Richard Cornelisse

Posts Tagged ‘richard cornelisse’

Standard Audit File for Tax solution

In Audit Defense, Business Strategy, EU development, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, Technology on 31/03/2014 at 11:43 pm

The SAF-T standard, originally created by the OECD, is intended to give tax authorities easy access to the relevant data in an easily readable format. This leads to much more efficient and effective tax inspections

The SAF-T standard, originally created by the OECD, is intended to give tax authorities easy access to the relevant data in an easily readable format. This leads to much more efficient and effective tax inspections.

The OECD’s Committee on Fiscal Affairs (CFA) developed a set of guidance on business accounting system data requirements for tax audit purposes, and associated practical implementation issues for software developers.

The set of guidance was prepared by a task group consisting of representatives of national revenue authorities, the Business Applications Software Developers Association (BASDA), accounting bodies, and other interested parties.

The standard, originally created by the OECD, is intended to give tax auditors easy access to the relevant data in an easily readable format. This leads to much more efficient and effective tax inspections

The aims of the guidance are to simplify tax compliance and tax audit requirements as they relate to information required for tax purposes from business and accounting systems.

This guidance should encourage voluntary compliance by businesses that will also add to profitability by encouraging better internal control procedures. The guidance should also help promote compliance with new legislation on accounting standards such as Sarbanes Oxley and IFRS (International Financial Reporting Standards).

The application of standards through software development also provides both public and private auditors with a reference point. The legal requirements of the file are in line with the obligation of using certified billing and logistic software that prevent changes on documents already issued.

Submit on mandatory basis billing data and logistic information on a monthly basis

The Standard Audit File for Tax Purposes (SAF-T) became obligatory for entities with head office or a permanent establishment liable to Corporate Income Tax in Portugal in 2008, with the objective of making  tax inspection more efficient and reducing the effort.

The latest development is the introduction of a new obligation in 2013: Taxpayers now have to submit billing data and logistic information on a monthly basis. This is what causes problems for many companies: The amount of data is large, and the extraction too complicated for a monthly submission of SAF-T files.

SAF-T: a global trend

Besides Portugal similar obligations exist already in Austria, Canada France, (voluntary basis), Luxembourg and Singapore. In Belgium, Croatia, Finland, Germany, Lithuania, Malta, Spain, Slovak Republic, Slovenia, and UK discussions on SAF-T are already taking place.

Countries like Sweden and Netherlands have their own e-audit file standard. Somehow related to SAF-T is the new mandatory electronic Tax Balance sheet requirement in Germany. From January 1, 2014 it is mandatory to send Tax Balances electronically. See also our eBilanz-Cockpit for Germany: our integrated SAP solution

SAP’s own solution

Not flexible, response time to change low and impact on IT resources to implement

It is possible to use standard SAP for creating the required report but as you might know it is a very complicated change in SAP (more than 100 OSS notes) that will require a lot of IT resources. SAP own solution is in practice often not considered flexible enough when it relates to response time on new law changes when new or additional requirements are issued. That means that any solution should have the followings benefits to contribute value:

  • Cycle time re changes in short periode of time (e.g. one week including testing)
  • Reduction in needed IT resources
  • Reduced impact on ERP system and test cycles
  • Establish effective workforce

KEY Group’s ERP independent SAF-T solution

ERP system independent solution when multiple legacy systems are used

Based on OECD requirement we developed a solution that can combine data from different sources (i.e. SAP, Oracle and Sabrix).

This solution is beneficial in case multiple legacy systems and can be easy tailored to country specific requirements.

It runs automatically within either ACL or Access and manual intervention is no longer needed as it is a fully automated process without data manipulation. The output will be a correct SAFT-XML. SAFT 1 SAFT 12

Integrated SAP solution: for SAP users only

In development Standard Audit File Cockpit for SAP

Cockpit1ERP independent SAF-T solution is used as prototype to develop an easy-to-use and lean SAF-T cockpit solution for SAP with country specific flexibility. This solution is currently built in SAP and will be able to generate automatically based on the specific country’s legal requirements (e.g. every month and output) the mandatory SAF T files that need to be reported to the tax authorities.

Besides that – as legal requirements might differentiate – our solution will have the necessary flexibilities. The solution focuses on master data and transaction data in SAP, extracts the required data from several tables and is flexible enough to allow country- or company-specific adaptations (customizing).

The output is an XML-file with all relevant data as required by the SAF-T standard or an MS Excel / Access file that can easily be converted into XML. That makes roll out to other countries an efficient and effective process.

Therefore, a user-friendly solution for creating the monthly SAF-T files would be of great added value if the objective of the organization is an effective workforce and prefer in SAP automated processes with no manual intervention.

Full ERP Integration

  • The SAF-Cockpit is fully integrated into SAP®, all SAF-relevant data is directly extracted out of SAP-tables and is brought into the required SAF reports
  • Only one single transaction easily guides users to the creation of the reports
  • No interfaces or external data 
manipulations required
  • Full integration of SAP security 
features (e.g. roles, change logs)

Cockpit2 Via Standard Audit File for Tax solution.

‘Why’, ‘What’, and ‘How’ of Managing an Effective Indirect Tax function

In Audit Defense, Benchmark, Business Strategy, EU development, General, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, Technology, Training, VAT planning on 04/03/2014 at 9:07 am

Table of Content

Yes, I address more than one person with this newsletter, but here’s the absolute magic trick (the secret behind the curtain):

  • People who don’t belong here unsubscribe and find where they belong.
  • People who do belong here lurk for a VERY long time usually before they dare to hit reply and see if I’ll write back (I almost always do, and usually ridiculously fast).
  • People who do belong here learn really quickly that I don’t want your money as much as I want your time and attention and connection.
  • People who do belong here learn really quickly that if they do spend money with me, I work very hard to deliver value. [Chris Brogan]

Philosophy behind the GITM initiative – Richard H. Cornelisse

The objective of the GITM initiative is to set out and discuss the ‘Why’, ‘What’, and ‘How’ of managing an effective indirect tax function.

Impact of the increase of VAT rates globally: the greater the amount of tax in the system, the greater the tax risk. VAT errors could – as it is a transactional tax – negatively impact profit margin and shareholder’s value.

Besides the ‘Why’ it is important to know what needs to be managed within an organization. To support change of roles and responsibilities – e.g. governance and mandate – involvement of senior management is essential.

Change management is an important topic in various sections. How to realize sponsorship and make a difference? An overview of approaches, methodologies and best practice tools are included.

