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Issue
This KDD will focus on Global Indirect Tax and its three core components as stated below. This decision for this KDD is to decide on the foundation for indirect tax and the approach for the 3 mentioned sub-components, that will be further developed in the Detailed Design Phase. The endorsed approach will have cost implications that need to be considered in the Conceptual Design phase.
Determination
- Indirect Tax determination, for example VAT and GST, is a detailed and often complex area with many rules/laws that vary country by country. Lack of adherence to regulations results in fines for the organization.
Reporting
- Indirect taxes need to be reported to local authorities in specific formats which require upfront preparation of data sourced from the transactional accounting systems. As per current practice at Syensqo, preparations of forms, reports and declarations are primarily managed outside of SAP and often require manual, labor-intensive preparations. which may also rely on SAP standard reports as base selections for the tax declarations. Although the preparation is largely manual, reports and data are sourced directly from SAP.
- Many SAP standard reports commonly used for Tax Reporting purposes in SAP ECC have run out of SAP support and have been replaced with reports in the Document and Reporting Compliance (DRC) framework for Statutory Reporting available in S/4 HANA. Relevant reports are further detailed in the background section of this document.
Preparation & Submission
- Indirect taxes need to be reported to local authorities in specific formats, timeframes and often by registered organizations.
- At Syensqo, submissions are currently either outsourced to registered and authorized agents (wherever this is legally required) or performed manually which is a time-consuming process with compliance risks.
- In a growing number of countries, electronic submissions of financial data for tax & statutory reporting purposes to governments and fiscal authorities are becoming legal requirements (e.g. UK, Germany, Austria).
- In S/4 HANA, the dedicated tool for managing electronic submissions for tax and statutory reporting is SAP DRC which comes at additional licensing costs. Other non-SAP reporting and submissions tools from third party providers such as Deloitte or PWC are currently being explored by the indirect tax departments at Syensqo as well.
Recommendation
Option A - Retention of current practices for Tax Determination, and introduce a new application for automation of Tax Reporting, Preparation and Submissions
- Indirect Tax Determination to continue with as-is solutions in SAP and Vertex (for USA and Canada).
- Introduce automated application for Reporting.
- Introduce automated application for Preparation and Submission.
Ensuring continuity of regulatory compliance and a higher degree of automation for efficiency gains in the to-be solution for tax reporting and submissions, is the recommendation.
Continuing with an obsolete and outdated tax reporting framework which has already reached or is nearing the end of life from a SAP support and product development perspective in a new S/4 HANA implementation is not aligned with future proofing the to-be solution.
For tax reporting, preparation and submissions, the current manual practice poses compliance risks and leads to inefficiencies and lack of controls in the reporting and submission process. As such, it is recommended to automate these activities in the to-be solution with a tool that supports tax reporting out of the system with embedded submission options.
The actual selection of the ideal tool for Syensqo for tax reporting, preparation and submission will be performed at a later stage considering various aspects such as costs, integration capabilities and ease-of-use.
The deployment of a global tax determination and compliance solution through a third party application such as Vertex is not recommended due to its complexity and the high costs involved in the initial build and the ongoing maintenance to ensure accuracy of the tax determinations and reporting results.
Background & Context
Determination
Currently, indirect tax determination is fundamentally performed in the primary SAP ECC systems. The exception is in North America, where Vertex (a 3rd party system) is utilized. As highlighted by Finance and Tax stakeholders in the as-is analysis, there are some existing accuracy challenges for Syensqo, especially in the procure-to-pay processes. The business stakeholders are, however, confident that this can be addressed and improved via continuous and more proactive monitoring and maintenance of the required determination parameters in the system.
Reporting
Syensqo is currently using various tax applications for reporting purposes. While some of these applications allow for seamless integration with SAP as the source system for regulatory filings and reporting, (e.g. Vertex), the business is still relying on supporting reports from the underlying SAP transactional accounting system especially in countries where no automated or only semi-automated solutions are in place for tax reporting. The introduction of a more holistic tax reporting framework in the to-be solution would assist not only with regulatory compliance but also provides the business with a more automated reporting and submission solution.
