Revolutionising tax using SAP S/4HANA® – getting it right first time, in real-time
Today’s enterprises require new tax strategies, along with new operational and tax technology capabilities to support both evolving business needs, as well as evolving tax regulations
Tax departments are facing ever-increasing external pressures resulting from regulations. The evolving requirements for calculating and reporting taxes in real time, improved tax transparency and compliance burdens force an increased emphasis on the quality of tax data and reporting within integrated business processes, in real-time, rather than at the end of the finance cycle. Tax departments face increasing pressure to deliver business value without jeopardizing compliance and tax controls. As your organisation embarks on a digital transformation project to deliver new operational capabilities, an opportunity to transform tax presents itself. To take advantage of the digital transformation, tax departments need to address historical issues with non-tax sensitized business processes but must also ensure they are not creating more complexity in their tax data and business processes. Creating this necessary foundation, enables increased transparency, auditability, and the ability for your Tax function to simulate scenarios to better manage tax outcomes. With strategic tax management, tax becomes an integral part of business decisions, making it easier to explore new business models and foster trust in the working relationship with local communities and tax authorities.
Tax Transformation powered by SAP S/4HANA®
Business Transformation and Taxes. They are two of the greatest certainties in business today, and both can bring big questions. Ongoing business transformation is driving many organizations to take a strategic leap with cloud technology and ERP transformation—to enable greater speed, flexibility, innovation, and efficiency. Organisations are considering three main ways to achieve business transformation enabled by SAP S/4HANA® and our article here covers the main paths to digitisation.
The role of the tax function is undergoing a massive change due to digitization and transformation of business models and activity, along with evolving requirements for calculating and reporting tax in real-time. Consequently, there is an increased emphasis on considering accurate tax calculations and reporting within integrated business processes rather than at the end of the finance cycle. “First time right” is becoming the norm and this is challenging older ERP solutions which were built for fewer, simpler tax flows in the businesses that they support.
At the same time, tax transparency and increased compliance burden triggered by regulatory initiatives puts extra pressure on tax departments. On top of that the tax function is asked to consider high-performance analytics in the ERP to improve tax efficiency and gain control.
So overall, to manage the dilemma of dealing with outside pressure from the regulator to be transparent and compliant and inside pressure from the business to add more value, requires companies to re-imagine how to integrate tax in all business processes, running through their ERP platform(s).
An ERP modernization is a catalyst for the transformation of the tax function and an opportunity for organizations to bring Tax into the dialog as business processes are enhanced. This is a unique opportunity to get tax truly integrated within the business. By doing so, the tax team will become a strategic business partner for the organization, which is much better than operating in a silo. It results in enhanced control and allows the Tax function to define future-proofing and value-adding business models as they need to be adapted faster than ever.
By bringing tax in the ERP to a next level, the tax function can move the needle from being a operator to become a strategist. You can achieve a reduction in tax risks, increase job satisfaction of the workforce, and the means to create tax transparency, which adds trust to the working relationship between companies, the tax authorities and the community.
Considerations for tax transformation
Delivering a convincing business case for something few people truly understand, can be daunting, even when it’s in the best interests of the business. However, this need not be the case. A new ERP system is usually a key component of a company’s response to the changing tax landscape, as well as the latest software underpinning the business’ transformation journey. However, it’s fair to say the latter likely makes front-page news in the boardroom, while the former may find its way into a sub-story in the appendices.
Many organisations are already planning their core ERP transformations, some have already started to implement the upgrade, and others are about to commence their ERP needs-analysis. We have written about how Deloitte and SAP are transforming tax together, and how tax transformation with Cloud ERP is imperative for future-ready businesses. But, whatever stage of the thought process, tax has an important part to play in the journey. So how to plan where and when Tax needs to be involved? The key questions to consider can be summarised as follows:
- Be clear about the desired outcomes. Businesses need to be completely comfortable with the end-state and must be able to articulate why they are aiming for it. Compliance can be achieved with many combinations of digital solutions; automation tools and manual work and the trade-off is important to articulate before embarking on the journey.