Richard H. Cornelisse

Introduction

A roadmap to indirect tax function effectiveness

Planning of non-routine transactions

Building Blocks of an Indirect Tax Strategic Plan

Indirect Tax Risk Management

Building Blocks of a VAT Control Framework

Data and Technology

Fraud

Training

Indirect Tax Technical

Forum

Prelaunch Global Indirect Tax Management

In Audit Defense, Benchmark, Business Strategy, EU development, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, Technology, Training, VAT planning on 28/11/2013 at 7:57 pm

This site addresses indirect tax function effectiveness and sets out the ‘Why’, ‘What’, and ‘How’ of managing an effective indirect tax function. Simply put, Indirect Tax needs to be managed because the VAT throughput increases due to increased VAT rates globally.  VAT errors  - as it is a transactional tax – impact profit margins negatively and could beside tax risks result in commercial and reputational risks as well (see also sections: ‘Why Managing Indirect Taxes‘ and ‘A roadmap to a sound ‘Audit Defense’ Strategy‘).

Beside the ‘Why’ it is important to know ‘What’ needs to be managed within an organization. For change of roles and responsibilities (e.g. governance and mandate) involvement of senior management is essential. From benchmark studies it follows that indirect tax is low on the priority list of senior management.

The question then becomes: what approaches and optimal practice tools are available to change that mind-set and achieve the indirect tax objectives?

A starting point in increasing indirect tax function effectiveness is to set clear and realistic objectives. Is being fully VAT compliant a realistic goal? An answer will be given. In addition, an overview is provided that could be used as a guideline (including activities and examples) to set SMART objectives.

A summary – first chapter subdivided into the following sections:

Why is management necessary and what needs to be done?

Via quotes of benchmark studies performed the current state is explained from an overall Indirect Tax management perspective. How is indirect tax perceived by senior management and what is the root cause? An overview is given of the impact of VAT in general and non-routine and significant business transactions that always need timely management. Realizing indirect tax objectives contribute added value to the company’s business objectives as for example hidden operations are reduced (hrs spent on rework). However, in order to change mindset or company’s culture re indirect tax involvement of senior management is essential.

How to realize objectives via best practice approaches, tools and methodology

This sections deals with prioritization and gives answer ‘Why’ time should be spent only on indirect tax risks that exceed the company’s risk appetite. What are misperceptions and how deal with these in daily practice? When objectives are set it is important that proper tools are available to realize set objectives. A roadmap is provided including templates of a VAT Strategy 2014 (including performance requirements), VAT Risk Profile 2014 and VAT strategy Plan (long term).

How to increase indirect tax function’s effectiveness

This section deals with building the business case and defining the problem statement for senior management and how a VAT Throughput calculation can support when used in the right way. Measure is important and tools like statistical sampling, data analytics, ERP reviews could be used not only to quantify amount of risks, but as well to understand its root cause.

Achieving stakeholder satisfaction

This section is about understanding senior management, communicate a problem statement, write a business plan with the right elements and achieving mutual responsibility to optimize internal buy-in.

Writing a business case / problem statement and calculate Return on Investment (ROI)

This section is about cost benefit and deals with the question how much money is saved when the problem is eliminated. The section contains a template with non-exhaustive examples as well the definitions of various savings (hard, soft and potential).

Main menu

From test phase to go live

  • Test phase – prelaunch to selected audience [done]
  • Receiving feedback [open]
  • Evaluate feedback [ongoing]
  • Remediate and improve [ongoing]
  • Write introduction how to use site and forum [work in progress]
  • Official Launch [expected soon]
Indirect Tax Function Effectiveness

Indirect Tax Function Effectiveness

New product launch: Taxmarc™ Add-on

In Business Strategy, Indirect Tax Strategic Plan, Processes and Controls, Audit Defense, Indirect Tax Automation on 08/11/2013 at 5:15 pm

Taxmarc™ Add-on: a standard SAP solution with limited adjustments to resolve some standard SAP gaps and improvement of the overall VAT determination.

Taxmarc™ Add-On is a preferred option when an integrated VAT solution:

  • should have a low impact on the company’s SAP set up, and
  • is cost efficient , and
  • is flexible for adding new features later on, and
  • is based on proven technology and architecture.

Taxmarc™ Add-on is based on standard SAP VAT determination logic and functionality. Based on the select options it might be delivered with a standard design for VAT conditions, access sequences, tax codes, tax sensitive master data and logic for the determination of customer VAT registration number.

For ‘simple’ business models (AB scenario’s) this standard SAP functionality can be used.

However when business models are more complex, standard SAP VAT functionality is insufficient – due to the company’s business model, organizational structures and/or VAT requirements – to manage the correct VAT treatment additional Taxmarc™ Add-on features are implemented. These add-on’s are built on the proven Taxmarc™ platform and upgrade to the full Taxmarc™ Tax Engine is possible at a later stage.

Additional Taxmarc™ Add-on features could be implemented for the following type of scenarios:

  • standard triangulation,
  • cross border inter-company,
  • electronic invoices via EDI/iDoc

Taxmarc™ Add-on does not have an integrated Tax Control Framework like Taxmarc™ Tax Engine or Taxmarc™ Basic. That means that in addition manual controls and processes or automated VAT tools need to be set up to manage risks properly. To support our clients Taxmarc™ has developed a normative VAT Control Framework that can be used for realizing this aim.

Our add-on solutions have a proven track record as these are all part of functionality of our Taxmarc™ Tax Engine. This engine has been implemented by many multinationals with great client satisfactions.

Taxmarc™ Add-on Features

Taxmarc™ Add-on’s features in below overview are divided in:

  • Can be selected
  • Optional

Can be selected‘ are features that have a low impact on current SAP set up and focus on quick wins. Cost efficiency is realized as less features with focus on quick wins means lower implementation costs.

The ‘Optional‘ features have a medium impact on SAP set up and are features of Taxmarc™ Tax Engine respectively Taxmarc™ Basic that can be added based on increased client needs.

Tax Engine Basic Add On features1

Tax Engine Basic Add On features2

Tax Engine Basic Add On features3

Compare Taxmarc™ Tax Engine, Taxmarc™ Basic and Taxmarc™ Add-on

Which product best fits your organization: compare features, impact on SAP set up, implementation time of all VAT determination solutions of Taxmarc™ that are integrated in SAP without an external interface.

‘Can be selected‘ are features that have a low impact on current SAP set up and focus on quick wins. Cost efficiency is realized as less features with focus on quick wins means lower implementation costs.

The ‘Optional‘ features have a medium impact on SAP set up and are features of Taxmarc™ Tax Engine respectively Taxmarc™ Basic that can be added based on increased client needs.

Tax Engine Overall features1

Tax Engine Overall features2

Tax Engine Overall features3

Tax Engine Overall features4

For more info please contact:

Richard Cornelisse – Director Strategy & Sales
Telephone: +31 6 53 99 48 74
Email: richard.cornelisse@taxmarc.com

Website: Taxmarc™

Download Flyer Taxmarc™ Tax Code Solution

Why Manage Indirect Taxes?