In the past, Tax reporting capabilities in SAP ECC were primarily focusing on indirect taxes (e.g. VAT, WHT) and numerous reports were developed by SAP over the years to comply with regulatory needs in supported countries. Those reports were regularly updated by SAP as and when tax jurisdictions changed in the respective countries. With the move to S/4 HANA, SAP has changed its reporting strategy towards a more consolidated and centralised tax reporting framework in SAP DRC (previously named SAP Advanced Compliance Reporting) and has therefore announced that support and compliance assurance for many of the widely-used tax reports in ECC will come to an end.
The following list shows a non-exhaustive selection of commonly used SAP standard reports for tax reporting in ECC systems for which SAP support and further product developments to keep the reports up-to-date with latest changes in regulatory requirements has either ceased or is about to reach this stage in the near future - for a full list of no longer supported standard SAP reports for regulatory and statutory reporting and submissions, please refer to SAP note 2480067:
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SAP DRC
Most of the outdated reports have been replaced with a corresponding equivalent report in the SAP DRC framework for Statutory Reporting in S/4 HANA. New reports introduced by SAP to meet regulatory requirements effective after approx. 2020 are also all implemented using SAP DRC.
The full scope of currently supported reports and compliance tasks in SAP DRC in S/4 HANA can be viewed online on the official 'Supported Compliance Tasks by Country/Region' webpage on this topic. Please note that the list of in-scope tasks for SAP DRC in S/4 HANA is subject to frequent updates and changes.
Below a sample extract of supported key functionalities in countries where Syensqo is operating larger organizations without external tax applications to support statutory submissions to authorities:
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Preparation and Submission
In a growing number of countries its becoming a legal requirement to integrate the accounting system with government portals for direct submissions of statutory filings to the authorities (e.g. 'Make Tax Digital' initiative in the UK for indirect tax submissions).
Although other Preparation, Reporting and Submission tools will be assessed as well over the next few months, below an example of end-to-end process design capabilities out of SAP DRC as the future roadmap tool from SAP for preparation and submission of statutory and tax reports.
SAP DRC
SAP DRC in S/4 HANA is SAP's response to the growing need for electronic data exchanges between organizations of the private as well as the public sector. It is addressing and facilitating the transition from paper-based to data-based management of trade- and compliance-relevant documents in an organization.
SAP DRC for Statutory Reporting in S/4 HANA is not only the new home to SAP standard reports for Tax Reporting and other mandatory regulatory compliance tasks (e.g. submission of electronic Financial Statements) but also offers additional functionalities to manage and support periodic compliance tasks out of a single place in a controlled manner in S/4 HANA - the below process flow illustrates the solution components, how they interact with each other and the usual flow of activities to complete the end-to-end process of preparation and submission in S/4 HANA.
Preparation Submission
1.) Report Definition:
- Additional auxiliary reports can be built on top of the SAP standard reports available in the pre-defined SAP standard content delivery to support manual filings through targeted data extractions.
2.) Reporting Activity:
- Reporting activities provide the business users with the option to manually adjust the automatically extracted figures before the actual submissions to the authorities are scheduled (e.g manual inclusion/exclusion of specific transactions). Any manual adjustments are fully auditable through built-in audit trail mechanisms and commenting functionalities.
3.) Reporting Category:
- Reports can be grouped together based on various criteria (e.g. country, type of tax, organizational units, etc.) where this is required for statutory submissions.
4.) Reporting Entity:
- The required statutory reports can be produced at different reporting levels via the use of organizational units. The reporting levels currently supported in Statutory reporting are company code, business place, profit center, segment, jurisdiction code and section code.
