For nearly every company, the accuracy and efficiency of local VAT compliance is completely dependent on the functionality of the underlying SAP system. Any incorrect set-up of the basic VAT configuration of their SAP systems can severely impact it’s processing. Operational errors in a system that is used to manage VAT compliance can also lead to substantial financial risks.
There are numerous 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.
Without the proper implementation of VAT rules, many systems are incapable of processing transaction information correctly leading to blocked transactions, the potential misstatement of tax liabilities and can have a great impact on logistics, invoicing and other financial processes.
The SAP VAT determination logic was developed during the 1980’s and, except for the “plants abroad” logic, SAP’s VAT determination logic has changed little.
This is in stark contrast with the significant changes made to VAT rules and business models over the same period. The VAT landscape and rules have changed from simple to complex:
- Cross -border from always export to new category within the EU: Intra community transactions (goods) with own rules and new formalities to manage
- VAT simplifications are often very complicated for IT to implement
- VAT qualification of services (e.g. ancillary to supply of goods or connected to immovable property (e.g. repair)
In addition business models have developed and become more complex, to adapt to changing operating environments including:
- Increase of inter-company transactions to optimize effective tax planning (e.g. central procurement, principal structures)
- Use of drop shipments to avoid delays in delivery but causing a difference between invoices and goods movements
- Pick-up transactions to facilitate a client immediate need but are high risk if formalities are not met
Standard SAP has not made the changes necessary to become aligned with the more complex VAT requirements and business models.
What Phenix Consulting offers on SAP implementation
Phenix Consulting possesses practical experience and understands SAP's possibilities, but also its limitations and thus the capability to free up resources, reduce manual activities and manage risks.
With respect to the possibilities, we can express the wishes to the external SAP 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.