In Audit Defense, Benchmark, EU development, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, Technology, VAT planning on 19/10/2013 at 7:00 pm

By Richard Cornelisse

KPMG quote

To self assess risks the following non-exhaustive overview might be useful as a guideline:

risks overview 1

risks overview2

risks overview3

The correctness of VAT reporting is checked only afterwards by the tax authorities. Non compliance could result in that over many years an assessment can be levied (depends on country’s assessment period: NL is five years) including interest and increased with penalties.

It is risky business to monitor only the balance between output VAT and input VAT.

Neutrality can only be achieved – better is the word earned – if certain formal and material requirements are met.

EY Quote

Optimizing VAT recovery, working capital efficiency

Overall business strategies focuss nowadays on:

  • Release cash
  • Reduce costs
  • Efficient refinancing and restructuring

cash flow

To self assess opportunities the following non-exhaustive overview might be useful as a guideline:

cash flow

Increased Audit Risk due to Fraud Priorities?

A recent European Union study (2013) says the bloc’s 28 member nations may be losing almost 200 billion euros ($267 billion) annually in value-added tax revenues due to tax evasion and a lack of enforcement.

EU Tax Commissioner Algirdas Semeta said  the amount of revenues slipping through the governments’ nets is “unacceptable, particularly given the impact such sums could have in bolstering public finances.”

The study for the European Commission, the bloc’s executive arm, found member states lost an estimated 193 billion euros ($258 billion) in VAT revenues in 2011, or 1.5 percent of the EU’s economic output. European Commission – Press Release - Fight against fraud: new study confirms billions lost in VAT Gap

Actively combating VAT fraud is a priority for the European commission and local governments. New measures are being taken such as the introduction of individual liability for not remitting VAT if the buyer knew or should have known that he was buying from a fraud. To prevent such a condition of liability, the ability to demonstrate that sufficient control measures have been taken is essential.

In the next paragraph an overview is given of the estimated VAT Gap per Member State.

Is it not realistic to state that the risk of a tax audit increases in countries that have lost substantial tax revenue because of VAT fraud. Something to consider from an audit defense strategy perspective and could be a reason to challenge the company’s current indirect tax priorities set.

One of the tasks of the indirect tax function is to timely identify changes in legislation and regulations potentially affecting the group and/or its business. There could be many other arguments why for example review of control measures to avoid such liability should be a top priority.

Top on my list is managing reputational risk.

Estimates of the VAT Gap per Member State

EU study VAT Gap due to Fraud

Related articles

The impact of VAT rate change on company’s compliance costs

In Audit Defense, Benchmark, Business Strategy, EU development, Indirect Tax Automation, Processes and Controls, Technology, Training on 14/10/2013 at 5:58 pm

By Richard Cornelisse, Director Strategy & Sales of Taxmarc™

ORC International was commissioned by HMRC in 2010 to undertake research with businesses and trade associations to explore the compliance burden and commercial impact of the VAT rate change in 2008 in the United Kingdom.

In their report “HMRC Compliance Costs and Commercial Impact of December 2008 VAT Rate Change” ORC analysed that large businesses – businesses with more than 250 employees – spent on system change re this rate change between 235 – 4,040 hours.

If the hourly rate would be determined at EUR 75 per hour the overall system change costs would be between EUR 17,625 – EUR 303,000. Based on the definition used for large businesses it is more than likely that multinationals with multiple or complex systems will be in the higher range.

Due to the increased frequency of VAT rate changes and all the activities mentioned in SAP checklist for VAT rate changes, the costs of a multinational will likely be around EUR 50,000 and EUR 250,000 annually.

Writing the Business Case for Taxmarc™ Tax Code Solution

Via Taxmarc™ Tax Code Solution’s time-stamp design no new VAT codes are required in case of VAT rate changes. Only the effective VAT rate dates need to be changed in SAP. There will be a major reduction in maintenance effort and the risk of a shortage of tax codes is eliminated.

As the name and description of the tax code remains the same the Accounts Payable and VAT compliance processes can remain the same as well. All reports and templates that are using the tax codes (i.e. the VAT returns templates) do not have to be changed.

Changing VAT rates will be almost as easy as changing a sales price in SAP.

Final Tax Code Solution One Page Flyer

Download digital flyer

An example of a business case:

“Our company faces a shortage of SAP tax codes soon what impacts the efficiency and effectiveness of our business processes negatively.

Overall, developing workarounds cost either a lot of IT and stakeholder’s time (internal or external) and extra management time is needed to avoid human errors due to manual intervention.

  • This project results in a significant reduction in labour and IT time needed. Reduce time spent only on ‘VAT rate change’ decreases annually from 4,000 hours to 20 hours average by July 2014.
  • This project will save at least EUR 250,000 per year and supports our corporate goal of cost reductions. Soft and potential savings are more efficient and effective deployment of employees, a reduction of head count in finance department, less time is needed for update of any training manuals, lowers external advisory fees.
  • The Taxmarc™ Tax Code solution has a break-even point within twelve months.”

Tax Code Solution front

For drafting and supporting a business case the following information could be used.

EU VAT Rate Changes

In many countries around the world the VAT revenues make up an important part of the total revenues of the government. Combined with the financial crisis and the need to reduce the budget deficits, VAT rates are changed frequently. The average EU standard VAT rate increased from around 19.5% to more than 21%. Raising VAT rates is not limited to Europe.

Europe has seen changes in 11 countries in the period 2007 – October 1, 2013 and the following increases are expected:

  • Cyprus will raise VAT 2% to 19% by 2014
  • France Will raise its standard VAT rate from 19.6% to 20% in 2014
  • Luxembourg will raise VAT from 15% in Jan 2015

The change of a VAT rate has a huge impact on the ERP system. Due to design limitations in SAP for every new VAT rate, new tax codes must be set up in standard SAP and a significant amount of additional changes are required to get the new tax codes up and running for all SAP transactions. This usually entails significant projects that include the adjustment of many tables in SAP.

A non-exhaustive overview of activities can be found in our checklist for VAT rate changes in SAP

What have your peers experienced?

Quotes from HMRC Compliance Costs and Commercial Impact of December 2008 VAT Rate Change:

“[the system changes] was a big one, yes, for our retail arm of the business where we do more standard-rate, if we had to have a new rate input into the system or a new VAT code … I know there was a working party set up for it and the changes had to be done, but I wouldn’t know how much time was spent on it, but it was quite big, it was understanding how to change it in the system and then obviously conveying that across to everybody so that they started using the correct code for the correct transaction.”

