By Rizal Ahmed, Chief Research Officer, SAPinsider
Tax laws and regulations are in constant flux. Preparing for and ensuring compliance has become a greater challenge and requires constant collaboration between IT and Finance. SAPinsider sat down with Vertex Tax Experts, Michael Bernard, Chief Tax Officer; Peter Boerhof, VAT Director; and Brian Wilchusky, Director of Global SAP partnerships to discuss the latest tax trends and what customers need to do to stay compliant.
Keeping Up with Change
If one thing is a constant in tax it is change, reports our panel. The constant state of flux in tax laws and regulations is only becoming more rapid and complex. Many of the driving forces behind emerging tax trends relate to increasing globalization, the move towards digital as well as the rapid growth of compliance obligations.
Our panel discussed three tax trends that customers need to have on their radar.
Growth of country-specific tax regulations. This trend is taking hold specifically in regions like Europe, Asia, and Latin America where there are more distinct tax jurisdictions. If you also consider major events such as Brexit and the rapid growth of e-commerce, it becomes even more difficult to stay on top of key issues and their impact on tax reporting and compliance.
“One of the big overarching themes we’re seeing is unilateralism in tax. A lot of countries are creating their own rules that go beyond traditional use and sales tax. This increases complexity when it comes to compliance,” describes Bernard.
The digitization of tax reporting and audit: According to our experts there’s increased pressure on finance and tax teams to provide tax information a lot faster and more often. Tax authorities are moving closer to the ball rapidly and are also driving needs for business to have real-time digital audit trails for tax calculation and payments. These new requirements are forcing companies to rethink their current tax processes and supporting technology.
Increased complexity of IT and business applications: With the advent of cloud solutions, organizations support a wider variety of financial business applications than they ever have, and this trend has implications for tax. “Most companies are running many different financial business systems in addition to their core ERP, such as expense management solutions, procurement systems, and ecommerce applications. All these applications and systems contain some logic for taxation that needs to be build and maintained and feed into central ERP. This provides more complexity when it comes to tax, not less,” summarizes Boerhof.
What’s the Impact and How Should You Prepare
Many of the trends and changes described above are forcing companies to modernize their tax related business processes and associated applications continuously. SAP for many enterprise organizations sits at the center of it all because it’s the main system of record and manages many of companies’ most critical financial and business transactions.
Most organizations have leveraged SAP to support tax management in different ways, reports our panel. Organizations have worked with major (Big 4) consultants to implement componentized software solutions that are fed by their core ERP. These individualized toolsets have been built to support specific regulations, often in the field of tax reporting. Companies have also built their own custom programs and condition records within SAP.
The consequence of having a patchwork of solutions and systems is that such a landscape is very difficult and time-consuming to maintain for indirect tax and must be frequently updated to support new regulations. Most ERP systems do not have the robust and detailed tax calculation and determination capabilities that companies need to comply with the changing tax legislation. “As laws become more complex, it becomes harder to it becomes harder for companies to manage the changes. This can create downstream impacts for compliance and reporting,” says Boerhof.
That’s where specialty tax technology providers like Vertex come in. They create centralized tax engines that plug into your organizations key business and ERP applications. In this way the tax vendor takes on the management of tax content (ex. determination rates and taxability rules). The tax vendor delivers updated content and enables your organization to be compliant with the frequently changing rules and regulations, eliminating the need for customization and simplifying indirect tax change management within core financial systems.
“SAP and most ERP vendors are not in the business of providing regular updates to tax content. That’s where Vertex’s tax technology can provide value by helping customers be responsive to changing rules in their tax determination and reporting processes. No one wants to maintain a large internal team to follow tax changes and localize their SAP solution to support tax laws in hundreds of jurisdictions across different countries, regions, and territories,” comments Wilchusky.
Where Are You on the Tax Maturity Curve?
While there are no hard and fast measures to assess tax maturity, the panel suggested a few different ways to look at it depending on your available resources and requirements. By necessity, companies that do a lot of business in regions where there are highly complex and individualized tax regulations have had to build up their processes and solutions to support them. Those that do business in more homogeneous and centralized tax jurisdictions or in one geographical region, therefore less complex, have had less of a need.
Does this make one better than the other? Not necessarily, say our experts. One of the simplest measures of true maturity, suggests Boerhof is setting tax KPI’s and testing for error rates. How often do you test and are you seeing mistakes in tax processes, calculations and reports? Are you being audited regularly and do you have excessive fines? These will tell you if you need to take significant steps forward in tax compliance.
Another measure of tax maturity is the level of automation in your indirect tax processes. Many countries, especially during this pandemic, are accelerating their moves toward the digitization of tax processing and reporting. This approach is not just meant to limit errors, and fraud, but to enable tax auditors to inspect your indirect tax systems and processes remotely and be able to collect relevant data in a more streamlined and consistent way. Among the many countries that are pushing or have already pushed legislation forward are Italy, Poland, India and Argentina. The consequence of this for business is that there is less room for manual controls and corrections.
What Does This Mean for SAPinsiders?
No matter where you are on the tax maturity curve, you need to remain vigilant stay informed of both emerging tax trends and regulations as you plan for 2021. Here are a few insights to help guide you.
- Actively inform your business and IT teams who support tax processes. In this wake of constant change, you must establish internal disciple and standard processes for educating your organization on emerging tax laws and regulations that impact you. And that’s only part of the battle. You must involve IT and those that support your tax processes and reporting. Knowledge sharing and tight collaboration will help ensure that you are evolving both systems and processes to support compliance.
- Balance internal and external guidance: Once you establish your own internal knowledge and expertise, you should seek to supplement that perspective with outside experts. Whether they come from your audit teams or solution and content experts, like Vertex, those sources can serve as both a sounding board and external confirmation that you are on the right path and considering all the relevant impacts. But don’t just leave it to a third party for the complete story.
- Establish a roadmap that reduces reliance on customization and manual tax processes. Many organizations face a litany of legacy and custom tax processes and operations. Emerging regulations and the constant pace of change within tax, make maintaining this environment highly expensive and potentially risky. If you have not already done, so, start investigating technology, solutions and strategies that can provide more automation and intelligence.
- Understand the potential impact of technology and solution changes on tax. Projects such as the move to SAP S/4HANA and cloud business applications do hold implications for how you manage tax. You need to understand how these solutions impact your processes and how tax compliance might be impacted. “Don’t leave this responsibility for your consultants. The story they know may not be complete as it relates to your company,” warns . It’s important too choose the right solution and approach that can support your company throughout its business and technological evolution.
Vertex is a global provider of tax solutions and technology. Vertex serves over 4,000 customers across 130 different countries. Vertex has been in business for over 40 years and counts 56% of the Fortune 500 as its client base. For more information on Vertex and its thought leadership in tax go to www.vertexinc.com