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Top 5 challenges of managing VAT in SAP – and what you can do about them

As a finance professional using SAP, you’re probably already aware that the ERP in its native form isn’t exactly finetuned for tax.

In a recent webinar with our friends at Vertex, Wendy Fischnaller, Business Development Director at Vertex, and I discussed the reasons it’s simply impossible for big businesses to manage tax manually in the modern world; from the risk of human error to the cost of compliance and the challenge of meeting frequent regulatory changes.

We also explored the specific limitations of SAP in a tax context – and I’d like to share with you the top five challenges we identified:

1) VAT determination capabilities in SAP are limited

SAP’s ability to accurately determine VAT is remarkably simple. In fact, it’s essentially based on just four fields.

Wendy explained that while such a system can be effective to some extent on the most basic transactions your company will face – for instance, if you sell one product to a small number of different companies – it is wholly unsuitable if your business faces any more nuanced challenges, such as:

  • Working in a complicated industry – such as pharmaceuticals – with regular rate changes and regulatory updates.
  • Being part of a complex supply chain.
  • Having to send invoices to multiple companies to ensure accurate revenue recognition (or transfer pricing).

2) Standard SAP drivers are very narrow

Native SAP is constricted to just four tax fields – Plant or Company Code Country, Ship To Country, Customer Tax Classification and Material Tax Classification. These contain nowhere near enough data to build a complete picture of every tax scenario and to ensure the level of performance a large and ambitious business would expect in its tax dealings.

3) Partial logic equals inaccurate determination

With access to just four tax drivers, sub-standard tax logic becomes the norm for some SAP users and the inevitable result is inaccurate determination. If your ERP determines VAT inaccurately, you will no longer be compliant and face the risk of significant fines and other punishments.

4) You’re always at the mercy of IT

Despite all that we’ve said so far, it is possible to circumnavigate the limitations and lack of functionality within SAP by hard-coding internal solutions and workarounds.

But, as Wendy discussed, this responsibility will always sit with your IT team. And it’s not a one-off request. Every time you want to make a change – whether it’s to add a tax code for a new rate, to take your business in a new direction, to integrate with a new third-party system or to add a new company code – you’ll have to raise a ticket and inevitably feel frustrated when it isn’t seen to immediately.

That’s without factoring in the annual maintenance and repurposing your IT team will also need to run through. In essence, you’ll create a complicated, rigid system which is prone to snapping the moment you need it to flex.

As a result, we strongly believe that relying on IT to keep your SAP platform in tip-top shape is a non-starter.

5) Inability to handle complex data mapping

The infrastructure of SAP doesn’t allow for complex data mapping processes to be completed; at least not accurately, efficiently and in their entirety. If your business needs to complete chain flow transactions or other complex procedures, you will struggle to achieve comprehensive results with your native functionality.

What can you do about it?

You might not need to do anything, but only if you can live within the limited provision of tax determination functionality that SAP native has to offer.

It’s clear that, for most businesses, attempting to manage VAT within SAP will leave your business vulnerable to an increased risk of audit and with an unscalable solution that suffers from a lack of agility.

That’s why we’ve developed and refined an industry-leading implementation delivery system for Vertex’s Tax Decision Tool to simplify VAT determination and ensure compliance.

Innovate Tax experts approach any implementation project as if it were a blank canvas – through a blend of business needs identification, discernment of idiosyncratic tax scenarios and bullet-proof technology selection, we deliver the ‘right’ system based on your needs.