“Sitting down with a VAT manager and listing every system and process that we thought was impacted, we then got together with our IT people and we had to set up a SharePoint site in order to be able to monitor all the different changes, because there were a lot …”

“A VAT rate change affects a huge number of people in a organisation – you have the main Tax Teams, who are subject matter experts, you have to understand the rules and understand the changes and direct what change is going to be made; you have the Documentation Teams that are required to make sure that invoices go out with the right VAT rates on; you have the system changes that need to be made, and many of those systems are quite diverse; many members will have several systems for example, not just one, that they are managing, so you have to make changes across multiple systems.”

SAP checklist for VAT rate change

Numerous multinational companies use very many different tax codes and risk facing a “shortage” of necessary tax codes. Companies face bottlenecks with SAP‘s 2 character tax codes and the many necessary modifications in SAP in the event of VAT rate changes.

It seems therefore a straightforward matter, however in practice a considerable amount of activities are required to get this properly implemented in SAP.

The reason is that VAT codes in SAP are not set-up with validity dates and therefore for every VAT rate change a new VAT code has to be created. Due to the complexity in SAP, the creation of a new code is just the starting point to get SAP up and running.

Below you find a non-exhaustive list of required activities in case of VAT rate changes. It depends on the current configuration of VAT functionality whether all activities listed below are required. The opposite is also possible that more activities are necessary.

Taxmarc_ Tax Code Solution pc9

Mandatory electronic audit files: a worldwide trend?

In Audit Defense, Business Strategy, EU development, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, Technology on 05/10/2013 at 11:13 am

Richard Cornelisse

By Richard Cornelisse, CEO of the KEY Group

The SAF-T standard, originally created by the OECD, is intended to give tax authorities easy access to the relevant data in an easily readable format. This leads to much more efficient and effective tax inspections.

The legal requirements of the file are in line with the obligation of using certified billing and logistic software that prevent changes on documents already issued.

Besides Portugal similar obligations exist already in Austria, Canada (voluntary basis), Luxembourg and Singapore. In Belgium, Croatia, Finland, France, Germany, Lithuania, Malta, Spain, Slovak Republic, Slovenia, and UK discussions on SAF-T are already taking place. Countries like Sweden and Netherlands have their own e-audit file standard.

We are currently testing a solution built in SAP that will be able to generate automatically the mandatory SAF T files based on the specific country’s legal requirements.

Somehow related to SAF T is the new mandatory electronic Tax Balance sheet requirement in Germany. From January 1, 2014 it becomes mandatory to send Tax Balances electronically.

We have launched successfully “eBilanz-Cockpit”: an easy-to-use, user-friendly, cost efficient and fully integrated SAP solution for German electronic tax balance.  See attached Powerpoint of the KEY Group for more detail.

All our products are in SAP integrated products (without external interface) and have been implemented by major multinationals and of course client references are available.

Background

The OECD’s Committee on Fiscal Affairs (CFA) recently approved two notes arising from work to develop a set of guidance on business accounting system data requirements for tax audit purposes, and associated practical implementation issues for software developers. The set of guidance was prepared by a task group consisting of representatives of national revenue authorities, the Business Applications Software Developers Association (BASDA), accounting bodies, and other interested parties.

The aims of the guidance are to simplify tax compliance and tax audit requirements as they relate to information required for tax purposes from business and accounting systems. This guidance should encourage voluntary compliance by businesses that will also add to profitability by encouraging better internal control procedures. The guidance should also help promote compliance with new legislation on accounting standards such as Sarbanes Oxley and IFRS (International Financial Reporting Standards). The application of standards through software development also provides both public and private auditors with a reference point.

Guidance Note: Guidance on Tax Compliance for Business and Accounting Software

This guidance note describes the processes needed in business and accounting software to attain a sufficient level of reliability for electronic records kept in support of tax returns during the retention period prescribed by tax legislation in individual countries.
The principles outlined cover:

  1. integration of effective tax protection controls;
  2. production of audit trails;
  3. enabling audit automation;
  4. production of SAF-T
  5. allowing users to file returns electronically;
  6. archive procedures to ensure integrity and readability; and
  7. provision of comprehensive documentation.

Communication from the Commission to the European Parliament and the Council An Action Plan to strengthen the fight against tax fraud and tax evasion

On 2nd March 2012, the European Council called on the Council and the Commission to rapidly develop concrete ways to improve the fight against tax fraud and tax evasion, including in relation to third countries and to report by June 2012. In April the European Parliament adopted a resolution echoing the urgent need for action in this area.

(…)

Future work on these actions will be guided by the need to reduce costs and complexity of tax systems for both the taxpayers and the tax administrations. For taxpayers, decreasing costs and complexity would encourage better tax compliance. For tax administrations, the development and full use of automated tools and risk management techniques would release human and budgetary resources to concentrate on achieving targeted objectives.

The Commission will also continue to promote the most effective use by all Member States of practical IT tools for all taxes. It will also promote a more joined-up approach between direct and indirect taxes and between taxation and customs by making appropriate use of the FISCALIS and CUSTOMS programmes to enhance communication and promote a more systematic sharing of best practices and tools, where appropriate. This can help to improve the efficiency of audits and controls and reduce the burden on taxpayers.

All the actions proposed to be taken up by the Commission in this document are consistent and compatible with the current Multiannual Financial Framework 2007- 2013 and the new Multiannual Financial Framework 2014-2020.

31. Develop an EU Standard Audit File for Tax (SAF-T)

The use of an EU standard audit file for tax (SAF-T), along the lines of what is already in force or under development in certain Member States, would both facilitate voluntary compliance from taxable persons and facilitate tax audits.

A pilot project is currently under development in the specific context of the mini One Stop Shop for telecommunications, broadcasting and electronic services. Its further development should be envisaged.

KEY Group Final front

Download in PowerPoint

RELATED SAF-T TOPICS

  1. New requirement for submission of tax report with transaction details in Portugal (SAFT-PT)
  2. Tax Authorities peeking at your data – Are you still confident about your tax position?
  3. On monthly basis, companies are obliged to submit the SAF-T (PT): how to be compliant?
RELATED ARTICLES

Indirect Tax Can Drive Costs For Shared Service Centers

In Audit Defense, Business Strategy, EU development, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, Technology on 16/09/2013 at 10:00 am

The Intersection Of VAT And Shared Service Centers. A Site For Global Savings Or A Source For Worldwide Risk?

The world has changed and so has the way the world does business — some say irrevocably, whether for better or for worse. An arguable upside of the global credit crisis is that it has provided many companies with an added impetus to look for ways to improve processes, manage costs, increase functionality and customer satisfaction, eliminate redundancies and extract additional value.

One approach that is growing in popularity is the migration to a shared service center (SSC) model. About 27% of the respondents to a Ernst & Young survey of global executives indicated that they plan to increase their use of shared service centers over the next year for functions ranging from property management to customer service, from IT software and network management to HR and accounting.