5.) Reporting Task:
- The execution of statutory reports can either be done on an ad-hoc basis or via scheduled periodic activities. Workflows for review and approval of statutory reports can be defined before the outputs are generated. Outputs can be produced in various formats, such as, XML, PDF, TXT, JSON, ALV, or XBRL. You can also choose to view the information in a preview or tabular format, and use the information to file your tax returns manually through the authorized government portals.
SAP DRC Summary
SAP DRC is a centralised solution for statutory reporting, preparation, submission and monitoring of statutory compliance tasks with a growing number of SAP standard reports where regulatory compliance and support is assured by SAP. Additionally, it is also a powerful and flexible reporting workbench to create business-specific auxiliary reports to support statutory filings. Furthermore, it also provides a process-driven framework for managing statutory submissions end-to-end with abilities for controlled interventions by business users throughout the submission process.
Assumptions
- Scope, in relation to which entities/countries will utilise the reporting and/or preparation & submission processes will be addressed in the Detailed Design phase. This will also take into consideration the overall S/4HANA deployment approach.
- The e-invoicing capabilities of SAP DRC will be covered in another KDD (please refer to KDD 'e-invoicing for Regulatory Authorities' for further details).
- The SAP tool for automation of Tax Reporting and Submissions is SAP Document and Compliance Reporting (DRC). There are significant integration benefits of utlising an SAP application, however the decision on the application to be implemented will be made at a later date and is not part of the decision within this KDD.
- As highlighted by Finance and Tax business stakeholders, there are some existing accuracy challenges for Syensqo with regards to tax determinations, especially in the procure-to-pay processes. It is assumed that these issues will be resolved within the current ECC system. If not resolved in the ECC system, then they will be resolved via the integrated design for S/4HANA. Being an as-is issue, the exact details should be gained from the Syensqo business stakeholders if required.
Constraints
- The licensing requirements for SAP DRC in S/4 HANA for Statutory Reporting are not clearly documented. Infrastructure team was consulted and advice given is to assume that the scope of functionalities provided by SAP DRC for Statutory Reporting compliance will be a chargeable service in the to-be solution with unclear costs at this point as it will be subject to negotiations with SAP.
Impacts
- Licensing and Costs: Additional licenses will be required. Licensing costs will be applicable to both SAP DRC and/or external applications for Tax Reporting and Submissions.
- Training and Change Management: Extensive training will be required as the deployment of an automated tool brings about changes to the current ways of working (which is mainly manual).
- Automation: It is expected that reporting and submissions can be largely automated and streamlined.
- Data Cleansing and Migration: No impact.
- Basis: Business functions may need to be turned on in SAP to activate the native SAP solution DRC for Statutory Reporting in S/4 HANA if the decision is to opt for SAP DRC as the to-be solution for Tax Reporting and Submissions. Other services such as Adobe Document Services may need to be enabled as well to support generation of PDF documents out of the application.
Business Rules
None identified in conceptual design phase - this section may be revisited again during detailed design as underlying business processes leveraging tax reporting functionalities are investigated in more detail.Options considered
Option A: Retention of current practices for Tax Determination, and introduce a new application for automation of Tax Reporting, Preparation and Submissions
- Determination to continue with as-is solutions in SAP and Vertex (for USA and Canada).
- Introduce automated application for Reporting.
- Introduce automated application for Preparation and Submission.
Tax Determination will continue in SAP as per current practice. The challenges faced today in the current SAP systems with regards to inaccurate tax determinations for some countries for procure-to-pay processes can be addressed through a better design and governance process of the respective tax determination parameters in the system.
Reporting, Preparation and Submission will use an application to assist with automation.
Business users will get full access to the full suite of reports and compliance tasks currently supported and quality-assured by the provider of the reporting and submission tool with automatic updates to all reports should country legislations change. It is expected that entire end-to-end business processes can be defined for statutory submissions in the tools to be evaluated, ideally with built-in process and audit controls such as submission workflows and detailed logging functionalities. Furthermore, it is expected that reporting deadlines can be proactively monitored in the new tool via submission schedules with automatic submissions and alert functions before submissions fall due to avoid late filings and potentially also fines for non-compliant submissions.
