As tax, finance and IT teams plan to support the future growth of their businesses, many are realizing the challenges of managing customized ERP-centric tax compliance. A recent HCL-sponsored global study of large enterprises (over $1 billion in annual revenue) found that on average respondents had five separate instances of SAP operating across their businesses. Thirty-nine percent stated they were running more than six instances. Given increased M&A activity and the complexities involved in globalization and compliance, that number is likely to rise, and consolidation projects are already underway in best-run businesses.
The centralization of business processes, including continuous transaction-level tax compliance, is now a must for continued growth, visibility into operations, reporting and archiving. ERPs are proving limited in their ability to scale with growing companies facing multifaceted indirect tax requirements including value-added tax (VAT), sales and use tax, and e-invoicing. From the United States, with its 10,000+ tax jurisdictions, to Latin America and Europe, where governments have legislated B2B transaction-level reporting, SAP S/4HANA or Central Finance alone may not be able to address all of the challenges of a dynamic global regulatory environment.
Tax compliance is now an important consideration of an SAP S/4HANA implementation, a move to Central Finance or cloud upgrade strategy. A single integrated solution supports indirect tax determination, e-invoicing compliance and VAT reporting for current tax compliance obligations, and evolves as businesses grow and requirements change to address regulations five, even 10 years down the road.
Country-by-country tools and custom workflows
As global businesses move toward Intelligent ERPs, like SAP S/4HANA, and cloud-based applications, local governments worldwide are introducing legislation requiring businesses to comply with detailed processes for invoicing, accounting and tax reporting. This is forcing businesses to accelerate digital transformation in every financial process from purchasing to general ledger. SAP S/4HANA and ECC both address compliance requirements by providing country-by-country tools to build custom workflows, adding cost and complexity to SAP centers of excellence (COEs). Additionally, compliance updates are handled through complex standardized code releases, forcing companies to adapt the code to their customized systems.
SAP tax compliance gaps
Constantly changing requirements have come to be expected in the corporate regulatory environment. Global strategies set to roll out SAP updates on a set schedule are causing companies hyper-focused on this calendar to fall behind in compliance. The major updates and testing required by e-invoicing compliance and all forms of continuous tax compliance interrupt the COEs calendar and can affect entire global operations. Companies that run an N-1 upgrade strategy are especially at risk, as their compliance measures won’t be up-to-date with new requirements. SAP also doesn’t account for local-level details – like certain fields, naming architectures, codes and character limits. All of this equates to implementation nightmares and gaps in compliance measures.
ERP-centric tax compliance administration
To address these issues, tax compliance must be proactively managed within SAP S/4HANA to not only avoid the risks, fines and penalties that occur from data discrepancies and errors but project delays and wasted IT spend. Internal management of this process is no small feat, however, it requires major changes to the way global COE and shared service teams operate. At the same time, the IT team is involved in these time-intensive IT projects and frequent updates for not only the ERP and billing system but other customer transaction and purchasing systems the business requires, and acquires, with growth.
An ERP-centric approach to tax compliance administration can lead to multiple different ways of calculating tax across the business, leading to errors and increased difficulty as companies try to evolve for new opportunities or expand into new geographies. This quickly erodes IT’s time for other projects, causing missed opportunities to drive more effective compliance and innovation.
These challenges are most prevalent for companies operating multinationally. In Latin America, for example, 10 countries currently mandate e-invoicing compliance and/or tax reporting. In this region, global ERP upgrade strategies simply do not work. Companies doing business in Latin America need to understand the limitation of ERP systems and look for solutions that provide local expertise, support and flexibility.
In Part 2, I’ll address local and global tax challenges of native SAP tax compliance.
Learn how to minimize business disruption during an SAP S/4HANA upgrade project in the wake of modern tax: Read Preparing SAP S/4HANA for Continuous Tax Compliance and don’t let the requirements of modern tax derail your company.