613-01535203As varied as the drivers for and uses of the SSC model may be, there is one common denominator that is too often missing from the strategic or planning elements of the shared service discussion — indirect tax. And although these tax considerations may not be among the issues that drive a shared service decision, tax can certainly give rise to some significant and costly challenges. That is particularly true of value added tax (VAT), which hits a number of disparate points within the enterprise as diverse as finance, procurement, IT or HR.

For multinational companies (MNC), these touch points can arise in a wide range of countries and taxing jurisdictions as well. As MNCs move more and more to the shared service model to meet their varied objectives, the responsibility for indirect taxes migrates with them, especially in the case of VAT and goods and service tax (GST). Also, complexity in managing these taxes increases exponentially when cross-border activities are involved, especially in today’s VAT environment, where all too often controls are external, processes are manual and procedures are not documented.

Historically, the activities around transactions giving rise to indirect taxes have been handled by in- country entities that are more familiar with local regulations and compliance requirements and accustomed to the rules and obligations for invoicing, liability, rates, accounting and reporting specific to each of the myriad jurisdictions.

But what happens when VAT and GST functions are transferred to an offshore SSC in some faraway location? How complex will the operational requirements be when one SSC is dealing with countless transactions that originate in multiple countries and languages and fall under the auspices of a variety of cultures and authorities?

Getting ahead of possible problems at the planning stage before they arise in practice is one critical way to make sure that the company reaps the benefits intended from an SSC migration. VAT needs to move to the top of the priority list whether a new SSC is being designed or an existing one evaluated.

A look at the risks and rewards

Since cost savings is one of the most common reasons for an SSC, companies often go to what are considered low wage countries such as the Philippines, Hungary, Poland, India or the Ukraine. An additional upside of these countries has been the availability of educated and multi-lingual talent. However, what is often missed in the business case, planning and execution is a full understanding of the processes and controls needed to effectively and efficiently manage indirect tax. This knowledge gap can give rise to some important considerations:

Inability to comply with local VAT rules — Although the root cause will vary from one company and country to another, the risk is likely to arise because of the fundamental lack of resources with local knowledge, clear VAT policies and procedures, technology enablement and controls and metrics to facilitate and monitor compliance. In most cases, there is some combination of these causes.

System incompatibility — It isn’t uncommon to find that the ERP system or other available technologies do not support SSC staff as fully or effectively as required in making sound decisions related to VAT.

Processes not clearly defined

1211956_58126918— SSCs sometimes find themselves operating without clear descriptions or instructions as to how certain processes should function internally. That typically includes specific division of duties and defined responsibilities for every task and the person assigned to perform it, as well as the protocols for communicating with the tax office to receive updated information, escalate issues and solicit valuable feedback.

The more pieces missing, the greater the risk.

Non-existent or inadequate processes and documentation — Since indirect tax guidance is not typically part of the SSC brief, SSC staff may not have access to VAT training, manuals or web-based technology to support their decisions and activities relative to VAT.

Insufficient communications — Staff may also be hampered by inadequate or unorganized communications between the SSC and other operational business units (e.g., IT, logistics, group tax department) within the organization, making it very difficult to identify and address any crossover issues relating to VAT.

Non-existent or inadequate compliance controls — An indirect tax control framework and key performance metrics that focus on relevant indirect tax risk must be in place to provide the stability and transparency required to both enable and sustain compliance.

None of these “risk drivers” are insurmountable or prohibitively complex to overcome. That said, there are some equally significant VAT-specific rewards in migrating to a well-run and well-founded SSC:

Performance improvement — Companies have seen a reduction in both manual effort and error rates in VAT processes from automating VAT decisions in an ERP environment and (or) using technologies available on the market such as tax engines and certain web-based applications.

Better time management — More time is available to tax staff to set up and implement VAT strategy and planning. Since part of the VAT functionality is transferred to the SSC, problems can be anticipated at an earlier stage and action taken to pre-empt or solve them.

Process improvement — With the SSC doing a good portion of the “heavy lifting,” the organization has more time and resources to review, adjust, structure and optimize existing VAT processes. It may also lead to the development of a VAT team to operate as part of the overall international tax team.

Consistency and flexibility — An efficient and effective SSC/VAT relationship can provide the company with a consistent operating model as well as flexible organizational design to support growth, profitability and compliance.
Once the company has evaluated the risks and rewards and conducted any other due diligence, the processes begin for identifying the VAT-critical functions, diagnosing the current state and designing the structure that will enable the effective migration of VAT to SSC.

Identify, diagnose and design — steps for getting an SSC that works

VAT should be considered in every aspect of the migration process, from concept through completion and beyond. Although we’ve identified the three mega-steps as identify, diagnose and design, these are not necessarily discrete elements that take place only once. These same steps can — and should — be applied from time to time to an existing SSC to make sure that it is optimized and functioning as efficiently as possible and that it remains consistent with enterprise objectives in the event of changes in the business profile.

Identify

VAT-critical functions are among the most common transaction-handling processes to migrate to an SSC. That typically includes such functions as accounts payable, general accounting, intercompany settlements, travel and expenses, tax filing, customer billing and order entry.

This is essentially the time for defining the scope of the SSC – documenting the current VAT processes for the various local business units and determining what countries the SSC will support and the processes for which it will be responsible. Underpinning these decisions should be a realistic perspective on the available technologies and talent pool, coupled with reporting and metrics for measuring performance.

649-05658047Another important element built into making these choices is identifying their impact and any changes they could have on current processes. Centralizing functions into an environment like a SSC entails a shift of responsibilities, which then requires establishing and documenting new protocols and new lines of communication. This early stage is the time for surfacing potential problems and identifying the time frame and approach for addressing them (e.g., further integration of ERP systems, tax engines, procedural guidance and controls).

The complexity of change that comes with implementing an SSC and its various support systems gives rise to some critical considerations, so the company must fully understand the degree of change that’s about to occur and communicate and manage it across the enterprise.

Diagnose

The goal is to make sure that the outsourced VAT processes and functions are transferred and continue operating as effectively and efficiently as possible. That means determining whether the current processes operate satisfactorily as is or need to be improved, factoring in any potential or existing differences and taking into account the complexity of the existing processes and the variations between these processes in each of the business units to be supported by the SSC.

One of the potential actions that may be taken is optimizing the VAT functionality of the ERP system. For example, some systems and tax engines include the option of using a condition table or decision tree to determine the appropriate VAT action without human involvement. This virtual VAT manager establishes the VAT qualification for each transaction by allocating a tax code to yield a specific VAT result.

It is essential that any process functioning or being drawn up to function will reflect such changes as new customers, flow of goods, legislation, etc. and then is entered into the system accurately and in good time. The system also must include adequate controls to ensure that transactions not within the scope of the condition table/decision tree cannot be completed without the involvement of an internal or external VAT expert.

