The content of this blog is relevant for both SAP S/4HANA Cloud and SAP S/4HANA.
As a result of a digitalization journey, tax authorities are constantly introducing new and more demanding mandates forcing increased transparency of business processes to a point they can be controlled. No invoices can be sent to customers without being exchanged through the various national systems of e-invoices. Tax experts should leverage these disruptions as a way to bounce forward and refocus the tax function on generating true value - in the form of savings - for their companies.
According to Sveinung Baumann-Larsen, Partner and EMEA Head for Tax Technology and Transformation Practice at EY, “The digital tidal wave for tax is now. Tax is sitting on a pot of gold”.
The tax function has traditionally been focusing on enabling compliance manually, often with sidecar solutions made of spreadsheets. Unfortunately, tax processes have mostly been out of scope in the context of business transformations that have introduced technologies and automations in the world of finance. As a result, given the number of obligations around the world, the time spent by organizations on tax operations is massive, leaving no resources to focus on activities that could help companies reduce the burden of compliance. Therefore, if there is a function that can leverage digital ERP transformations to drive transformative benefits, it is really the tax function.
With an extensive number of ever-evolving mandates, tax authorities are pressuring companies to look at tax differently, from sustainability initiatives that require thoughtful consideration of tax implications in the design of products to minimizing compliance challenges, like real-time reporting that requires tax to be embedded in the sales and purchase processes, and global minimum tax that can impact how the overall business runs. This creates the perfect opportunity for turning taxes into value; however, for the value to materialize, there is a need for tax experts to step up. Digital is not something that is bought; on the contrary, it is something to become and live up to; therefore, tax experts need to become interested in exploring how technologies can be leveraged to deliver value. Furthermore, they need to pro-actively engage with digital transformations to make them the perfect change agent to transition to tax solutions, processes, and functions of the future.
ERP becomes the foundation to enable tax as authorities demand real-time data and increased transparency
Authorities continuously evolve mandates for enterprises with the goal of increasing tax controls, preventing tax evasion and maximizing efficiency of tax collection. On the other hand, this becomes a new challenge for companies that are relying on offline after-the-fact tax processes to meet compliance.
Processes began to be disrupted with the introduction of mandatory big audit files, like SAF-T, that have been forcing companies to send all accounting and other business records to authorities. Due to their size and complexity, the possibility of manual preparation after having corrected the data is no longer available. And this is not where it has stopped, governments are now demanding real-time transmission of electronic documents before they can be sent to customers and transparency within the system of record beyond indirect taxes. That means, authorities are the gatekeeper that allow businesses to run.
It is in this evolving landscape that SAP S/4HANA Cloud and its localization capabilities with 47 local versions becomes an essential need and a foundation for enterprises to transform compliance challenges into opportunities. Compliance is not optional, and compliance achieved once is not compliance achieved forever. Localization can be in fact complex and cumbersome. Localized software enables enterprises to conduct their business operations in accordance with the regulations of a country, which is essential to enable enterprises to run their business, scale across geographies, respond to new requirements that are introduced in a blink of an eye, create a game-changing foundation to optimize the tax strategy overall and reduce the burden of compliance.
It’s essential that tax has a seat at the transformation table
According to Victoria Bradford, Partner within the Tax and ERP Data team at PwC, “If companies look at a business transformation without involving tax, it will have consequences to the business. And it can be a true commercial impact, from working capital due to invoices not approved by tax authorities, goods stuck at the border due to missing delivery notes or even losing the trading license due to repeated offences”.
If tax is treated as siloed and is not involved in the design of future business practices, the chances of a digital transformation to be successful are very low. Current ERPs have been designed with traditional tax processes in mind; this was when taxpayers had to send an aggregated report every month or every quarter, many days after the financial close, after manual adjustments and corrections. Now, taxpayers need to send invoices in real-time, support digital audits, or they are even audited without knowing it, and this creates the essential need of integrating tax into business processes.
This transformation does not happen magically; hence, there is a real need to include tax at the forefront of the digital transformation. In fact, if tax is considered in the first place during the fundamental design of business processes, companies can implement processes that take care of compliance requirements resulting in savings by avoiding rework (it might not even be feasible!), standardizing operations, increasing automation, and creating a rich data foundation that can be used to evaluate the impact of compliance to optimize business decisions.
In the future, the tax function should fund itself and be a contributor
According to Sveinung Baumann-Larsen, Partner and EMEA Head for Tax Technology and Transformation Practice at EY, “It is not often to see recurring double digit millions in savings coming from the tax function. When looking at the business case, sometimes it is in the area of triple digit millions being saved EVERY YEAR.”
These savings can fund the digital transformation. It is a provocative statement, but the opportunity definitely exists. Companies should look differently at tax and make it more a value center rather than a cost center, and also look at the value realized through benefits delivered to the wider organization.
The creation of value can be seen like at a staircase where we have:
Enabling compliance at the bottom. This translates to savings on audits and settlements.
Second, ensuring compliance at minimum cost. This translates to efficiency savings thanks to the elimination of manual offline reconciliations, rework, and manipulations due to bad quality data, etc.
Finally, enabling strategic tax management within business processes. This translates to tax becoming a strategic partner for the organization. One simple example (out of many!) lays in the area of sustainability where plastic and emissions can translate into additional costs reducing or even offsetting profits: if this is foreseen early enough and taken care in the product design and supply chain, companies can avoid unnecessary compliance costs and preserve higher profits.
Tax people will no longer be traditional tax people
The tax function is changing, transitioning from classical tax experts who read laws and focus on tax advisory, to Global Process Owners. This is a very different competence, but a key ingredient for transformations to be successful and generate tax value. This means the world of tax needs polyglots that understand and can speak:
Technology and data, to set a vision of how technology can be leveraged to transform the world of tax rather than just enabling mandatory compliance.
Integration with finance and other processes, to optimize the business end-to-end, from product design to supply chain and finance.
Controlling, to prove the value that can be or is generated from taxes.
This change is already becoming a reality with new job positions, new master courses, etc., enabling digital transformations to shine and generate value in the world of tax.