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Business challenge


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.


 

SAP errors

 

Ineffective use of the proper partner functions in SAP for a supplier who provides services in multiple countries and invoices VAT locally. This can result in the standard VAT calculation generating incorrect results.

 

Incorrect derivation of VAT registration numbers for cross-border transactions caused by incorrect SAP configuration.

 

Missing/improper VAT registration numbers in customer master data, such that invoicing requirements are not satisfied for cross-border transactions.

 

Master data is adjusted and tested in the test environment, but the changes are not reflected in the production system.

 

The logic of the tax code structure is disrupted by VAT rate changes. This can be mitigated using the correct SAP configuration.

 

When performing reverse charge bookings, VAT rate changes do not get changed. For cross-border A-B-C transactions, a VAT mismatch between the VAT on procurement and the VAT on sales arises for party B.

 

Blocked iDocs (electronic interface documents) because of errors in the OBCD design.

 

Suppliers with invoices in other currencies and the VAT amount shown in Euro. This results in an incorrect VAT amount due to an incorrect FX conversion.

Distinguishing capability


The added value often needed is the capability to free up resources, reduce manual activities and manage risks. Important is besides practical experience and understanding of both SAP's possibilities,and its its limitations. 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 has 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., should be for each transaction individually. This cannot be imported and is difficult to evaluate for this reason. Moreover, the use of Excel carries the risk of making copy/paste errors.


See chapter: Spreadsheets and VAT ComplianceSAP review and Data and Technology


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Release of pressure on in-house IT resources


The question is: what is the best format for providing instructions to other workstreams and for making the test phase efficient and effective? It turns out in practice that decision trees are a particularly effective communication resource with the IT consultant. In addition, a SAP implementation is not "Plug and Play."

SAP has its limitations and not all transactions can be implemented in the systems in an automated fashion. For example, in the standard configuration, it is not always possible to have SAP automatically determine the VAT treatment of chain transactions within a concern or with third parties (3 parties or more).


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Template for SAP implementation roadmap


 

Roadmap VAT SAP functional design

 

1.

Review of basic business model from  a VAT perspective

  • Buy / sell
  • Principal
  • Locations
  • etc.

2. 

VAT requirements gathering for all countries in scope

  • Applicable VAT rates and non deductible rules
  • Tax point date
  • VAT registrations: multiple VAT numbers, fiscal representatives, VAT grouping
  • Invoicing rules, required VAT statements, sequential numbering, time of invoicing, credit notes requirements, self billing for sales and purchasing
  • Currency requirements, boxes of the VAT returns and sales listing
  • Master data for customers, vendors and materials: VAT registration numbers, VAT classifications, goods and/or services

3.

Design based on the requirements the SAP tax codes and specific setting and /or configuration

 

4.

Design based on the requirements the rules for automated VAT determination logic and tax code structure (VAT condition tables)

 

5.

Design the required invoice text message: language, reference to law via SAP tax codes or additional logic

 

6.

Design the setup of 'plants abroad'

 

7

Design the processing of intercompany transactions

 

8.

Design the VAT handling of purchases: automated VAT determination or manual selection of tax codes by AP staff

 

9.

Design setup of VAT return process and VAT GL accounts

 

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