677-03204467If different applications are used, integrating multiple ERP systems into one ERP system could be an option, so this is the time to diagnose the current conditions in light of the actions to be taken, their timing and feasibility. Keep in mind that ERP implementation immediately prior to the SSC’s go-live date is not realistic. Systems changes involve various stakeholders, are time consuming and realistically take months to complete, so they should be considered as a medium- to long-term objective.

As you begin to diagnose the current state and future objectives of your SSC plans, some of the questions that can help you determine the impact of VAT prior to migration.

Do we have sufficient insight into current VAT processes including all manual adjustments, workarounds and internal quality assurances processes?

  • Are the processes specific and well-documented and are they adequate to the new environment?
  • Do we understand the scope of personnel changes that may occur as we migrate to the SSC?
  • Have we captured all the relevant knowledge from personnel who may decide to leave the organization?
  • Are we retaining access to and information about existing manual processes and procedures and offline solutions?
  • To what extent do current processes depend on local VAT expertise and technology? How much will be lost in the event of a transfer to SSC?
  • To what extent are different processes required from one jurisdiction to another?
  • Who has final responsibility for the VAT compliance process at present and who will own it upon transfer to the SSC model?
  • Where are the essential process controls being carried out?
  • How does the SSC model deal with local VAT risks in terms of internal communication and coordination?

Design

There are no standard solutions, just the central requirement that any solution be VAT-compliant. What the future SSC/VAT interface will look like will depend largely upon the complexity of the transactions to be handled and the type of technology and talent available. If the SSC design will be based upon the organization’s existing ERP system, it’s essential to know from the outset how well its structure and functionality will support the completion of the VAT processes. It’s equally important to know the extent that technology will be used for electronic invoicing, tax engines, tax reports and other VAT-specific processes and to make sure that they are in keeping with any local VAT rules and guidelines.

Fundamental to the ultimate design is whether there is an integrated ERP system in place or the VAT compliance process is based on different applications. If the infrastructure comprises a combination of applications, this increases the chances of manual adjustments having to be made for consolidation or other purposes, which in turn leads to greater VAT risk because of the higher margin of errors. If employees with limited knowledge of VAT end up being responsible for manipulating and entering data, this begs the central question of whether the data can be considered sound.

Following are more questions that can help refine the design of the VAT/SSC intersection for short-, medium- and long-term functionality:

  • What kind of supervision is in place for SSC staff responsible for carrying out the relevant VAT processes?
  • Is hard copy documentation available on how staff members should carry out VAT processes?
  • Alternatively, is technology used to select tax codes and is assistance provided in the form of intranet/internet/tax engines?
  • What duties and responsibilities for VAT processes are assigned to the different members of the SSC? The business units? IT, tax, finance or other departments? Have these duties and responsibilities been clearly defined and documented?
  • Is everyone aware of the responsibilities in terms of monitoring, delegating duties and establishing efficient and effective communication lines between staff members with varying responsibilities?
  • What does the internal control structure pertaining to these processes look like?
  • Which controls have to or can be carried out at the SSC and which have to or can be carried out at local level?

A real world example

A multinational company based in France decided to centralize and transfer functions to Switzerland. Not only did they neglect to document the processes and thoroughly analyze the VAT impact, they also lost staff that was familiar with the functions. As a result, the company also lost access to the historical data relating to the preparation of VAT returns and had employees that were unfamiliar with the methods for preparing the returns or making manual adjustments.

At the time the VAT audit was announced, major panic ensued and the SSC staff had to work around the clock to obtain more insight into the original processes and collect information for reconstructing the VAT returns. The company was at risk for the full amount of the VAT and for penalties of up to 100% of the VAT owed. In short, the potential benefits of the SSC migration were largely overshadowed by the additional time and money that had to be spent for this emergency response and the disruption to orderly operations.

Upfront agreement and alignment

Underpinning all the activities that comprise identifying, diagnosing and designing the SSC’s treatment of VAT and GST is transparent communication and a well-defined service level agreement (SLA) that everyone involved understands and supports. That must include the responsibilities both within and outside the SSC, the division of duties and the protocols for communicating, resolving and escalating issues.

Before the processes are transferred over, each one should be thoroughly vetted to confirm:

  • Overall efficiency and functionality
  • Feasibility within the SSC model
  • SSC resources required
  • Impact on current state and ongoing processes
  • Impact on ongoing processes
  • Critical success factors and performance measurement

1158737_66509283Rollouts should be reviewed holistically from a portfolio perspective in order to understand and effectively manage the demands upon corporate and SSC resources and the return on investment for each major initiative. Likewise, the VAT work stream should be integrated with contingent technology and finance projects. This may prove challenging as a number of initiatives, particularly those that deal with systems development and technology enablers, are often not visible to the tax function — another point that underscores the need for transparency and upfront communications.

Failure to align with initiatives that can intersect with VAT can result in a VAT design that is inefficient from a process perspective and not a “best fit” for the business.

Underrating VAT — some cautionary notes

Global indirect taxes can amount to as much as 75% of the overall corporate tax burden, with VAT and sales/use tax outlays nearly 40% of total business tax expenditures — almost twice as much as corporate income tax. And the more taxing jurisdictions around the world focus on taking in VAT revenues, the more prevalent will be VAT audits.

For a company that underrates the impact of VAT and fails to factor in its implications throughout the SSC design, the financial consequences can be huge:

  • An oil and gas company had to pay $2 million in VAT instead of getting the refund they expected in the same amount.
  • A mining company was assessed $500 million in taxes and penalties because they lacked the proper documentation.
  • A consumer products company missed out on a $20 million VAT refund.
  • A Fortune 100 company saw its officials put in jail because of personal liability.

Granted, not all these outcomes arose from the shared service model, but they were a direct result of failing to properly handle VAT. When SSCs are vested with the responsibility for VAT, the potential for risk at this level follows.

Managing by design — last words and leading practices

The levers for performance improvement that must be addressed to comply with VAT also help to fully optimize shared services and enhance the sustainable value they deliver. So with proper planning for an SSC that manages VAT appropriately and proactively, the pain of noncompliance can be replaced with the gain of a leading practice shared service model. And that means 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. It also means addressing the roles and responsibilities connected not only with the processes being moved to the SSC but also with those that are being left behind, fully and accurately capturing local and tribal knowledge about how things actually get done.

