Richard Cornelisse

SAP and ABC transaction with drop shipment

In Benchmark, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, SAP add on, SAP add on for VAT, SAP for VAT, VAT automation on 29/08/2014 at 3:32 pm

If the aim of an organization is full VAT automation of AP and AR, it is important to understand what exactly makes standard SAP not functioning optimally from an Indirect Tax perspective. Only then it is possible to validate whether company’s objectives can be achieved with upgrading standard SAP functionality and/or implementing a tax engine.

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.

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.

To realize such ‘birds eye’ view the tax logic should be based and generated on a higher SAP’s hierarchy: at 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.

Without that approach: the ‘Garbage In’ and ‘Garbage Out’ principle will apply.

Case Study

The business models of many enterprises have radically changed over the last years and have become increasingly complex. SAP, however, has failed to keep up, which has resulted in the standard functionality of SAP being no longer sufficient for complying with VAT obligations.

Practical solutions must be found within the flexibility and static organization of SAP regarding indirect tax. Because of this, SAP Indirect Tax Consultants in the market can only patch up the existing SAP framework (e.g. ‘hard coding predefined VAT treatments’, see below).

  • Cross-border chain transactions with third parties or within a group of company (intercompany transactions) have become the rule rather than the exception
  • For example goods are sold twice but only are shipped once. 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)
  • Tax logic should in those circumstance be based and generated on a higher SAP’s hierarchy: at 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

Below you a case study re cross border intercompany transactions. It is representative for overall Standard SAP weaknesses from an indirect tax perspective.

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Hard coding predefined VAT treatments

One of the solutions is to work with assumptions and to implement these in the system (hard coding of transactions via a predefined VAT treatment). This means that a VAT treatment is no longer deduced using information present in the system. Assumptions may be incorrectly implemented during the actual execution or may undergo a change after “going live.” An incorrect VAT treatment is the potential risk.

If such solution is used, periodic audits as detective control need to be set up since the risks at hand will likely exceed the company’s risk tolerance. This results in extra man-hours, representing additional costs du to rework and retrospective corrections.

An important question to raise for sound business decision process is what tools are available in the market for still achieving full automation without making use of assumptions and determine the VAT treatment on real time data in the system.

ABC_SAP

From Global Indirect Tax Management by Richard Cornelisse and Robbert Hoogeveen

SAP and VAT simplified triangular

In Uncategorized on 27/08/2014 at 2:11 pm

Triangulation is used to describe a ABC chain transaction, which involves three different parties where the products are shipped directly by party A to party C. Party B acts as intermediary, never physically receiving the products.

A cross-border triangulation sale with three parties in three different EU countries has the following VAT consequences. Without any special rules party B would be considered to take legal title either in the EU country of dispatch of the products or in the EU country of arrival. If party B is not VAT registered in these countries it will need to register for VAT purposes in one of these two EU countries.

2 VAT simplified triangular

In order to apply the simplified triangulation measures, the following requirements are set by the EU VAT Directive:

  • There must be 3 parties in the supply-chain, which are identified for VAT purposes in three different EU countries;
  • Party B, must not be established in the EU country of arrival of the goods (EU country C) and in the EU country of dispatch (EU country A);
  • The goods must be transported directly from EU country A to EU country C;
    Party C must be registered for VAT in the EU country where it receives the products (country C);
  • The transportation of the goods must be ordered / arranged in the first part of the chain (i.e. between party A and party B).

The simplified triangulation rules do not apply if party B is registered for VAT in the EU country of dispatch and/or established in the EU country of arrival, however not all EU countries apply this rule strictly and there are in practice many country specific requirements.

SAP and triangulation

Due to the country by country deviations of the standard rule there are many country specific rules for triangulation. That means that in the determination logic different local rules should be taken into consideration when Party B is VAT registered in either the Ship from country or the final Ship To country where the customer receives the goods.

If the supplier (i.e third party vendor) is not set up in SAP the ship from location will not be available in standard VAT determination during billing and sales.

Based on the above the consequence of the simplified triangular is that standard SAP often requires manual intervention. Staff ( sales order staff/customer services representatives) needs to be trained to manually determine triangulations and detective controls have to be set up that it is done correctly.

This manual intervention could be avoided if extra functionality is to standard SAP to recognize these triangular scenarios and all the country specific rules so it can deal with it in an automated way. That is part of the basic VAT determination functionality of Taxmarc™.

_2_Simplified_Triangulation

From Global Indirect Tax management written by Richard Cornelisse and Robbert Hoogeveen

SAP and Plants abroad

In Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, SAP add on, SAP add on for VAT, SAP for VAT, SAP SLO renaming tax codes, VAT automation on 26/08/2014 at 12:47 pm

The SAP ‘Plants abroad’ functionality is designed to handle tax issues for companies that have warehouses/distribution centres and VAT registration numbers in more than one EU country.

The functionality enables the use of different Tax reporting countries within one company code, the use of the correct company VAT registration number for the sales invoices, the correct VAT treatment for cross border stock transfers and consignment transactions and easier VAT and Intrastat reporting.

When should plants abroad be used:

  1. If a company has plant/storage/warehouse locations in multiple EU countries and the company is VAT registered in these plant/storage/warehouse location countries
  2. If there are intra-company transfers of goods between plant/storage/warehouse locations or in case of consignment stocks in multiple EU countries
  3. If the countries where the company is VAT registered are using different ‘tax currencies’

When plants abroad is implemented a new field for tax reporting country and currency conversion is available for VAT reporting. With activating plants abroad functionality you do not need to create separate company codes for European plants or implement manual processes for VAT and Intrastat reporting.

Cross border stock transfers and plants abroad

With the plants abroad functionality a plants abroad invoice (document type WIA) for cross-Border (intra-company) stock transfer can be created between a foreign plant (e.g. warehouse in France) and a domestic plant (e.g. warehouse in Germany) as such transaction is deemed to be a fictitious intra community transaction from a VAT perspective.

In below example an intra-community acquisition of goods via reverse charge mechanism needs to be reported in the German VAT return and an intra-community dispatch in the French VAT return. These transactions also needs to be reported in the Intrastat report.

Plants abroad

The SAP impact of activating plants abroad

The ‘Plants abroad’ functionality is integrated in SD, MM and FI. By activating the functionality new fields are updated at transaction level. These new database fields for plants abroad are standard available in every SAP environment.

On the tax code properties a new field ‘Tax reporting country’ is added and the ‘Tax reporting country’ field is added on the VAT return reports and EC sales list. A new currency field will be added to enable conversion of the VAT relevant amounts to the tax country currency.

New processes for stock transfers (intra-company replenishment/consignment business) are supported and enable creating a self-invoice (the “WIA” process). Although ‘Plants abroad’ is primarily global cross function setting in SAP it is possible to implement is only for specific company codes.

From a VAT perspective the SAP risk of activating plants abroad is low.

Roadmap of activating plants abroad

  • Review tax codes
  • Update all relevant tax codes with ‘tax reporting country’
  • Setup alternative currencies
  • Update exchange rate type per country
  • Setup configuration for stock transport orders including new pricing procedure
  • Review tax code selection for Accounts Payable and Accounts Receivable as this might be impacted

From Global Indirect Tax Management by Robbert Hoogeveen and Richard Cornelisse

Taxmarc™ SAP solution2

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