? Can you leverage the solution across all of your business systems whether integrated or not? Does the solution meet your company s security requirements? Does it have enough processing power to run transactions in real-time without slowing down your users? How long will it take to implement? What is the upgrade process? Are upgrades included in the annual fee? Can users access an audit trail when needed to simplify both post-audit and clearance model e-invoicing compliance requests? Does the solution have the ability to manage all of your company compliance requirements today and be scalable enough to accommodate where you are going five to eight years out? Are determination and compliance reporting/filing provided for all the jurisdictions where your company operates? Is the solution capable of being scaled globally? Does it support customized tax rules? Can it track in-progress government audits? Will the solution allow the creation of if-then rules against the incoming data before the tax engine determines and calculates tax? Can it automatically determine nexus taxation? Is there exemption certificate management through the entire certificate lifecycle, including certificate requisition, approval, storage and application to transactions? Do users have access to an exemption certificate portal to enter and upload exemption certificates? Does it have the ability to drill down from category to individual invoices to individual line items? Can it support VAT compliance for 150 countries including the E.U., Brazil and India? Are your purchasing process and applications ready and able to create government mandated acknowledgments within required timelines? Will it handle cross-border supplies of goods and services? Is there centralized visibility and control over internal processes and obligations? Are there automatic updates to ensure compliance for every rate change and new requirement? Are all the security certificates in place? Can the solution generate forms in English and local languages in the countries where your company operates? Is there a single point of contact for questions and ongoing support? With more countries implementing transparent VAT compliance and reporting processes, businesses will need reliable, scalable support. Ensure in the evaluation process that the solution will help tax teams to realize control across the entire tax compliance process. 13

14 Sovos Helps Companies Navigate Global Tax Laws The Sovos Intelligent ComplianceTM Cloud is the first complete software solution for safeguarding businesses from the burdens and risks of modern tax, providing three core functions on a modern SaaS-based software solution that was built to work with and in S/4HANA and S/4HANA Cloud: Global tax determination - Accurate tax rate calculation on all sales and purchase transactions across business systems, based on millions of unique jurisdiction, product type and exemption combinations e-invoicing compliance - Compliance with requirements for invoice creation, archiving and approval for VAT audit purposes Tax reporting - Automation of summary and transaction-level reporting of tax and taxpayer information to governments for tax enforcement and collection LEARN MORE ABOUT SOVOS FOR SAP Prepare your SAP solutions for the digital future of tax LEARN MORE ABOUT SOVOS FOR SAP

15 About Sovos Contact us Sovos is the leading software provider for global tax compliance and businessto-government reporting solutions, reducing regulatory burdens and risk for customers while helping them grow through Intelligent Compliance Boston, Minneapolis, Atlanta, Boulder, London, Amsterdam, Santiago and São Paulo