Companies that efficiently and effectively integrate VAT into their shared service model will have these leading practices in common:

  • They know that VAT is far more than a simple “wash” as a consumption tax but needs to be proactively managed throughout the buy and sell end-to-end processes.
  • They look at the upstream and downstream processes connected with any transaction that carries VAT and have a transparent end-to-end perspective into the controls and metrics for each.
  • They leverage the capabilities of their ERP systems to automate VAT processing wherever possible, and design their solutions so the decision is made at the right time by the right resource.
  • They know that an SSC is not the end result of a one-time initiative. Rather, it’s a vehicle for continuous improvement, with the built-in ability to flex with the changes in company, industry, marketplace, business and the global regulatory environment.
  • They know that VAT is not an add-on to the SSC model, it’s a critical requirement that if proactively managed brings an additional slate of benefits to the SSC.

Co-written By Richard Cornelisse: The Intersection Of VAT And Shared Service Centers. A Site For Global Savings Or A Source For Worldwide Risk? The views expressed herein are those of the authors.

Related Topics

  • Taxmarc™ Purchase Engine - With use of standard SAP functionality the VAT treatment of incoming invoices can be determined and verified real-time in a fully automated way
  • Taxmarc™ Basic - Fully automated VAT determination of outgoing invoices (AR)
  • Taxmarc™ Tax Code Solutions - In Taxmarc™ Tax Code Solution’s time stamp design, no new VAT codes are required and only the effective VAT rate needs to be changed in SAP. The risk of a shortage of tax codes is eliminated and the name and description of the tax code in de SAP pricing procedure remain the same.
  • Taxmarc™ VIES Solution - Taxmarc™ can automatically check the VAT numbers when a VAT number is added to the customer master data. A real time link to VIES is made to validate the entered VAT number.

Case study: cross-border chain transactions and the weakness of Standard SAP

In Audit Defense, Benchmark, Business Strategy, EU development, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, Technology on 12/09/2013 at 2:35 pm

By Robbert Hoogeveen and Richard Cornelisse

Richard CornelisseRobbert Hoogeveen 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.

Cross-border chain transactions with third parties or within a group of company (intercompany transactions) have become the rule rather than the exception.

Below you will find a case study re cross border intercompany transactions.

This example is representative for overall Standard SAP weaknesses from an indirect tax perspective.

Standard SAP issue – intercompany transactions – a case study

Chain of transactions:

  • Company A, manufacturing, is established in Frankfurt DE
  • Company B, sales, is established in Rotterdam NL
  • Customer C established in Amsterdam NL
  • Company B sells to Customer C in country NL from a plant that belongs to Company A (Frankfurt DE)

Standard SAP set up

In Standard SAP the country of departure is based on the plant (Frankfurt DE) and the country of destination is based on the ship to customer (Amsterdam NL). The country of departure and destination are for both Company A and Company B the same.

  • SAP transaction from perspective Company A: plant is DE01 (Frankfurt DE), Sold to is Company B (Rotterdam NL) and Ship-to is Customer C (Amsterdam NL)
  • SAP transaction from perspective Company B: plant is DE01 (Frankfurt DE), Sold to is Customer C (Amsterdam NL) and Ship-to is Customer C (Amsterdam NL)

With Incoterm CIF – Company B arranges transport – both transactions would qualify in Standard SAP set up as an Intra Community Transaction as a valid VAT number in NL for both Company B and Customer C and proof of transport from DE to NL is available.

From a VAT perspective the transaction between Company A and Company B should however be treated as an Intra Community Transaction and the transaction between Company B and Customer C as a local NL transaction with 21% NL VAT.

Without adjustment of Standard SAP setting a wrong VAT treatment would be determined causing non compliance risks.

Transactions seen from Standard SAP perspective

SAP is only processing a transaction in a specific company code. When processing the sales transaction from Company  A to Company B only the red area is taken into account.

Native SAP garbage in  out 1

When processing the sales transaction in Company B then again only the red area is taken into account.

Native SAP garbage in  out 2

The result of this silo vision in Standard SAP  is that  in principle only the red area is seen (read: used) and that means for VAT determination the respective relevant data of white area is missed resulting in wrong VAT qualification.

For a correct VAT determination the VAT relevant data of Company A and B should be linked real time. That means a helicopter view is needed to make that happen.

This is only possible if tax logic is based and generated on a higher SAP’s hierachy: 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.

In case the first transaction qualifies as an EU transaction then for the second transaction the relevant departure country is not DE but NL. Not as a defaulting assumption but based on actual transactional data. The rule will be different if another Incoterm (FCA) is used.

Case study via slides

A perspective from SAP AG

‘In this presentation from the SAP Control for VAT Compliance conference 2011, Lars Gartenschläger, Product Manager for SAP ERP Financials, gives an overview of SAP’s perception of their customers’ needs, an insight into some of their VAT development challenges, as well as the increased focus that national tax administrations are placing on auditing ERP system data.”

Access SAP presentation here

Taxmarc™ Tax Code Solution

In Audit Defense, Benchmark, Business Strategy, EU development, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, Technology on 27/08/2013 at 9:52 am

Richard Cornelisse

Numerous multinational companies are facing issues with the SAP 2-character tax code design. In the event of rate changes, new tax codes will be required and because of the multiple recent VAT rate changes around the world some companies are almost running out of available tax codes. Although this issue has been raised to SAP many years ago, SAP is not providing a new tax code design on short notice.

In our integrated Tax Code Solution’s timestamp design no new VAT codes are required in case of VAT rate changes. Only the effective VAT rate dates need to be changed in SAP. There will be a major reduction in maintenance effort, the risk of a shortage of tax codes is eliminated and since the name and description of the tax code remains the same, the VAT compliance processes and templates can remain the same as well.

It is even possible to implement the Taxmarc™ Tax Code Solution for the existing tax codes in SAP in order to reduce the number of required changes in SAP.

Tax Code Solution front

Download Tax Code Solution flyer 

Background

In many countries around the world the VAT revenues make up an important part of the total revenues of the government. Combined with the financial crisis and the need to reduce the budget deficits, VAT rates are changed frequently. Europe has seen changes in the following countries (source:  VATLive: Global VAT rates on the increase – review the major changes):

  • Spain VAT increased from 16% in 2009 to 21% by 2012
  • UK Raised VAT 2.5% to 20% in 2011
  • Italy increased VAT 1% to 22% 1 October 2013
  • Greece VAT rose from 19% to 23% by 2010
  • Hungary Hit the EU record high of 27% VAT by 2012
  • Netherlands Increased VAT from 19% to 21% in 2012
  • Germany imposed a 3% rise in VAT to 19% in 2007
  • Finland Increased VAT to 24% by the start of 2013
  • Cyprus will raise VAT 2% to 19% by 2014
  • France Will raise its standard VAT rate from 19.6% to 20% in 2014
  • Luxembourg will raise VAT from 15% in Jan 2015
  • Slovenia raised VAT from 20% to 22% in July 2013
  • Montenegro raised VAT 2% in July 2013
  • Croatia increased VAT 2% to 25% in 2012

VAT Rates Applied in the Member States of the European Union – Situation at 1st July 2013

Raising VAT rates is not limited to Europe.

