It’s clear that company leaders understand that digital transformation is key for their very survival in a world of constant disruption, but only a small percentage actually have finished a company-wide transformation – opening the door to potential problems from lost customers to tax compliance issues.
An SAP survey finds that 84% of 3,000 executives in 17 regions around the world say that digital transformation is critical for business success, but only 3% have crossed the finish line toward completion. Of the leaders who are fully committed to digital transformation, 80% say that transformation has increased profitability, finds the study done with research and analysis by Oxford Economics.
And now, more than 60 countries have embarked on digital transformation tax initiatives leading to a host of technical challenges for businesses and their financial processes, while introducing new risks to S/4HANA upgrade projects.
Preparing S/4HANA for the Digital Transformation of Tax
For many companies looking at digital transformation, moving from ECC to SAP S/4HANA is seen as a way to benefit from a system that uses data from inside and outside an organization to make real-time decisions, instead of using a transactional system that just records data.
SAP expert, John Appleby, most recently global head of DDM/HANA COEs at SAP, says that many organizations have “this tremendous complexity of systems,” with 20 to 100 systems of record.
“So, if you want to do anything, like adapt to changing taxation laws or a need to do rapid M&A, having that volume of systems just creates a tremendous problem. I think that the business driver of simplification – be it the number of systems or complexity of processes – is a need to update existing systems of record,” he says.
A study by HCL finds that large companies with more than $1 billion in annual revenue had five separate instances of SAP operating across their enterprise, with 39% reporting more than six instances.
Further, because more companies are operating in other countries around the world in an effort to stay competitive, they also are confronted with foreign rules and laws on everything from who can sit on a board to indirect taxes. Specifically, the Organization for Economic Co-operation and Development reports that indirect taxes make up about 31% of all tax revenue collected by its member country governments, and VAT/goods and services tax is reported to be the third most important type of global tax.
As a result, companies may find that ERPs limit their ability to deal with tax complexities including value-added tax (VAT) and sales and use tax rules.
Such challenges may be enough to keep some tax lawyers or risk compliance heads awake at night, but most company boards have adopted the attitude that the regulations and tax rules will be handled in time to avoid any penalties or problems with local laws, Appleby says.
“I think people have been quite reactionary to (tax compliance) but I do think that will change. Right now, they adapt on an ad hoc basis. They’re not systemically making changes,” Appleby says.
“I know one online retailer who is still trying to figure out the sales tax in another country. That’s pretty basic. So, when it comes to taxation, it’s pretty much a just-in-time approach that companies often take. No one has been stung really badly yet,” Appleby says.
He says that as digital transformation is adopted by more companies, ongoing tax compliance will probably be a part of any company’s investment in systems that are designed to improve the customer experience or promote better productivity or employee satisfaction.
Appleby says it’s not unusual for some companies to spend $1 billion or more on their transformations. While companies want to ensure that their tech solution will provide them with the best road to revenue growth, they may not realize just yet that the technology also will pay off in eliminating just-in-time tax resolutions, says Appleby, author of “Building the Business Case for SAP HANA: Engineering Simplicity.”
A report by PwC finds that companies embracing digital transformation can reap benefits when tax compliance shifts into a “value-added business partner” role that makes it easier to make trends analysis, forecasting, modeling and peer benchmarking. “It can focus on key performance indicators such as effective tax rates, cash flow and reducing tax-related variability in earnings— activities that allow management to adopt a ‘one step ahead’ rather than a reactive compliance mindset,” the report says.
Transitioning from ECC to SAP S/4HANA
As IT and SAP heads make the business case for digital transformation and move from ECC to SAP S/4HANA, Appleby advises that they be willing to do their homework before approaching the CEO with their ideas.
“It’s pretty straightforward: You’ve got to understand the context of the business you operate. You need to spend time with each business line to understand what they truly need. It’s been the scourge of IT products to give someone a system and it’s not what they need. I think that’s really changing. You’ve got to understand what really matters to them and then frame the transformation in those terms,” Appleby says.
Take Action
Read Preparing SAP S/4HANA for Continuous Tax Compliance – How Tax Will Impact Key Processes in Your S/4HANA Upgrade and don’t let the requirements of modern tax derail your S/4HANA project.