- Know your scope – requirements for Tax to respond to the changing environment could be big; however, they are often not well captured or understood. Scope out what will bev involved; which systems will be migrated; which countries or entities are involved; which business activities will need to be considered; which taxes will be considered?
- Understand the preferred approach to delivering the implementation – as we have outlined within our article here, there are three main ways to achieve business transformation enabled by SAP S/4HANA®, and Tax functions need to understand which route their organisation is taking and the implications of these for realising their benefits. The optimal approach for Tax can usually be achieved when undertaking a greenfield implementation or selective transformation approach, as these routes provide the greatest opportunity to reimagine data, processes and tax technology architecture. However, whichever route the organisation takes, there will be a need to balance the business change impacts and therefore prioritise Tax’s asks into the program.
- Develop your roadmap. Timings are highly important. What do they look like from a Tax perspective and what do they then look like when overlaid with the transformation roadmap? Is it a 2-, 3- or 4-year deployment for example, perhaps longer? Could there be an interim state and timeframe that is needed to get tax up and running more quickly? What are the wider interdependencies you will need to consider?
- Bring it all together. By understanding the above, Tax leaders will be able to evaluate their business case. This should enable them to articulate; the benefit outcomes and how they’ll be measured; the investment asks to achieve those outcomes; and the return on the investment when you look at both these elements. You can learn more about the benefits that your SAP S/4HANA® journey can bring for Tax in this article.
Relevant Tax Design Topics for Consideration in an SAP S/4HANA® context
When an organisation is considering moving to SAP S/4HANA®, there are many design topics for Tax, across the multiple different tax types that organizations should actively consider. The timing of when these different design decisions will need to be taken will vary depending upon the overall scope and deployment approach for the SAP S/4HANA® implementation.
However, some of the design topics are integral to the overall core sales,
purchase and intercompany processes, thereby meaning that they need to happen from the outset of the implementation. The crucial design topics for Tax encompass:
- Tax data model
- Indirect Tax Determination
- Other tax determination/calculation
(as applicable) – e.g., customs duty, excise duties, withholding taxes, or
environmental taxes. Where these are applicable to the organization, they will
usually also be critical component to the initial implementation scope.
- e-invoicing & e-reporting
- Direct tax – ledgers and segmentation of P&L
- Transfer pricing calculation – pricing procedure approach for intercompany flows
Let’s explore each one of these in further detail and the considerations for the initial template/foundational design.
1. Tax data model
Data is crucial for the effective operation of the business’ tax compliance, calculation and reporting obligations, and with the increases in demands from Tax Authorities for more data and in real/(near) real-time ways the data model within SAP is foundational to protecting the business and its license to operate moving forwards.
A material portion (circa 80-90%) of the data used by Tax is usually not owned by Tax. It is owned and created by other parts of the organization, and therefore it is critical in the overall data model being created as part of the SAP S/4HANA® implementation that the tax considerations of the data model are considered from the beginning. This means it is not just traditional master data or enterprise structure level of data, it touches across the whole data imprint created within the core business processes as sales, purchase, intercompany and other transactions take place.
2. Indirect Tax Determination
How indirect tax determination is going to be handled is an important topic from a design perspective, especially when multinational companies are looking to address the objectives and demands from the business, from the authorities and from the programme. Based on our experience from a diverse range of implementations and conversions there is an increased need to consider additional indirect tax software (SAP Certified Add-ons, Tax Engines and/or solutions for specific local markets) compared with the wave of SAP implementations in the last two decades. Conducting an appropriate solution selection process and the subsequent contracting process typically takes more time than typically allowed for in an implementation project plan, so sufficient time should be planned for this in advance. The difference in design between the various indirect tax solutions and the highly integrated nature of these solutions into the business processes, require companies to have the solution available early in the design / explore phases.
