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.
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
Raising VAT rates is not limited to Europe.
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
As 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:
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:
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
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.
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:
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:
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.
By Richard Cornelisse, Director Strategy & Sales van Taxmarc™
- Taxmarc™: your best SAP solution for Indirect Tax Automation (indirecttaxtechnology.com)
- Everything You Always Wanted to Know About VAT in SAP * But Were Not Aware to Ask (indirecttaxtechnology.com)
- Indirect Tax Can Drive Costs For Shared Service Centers (indirecttaxtechnology.com)
- Case study: cross-border chain transactions and the weakness of Standard SAP (richardcornelisse.com)