Quote from EY: Indirect tax in 2013 –  A review of global indirect tax developments and issues:

The trend in rising VAT rates has been particularly strong in Europe, especially in the European Union (EU), where, as a result of the consistent rises, between 2008 and 2012 the average EU standard VAT rate increased from around 19.5% to more than 21%. The upward rate trend in Europe continues as Cyprus, the Czech Republic, France, Finland, Italy, Poland and Slovenia have already increased rates recently or have announced increases later in 2013 and 2014.

The change of a VAT rate has a huge impact on the ERP system. Due to design limitations in SAP for every new VAT rate, new tax codes must be set up in standard SAP and a significant amount of additional changes are required to get the new tax codes up and running for all SAP transactions.

Due to the multiple VAT rate changes in different European countries, many new tax codes had to be created. This usually entails significant projects that include the adjustment of many tables in SAP.

Limitations of Standard SAP

Taxmarc_ Tax Code Solution pc9As a tax code in SAP consists of 2 characters, the number of possible tax codes is limited. Numerous multinational companies use a considerable amount of tax codes and risk facing a “shortage” of the necessary tax codes.

Multinationals have asked SAP for a solution over the last couple of years, but to date, SAP has not complied with the request, which leaves companies with the 2 character tax codes and the many necessary modifications in SAP in the event of VAT rate changes.

See the checklist for VAT rate changes in SAP for more details (click to enlarge). Beside the required changes in SAP (new tax codes, condition records etc.), all VAT reporting templates (i.e. Excel, iVAT or OneSource) must be updated to incorporate the new tax codes correctly.

The costs of implementing these changes, including test cycles, are significant.

Taxmarc™ Tax Code Solution

Taxmarc™ Tax Code Solution offers a new design for tax codes in SAP that resolves the limitations and/or gaps in standard SAP without changing the standard functionality of SAP. In Taxmarc™ Tax Code Solution there are – because of its time stamp design – no new tax codes required and only the effective VAT/GST rate needs to be changed in SAP. It is almost as easy as changing a sales price in SAP. The risk of a shortage of tax codes is eliminated and the name and description of the tax code in de SAP pricing procedure remain the same. This makes any control activity or outsourcing considerably more effective and efficient.

The new tax code structure in Taxmarc™ Tax Code Solution offers an effective tool for efficient deployment of employees. With this, the solution underpins more efficient business processes and increased productivity, and implementation costs of any VAT change will be reduced to a minimum; the solution enables a substantial reduction of the working hours that are spent on maintenance.

Taxmarc™ Tax Code Solution is a flexible solution and can be implemented with a new tax code structure (case study 1) or on top of the existing tax code structure (case study 2). In practice, case study 1 is applied in case of a substantial SAP upgrade or migration to SAP. Case study 2 is often preferred in case a shortage of tax codes has to be solved with minimal impact on tax logic and current business processes.

Case study 1: new tax code structure

In SAP is it necessary to create new tax codes in the event of VAT rate changes. Due to the many VAT rate changes in different European countries, many new tax codes had to be created.

With a new SAP implementation, companies usually start with a new tax code design with specific ranges of tax codes for particular countries. The tax code in SAP consists of 2 characters; the first character is used to identify a specific country, the second to identify the applicable tax type.

An example with the following structure:

  • 1st character defines the applicable country: B= Belgium, N= Netherlands, E=Spain
  • 2nd character defines the applicable tax type: 1= Standard rate output, 2= Reduced rate output

This case study describes only the changes for the standard rated tax codes. The company is therefore starting with the following tax codes:

Taxmarc_ Tax Code Solution pc1

The standard VAT rates have been changed in the Netherlands and Spain as follows:

The Netherlands: increase from 19% to 21% on 01-10-2012 with new tax code NG

Spain: increase from 16% to 18% on 01-07-2010 with new tax code: EF Spain: increase from 18% to 21% on 01-09-2012 with new tax code: EN

As a result the following tax codes are set up in SAP:

Taxmarc_ Tax Code Solution pc2

Foreign VAT registrations

In case a Belgium company code is also registered in the Netherlands and is using a specific country ‘Tax Procedure’ in SAP, another tax code has to be created for the NL VAT rate change. The new tax code is not by definition the same as the new NL tax code NG. Foreign registrations have in practice less defined tax codes and the next available tax code for the Netherlands in the Belgium tax-procedure might have been NE.

The consequence is that countries will have different SAP descriptions for the same standard VAT rates. This is to the detriment of the transparency and logic, which causes more necessary (manual) control to monitor risks and (business) changes. Since October 2012 the following tax codes are applicable for the standard VAT rate in this case study:

Taxmarc_ Tax Code Solution pc3

Taxmarc™ Tax Code Solution

With Taxmarc™ Tax Code Solution the original name of the VAT rate (tax code) is maintained after rate changes. Moreover, a tax code is unique within the client and the applicable rate will be assigned to a transaction based on the tax point date. The actual used VAT rate will be concatenated to the description of the tax code.

Taxmarc_ Tax Code Solution extra

The result is a tax code structure that is and will remain logical. Due to Taxmarc™ Tax Code Solution time stamp design, the risk of shortages will be eliminated.

Case study 2: using existing tax code structure

Based on our practical experience companies prefer minimal changes in their SAP environment. This rule is also applicable for the tax environment as every change in SAP causes additional activities that need to be managed and communicated. Tax codes are used in many SAP tables, modules and business processes and companies will therefore prefer to preserve the existing tax code design and configuration as much as possible.

Because of these business preferences, Taxmarc™ Tax Code Solution has developed a tailor-made solution with the companies’ existing tax codes as a starting point. A snapshot is taken of the active tax codes, with the actual VAT rates, and these tax codes will be used for the time stamp design. This means that these tax codes will no longer change in case of future VAT rate changes.

An example based on data from the case study 1. The existing tax codes used are:

Taxmarc_ Tax Code Solution extra 2

The active tax codes in this example are NG and EN.

By using a snapshot of the existing tax codes as starting point the changes in the SAP system will be minimal for existing business processes and staff (ie AP, AR, tax accountants). Especially from a user interface and change management perspective this could be a preferred solution as the existing business processes and work-instructions remain the same.

The future tax code design for standard rated tax code will be as follows:

Taxmarc_ Tax Code Solution pc7

Due to historical rate changes the tax code is less logical but the advantages are that in the event of new VAT rate changes the tax codes will remain the same, and that (end) users will have to deal with little change with respect to their present situation.

Taxmarc Tax Code Shortage front

By Richard Cornelisse, Director Strategy & Sales van Taxmarc™

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