The tool to be used in the to-be solution is yet to be decided, but as also stated in the 'Assumptions' section. The SAP tool for automation of Tax Reporting and Submissions is SAP DRC. There are significant integration benefits of utilising an SAP application, however the decision on the application to be implemented will be made at a later date and is not part of the decision within this KDD.
The actual scope of entities/countries which will utilize the reporting and/or preparation & submission tools and processes will be defined in the Detailed Design phase. This will also take into consideration the overall S/4 HANA deployment approach.
Option B: Retention of current practices for Tax Determination with manual Tax Reporting, Preparation and Submissions (As-is)
- Indirect Tax Determination to continue with as-is solutions in SAP and Vertex (for USA and Canada).
- Reporting to continue as-is with mainly manual activities.
- Preparation and Submission to continue as-is with mainly manual activities.
With this option, Tax Determination continues in SAP as per current practice.
Reporting, Preparation and Submission will not introduce a new application to assist with automation. Instead, the classic reporting framework for Tax Reporting available in older SAP ECC versions (consisting of primarily ABAP reports, spread out over multiple areas and country versions) is retained and continued to be used to support tax reporting and submissions in S/4 HANA.
This option is considered because most of the SAP standard reports which have run out of SAP support as per SAP Note 2480067 (see also above section 'Background and Context' for further details) are still available in the latest S/4 HANA versions albeit no longer maintained as per legal requirements or supported by SAP in case of product bugs or other queries requiring SAP's attention. Report outputs in list, tabular or electronic format can still be generated but regulatory compliance of those outputs is no longer assured by SAP.
The use of the classic ECC reporting framework remains free of charge in S/4 HANA and is covered by the general license for S/4 HANA enterprise management.
Option C: Engage Third-Party Provider to integrate into S/4 HANA for Tax Determination, Reporting, Preparation and Submissions
- Indirect Tax Determination to change to determination and calculation method via external third party application.
- Introduce automated Reporting via external third party application.
- Introduce automated Preparation and Submission via external third party application.
This option foresees the engagement of a third party provider for a holistic tax determination and compliance solution managed outside of S/4 HANA in the respective external applications.
Third Party applications are strong on covering numerous taxable scenarios, however the negative is that continuous alignment of S/4 HANA with the third party application is required to guarantee accurate determination and reporting results. This alignment is not always one to one with the S4HANA business process, and/or requires mapping/adjustments and domain expertise to ensure alignment. In addition, future changes/updates to the third party tool may require updates to SAP to ensure alignment.
Additional administration, management and infrastructure requirements need to be considered from a time, effort and cost perspective.
Evaluation
The below table provides a summary of the pros and cons of each option explained in the above section.
| Pros & Cons / Project Principles | Weighting (H/M/L) | Option A - Retention of current practices for Tax Determination, and introduce a new application for automation of Tax Reporting, Preparation and Submissions | Option B - Retention of current practices for Tax Determination with manual Tax Reporting, Preparation and Submissions (As-is) | Option C - Engage Third Party Provider to integrate into S/4 HANA for Tax Determination, Reporting, Preparation and Submissions |
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| Pros & Cons |
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| Level of Regulatory Compliance | H | High | Low | High |
| Licensing Cost Score (H/M/L) | H | Medium | High | Low |
| Implementation Cost Score (H/M/L) | H | Medium | High | Low |
| Automation / Cost Savings | H | High | Low | Medium |
| Standardisation of Reporting & Submissions | M | High | Medium | High |
| Simplification | M | High | Low | High |
| Future-Proof | M | High | Low | Medium |
| Change Management Score (H/M/L) | L | Medium | High | Low |
| OVERALL | High | Low | Medium |
Fully integrated solution for determination, reporting and submissions out of a single S/4 HANA system.
Additional license costs for automated tool deployed for tax reporting and submissionsSee also
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