3. Other tax determination/calculation (as applicable) – Customs duty, excise duties, withholding taxes, environmental taxes. Where these are applicable to the organization they will usually also be critical component to the initial implementation scope.
Whilst indirect tax determination (VAT/GST) is the most front of mind tax type during a system implementation, there are many other tax types that the organization will need to calculate or incur as it undertakes its operations, some of which need to be calculated and captured as a transaction is processed through the system, in the same way as for VAT/GST.
The exact number of these additional tax types that the organization will need to cater for within its system will depend upon the exact nature of its business activities and the countries in which it operates; however, these are often aspects that need to be established right from the beginning of the system design and implementation. If not consciously incorporated into the high-level design from the outset they become costly and risky to implement later.
4. e-invoicing& e-reporting
With e-invoicing and/or e-reporting obligations existing now in 40+ countries and continuing to rise at significant pace year on year, most organisations will now already be impacted bye-invoicing and/or e-reporting, and usually will be struggling to support these obligations from their legacy systems as they were not designed to deal with real/(near-real) time reporting obligations.
These obligations are usually mandatory and whilst clients might often be using third party solutions outside of their ERP for the creation of the e-invoice/e-report, it will be necessary to consider how these requirements can be designed into the new SAP S/4HANA® landscape that creates a flexible and future-ready design. This may involve keeping andre-integrating existing solutions; however, often current responses and solutions will have been local: local in nature, rather than creating a more standardized and future proof design.
Getting the right design thinking from the beginning of the SAP S/4HANA® implementation is important, as even if the technology solution could come later if the initial deployment countries do not have immediate e-invoicing/e-reporting obligations, ensuring that the right data and business process considerations are taken into account within the foundational core SAP S/4HANA® design will be important.
5. Directtax – ledgers and segmentation of P&L
The ledgers and way that a P&L issegmented is core to setting the right baseline dataset to start anorganisation’s direct tax – corporate income tax and tax account/group tax reporting– processes. If an organization wants to move away from its current typically-manual/excel based processes, then getting the right baseline position within the ledgers and P&L is crucial. Following establishing the baseline, it will then be possible for future transformation and automation of the direct tax processes with supporting tax technology in future releases/waves of the implementation programme.
6. Transferpricing calculation – pricing procedure approach for intercompany flows The final tax design topic for consideration within the foundation design is around the start of the transfer pricing calculation as intercompany transactions are being processed within SAP i.e.the pricing procedure. The data and design requirements of the pricing procedure should take into account the requirements for transfer pricing, and ensure that the system can more effectively execute the organisations transfer pricing policy, as this reduces the need for manual processes to correct the position afterwards.
As with Direct Tax, following establishing the baseline position, it will then be possible for future transformation and automation of the transfer pricing processes with supporting tax technology in future releases/waves of the implementation programme.
Learn more about Deloitte’s SAP and supply chain capabilities
With a global network of more than 28,000 business and technology professionals focused specifically on SAP, Deloitte is recognized around the world for our depth, experience, and leadership in helping our clients manage their digital transformations. Clients choose to work with us because we combine business insights with technical know-how to deliver practical, results-driven solutions that work in alignment with larger strategic goals.
As the world’s leading SAP S/4HANA® Transformation Partner, Deloitte brings a wide range of experience helping our clients transition to SAP S/4HANA® and SAP BTP via Greenfield, Brownfield or Selective Transformation approaches. Within Selective Transformation, we are experienced in both the Shell Conversion and Mix and Match approaches and working with Selective Data Transformation partners. We also bring deep experience of hosting SAP S/4HANA® on all the hyperscalers and SAP RISE Private and Public cloud offerings. We bring a suite of automated tools to accelerate and streamline the delivery of these SAP S/4HANA® programmes.
Our team is ready to guide your company through the transition options and help you develop the scope, roadmap and compelling business case for change as well as to pilot- or co-pilot you through your SAP S/4HANA® transition. Contact us to get the conversation started and read more about selective transformation here.