This article is about SAP’s Transaction Tax Engine that uses decision trees in contrary to SAP’s MWST functionality that uses condition tables.
Get it Right at the Tax Front-End
Multinationals across the world have embraced SAP as the preferred Enterprise Resource Management (ERM). The idea behind the German designed software was to provide customers with the ability to interact with a common corporate database for a comprehensive range of applications.
Gradually, the applications have been assembled and today many corporations are using SAP products to run their own businesses. SAP applications, built around their latest R/3 system, provide the capability to manage financial, asset, and cost accounting, production operations and materials, personnel, plants, and archived documents. The R/3 system runs on a number of platforms including Windows 2000 and uses the client/server model.The latest version of R/3 includes a comprehensive Internet-enabled package.
In case of most large corporations, SAP can be tailored to meet the specific requirements of the industry they operate in. The Transaction Tax Engine (TTE), which manages Tax outputs, handles high volumes of transactions often generating billions of dollars of tax revenue. In simple terms, it uses the decision tree to make tax event determination, which in turn generates the applicable tax type and tax rate.
Like other SAP modules the TTE can be customised according to corporations’ specific requirements. The Tax and Finance teams are the end-users of the data and rely on it to generate tax lodgements to tax authorities and to produce financial accounts. With high turnover, accuracy is critical and any minor inconsistency in the master data set-up can result in tax and accounting errors which can go undetected for long periods of time.
While ‘End User Testing’ used in pre implementation stages is designed to prevent this, multiple operational models in a complex organisation often produce outcomes that are unsatisfactory and require subsequent manual input to get the right transactional outputs.
What makes the problem even more complex is that implementing SAP over an established tax platform does not necessarily ensure the underlying processes are fully aligned to the new system – contrary this is often left over to the system end-users who are ill equipped to deal with these types of issues.
SAP implementation are drawn out lengthy projects often running into millions of dollars and getting things right upfront is imperative for the end-to-end process to function.The experience with large multinational corporations is that over reliance was placed on post-fact back-end, detective type of controls.
Typically this involves exception reporting used to detect tax data errors once the tax returns have been compiled and lodged with the Tax Authorities.
The time frame can range from a few weeks to up to a year before a particular control is implemented, and even then the approach is based on transactional scenarios rather than having assurance all contingencies have been covered off.
In a nutshell, there is a significant room for financial exposure for the Head of Tax and CFO resulting in the underpayment or overpayment of tax – ultimately leading to margin erosion, penalties and reputational impact with Tax and statutory authorities, and customers alike.
The diligence in the approach is required at the front-end, designed to capture any master data inconsistencies in SAP before the transaction even occur. Typically, SAP inputs required for the transaction to interface correctly are wide spread.
Whilst, TTE is often controlled by the respective Tax team, other SAP master data inputs are not. For example, if the process maps and flow charts used to carry out customer set-ups are not done correctly or the system is not equipped to deal with the transaction, an error is very likely to occur.
Front-end controls which can customised to suit the corporations’ operational model and business type are key to ensuring the error free landscape. They can be designed up-front and tailored to cover a range of different business scenarios. Their optimal performance is in environments where there is emphasis on internal controls and corporate governance.
by Sasha Savic