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mineshladwa1
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Dive into the innovative capabilities of the Shared Ledger on SAP HANA, a potential game-changer in the realm of tax administration and e-invoicing, all powered by SAP's Business Technology Platform. This innovation by SAP, aims to revolutionize the way we navigate VAT challenges, improve tax compliance, and foster collaboration between tax authorities.

Leveraging SAP’s Business Technology Platform, Shared Ledger on SAP HANA aims to seamlessly integrate with various e-invoicing solutions, adeptly managing high volume transactional reporting processes in a verifiable way. This article explores this SAP innovation, showcasing how the capability has the potential to revolutionize transaction-based tax administration processes for tax agencies and taxpayers alike.

The article is based upon the experiences and opinions of Global Industry Solution Manager and expert Minesh Ladwa, who has more than 17 years of experience in strategizing and delivering innovative solutions for global government tax agencies.

Shared Ledger on SAP HANA - Addressing VAT Challenges in Tax Administration and E-invoicing.


Summary of Business Problem


As the digital era progresses, tax administrations worldwide grapple with an array of challenges. These include the need for increased tax revenue through improved compliance, requiring individuals and organizations, irrespective of their size, to pay their fair share of taxes where they conduct business, thereby mitigating tax avoidance and evasion. Furthermore, tax administrations must enhance the compliance of these individuals and entities with local and international tax laws and regulations, necessitating the development of effective tax compliance tools to automate processes and minimize errors.

Rapidly evolving e-invoicing landscapes have also called for greater transparency and consistency in tax reporting, making it easier for tax authorities to assess tax liabilities and detect potential risks. Coupled with this is the call for better collaboration between tax authorities, both domestically and internationally, a critical component to effectively share information and coordinate efforts to address the multifaceted challenges of taxation in the digital age.

To navigate these complexities effectively, government organizations acknowledge the need for a sophisticated, robust, and adaptable solutions for complex, high volume, transactional reporting processes. SAP's Business Technology Platform, offering advanced integration and automation capabilities, provides an ideal foundation for such a solution, particularly for tax agencies or any other governmental departments requiring a secure, immutable, cloud-based data store for electronic invoices, transactional data and even electronic tax return data on a mass, performant scale - capable of handling millions of processes a second.

This article discusses the Shared Ledger on SAP HANA, a revolutionary ledger database management innovation designed and created by SAP. Operating within the SAP Business Technology Platform, the Shared Ledger delivers a robust and scalable architecture that facilitates efficient transactional tax administration (such as VAT). This technology seamlessly integrates with e-invoicing solutions across all scales, ranging from small to medium-sized businesses (SMEs) to expansive corporations, creating a unified ecosystem for government agencies for effective transactional data and tax management for e-invoicing models.

 

Figure 1: Increase Government process efficiency and effectiveness by innovating using SAP’s Business Technology Platform

 

Section 1: Challenges in VAT Administration and E-invoicing


1.1 VAT Evasion - A Growing Concern


In an increasingly digitalized world, tax administrations grapple with significant and growing challenges. A trending issue among these is the mounting concern of Value-Added Tax (VAT) evasion and compliance, which has been exacerbated by the rise of e-commerce. With greater volumes of overseas sales and domestic transactions, there is a growing tendency for sellers, regardless of their size or industry, to evade tax obligations. This has led to a significant widening of the VAT Gap – the difference between expected VAT revenue and the amount collected. An example of these challenges is highlighted by the fact that as of 2020, EU member state lost a staggering €93 billion in VAT revenues [1].

Of upmost relevance is the VAT in the Digital Age (ViDA) initiative that has been proposed. If approved, will significantly reshape the e-invoicing and e-reporting landscape. Tax agencies will need to prepare for several key changes under this initiative. By January 1, 2024, they will no longer need to provide derogations for countries to mandate e-invoicing and can set their own national requirements. By January 1, 2028, they must have a centralized reporting infrastructure in place to receive real-time transaction data, which will require building new systems to handle structured data. From this date, they will also receive detailed transaction data within two business days of invoices being issued, necessitating the ability to process higher data volumes.

These changes represent a significant shift towards more detailed, transaction-level reporting, and will require tax agencies to adapt their systems and processes accordingly. As we move towards this new era of digital tax administration, it's crucial that tax agencies are equipped with the right tools and solutions to effectively manage these changes and ensure compliance with the new requirements.

Increased tax revenue: A prime goal in addressing these tax challenges is to augment the tax revenue collected by governments. This calls for a more equitable tax landscape where all business entities pay their appropriate share of taxes in the jurisdictions where they operate. This approach would serve to reduce tax avoidance and evasion that undermine the integrity of the tax system, and in turn, help narrow the VAT Gap.

Improved tax compliance: Alongside the need for increased tax revenue, there is a demand for significant improvement in tax compliance. This involves ensuring that all entities - individuals, small businesses, or expansive corporations - comply with both domestic and international tax laws and regulations. An effective solution would necessitate the development and implementation of robust tax compliance tools. The aim is to automate these complex processes and reduce the risk of errors, which will result in greater efficiency and fewer lost revenues.

Increased transparency and consistency: In parallel with improved compliance, there is a strong call for greater transparency and consistency in tax reporting. Such improvements would make it easier for tax authorities to assess tax liabilities accurately, detect potential risks, and effectively combat tax evasion.

Better collaboration between tax authorities: Taxation is not just a domestic issue; it has increasingly become a matter of international concern. As such, improved collaboration between tax authorities, both domestically and internationally, is integral. Enhanced coordination and information sharing will facilitate a more cohesive effort to address the problem of cross-border taxation.


Figure 2: Innovation and Digital Transformation driven by Government Agencies

 

1.2 The Transformation of E-invoicing


The e-invoicing industry is witnessing a revolutionary shift. The Billentis report (2019-2025) identifies evolving legislation, changing standards, and rapid technological developments as key drivers propelling a global trend towards mandatory e-invoicing [2]. With countries increasingly adopting e-invoicing regulations, businesses and tax authorities are required to navigate through the complexities of varied tax jurisdictions. This trend, while ensuring efficient and accurate VAT collection, also introduces an array of challenges.

Firstly, the integration of electronic systems into traditional invoicing processes necessitates businesses to remodel their financial operations in line with changing laws and standards. The complexity and pace of these changes can often result in compliance issues, potentially leading to penalties and legal complications.

Secondly, the vast heterogeneity in tax jurisdictions worldwide implies that e-invoicing solutions must be versatile enough to adapt to a wide range of regulations. This includes not only the calculation and application of taxes but also the secure handling of sensitive financial data.

Finally, the report highlights the need for robust and flexible e-invoicing solutions that can support businesses' growth and expansion. As companies grow and extend their operations across borders, they need e-invoicing systems that can scale efficiently and handle the increased complexity and volume of cross-border transactions.

The escalating demand for advanced e-invoicing solutions resonates with the need for innovative VAT administration systems. To navigate the intricacies of e-invoicing and effectively curb VAT evasion, a solution that combines the virtues of cutting-edge technology with regulatory compliance is imperative.

This is where SAP's Business Technology Platform, offering the Shared Ledger on SAP HANA, brings a compelling proposition to the table.


Figure 3: Example of eInvoicing transactional data process flow

 

Section 2: The Shared Ledger on SAP HANA – An Innovative Approach to Overcoming Complex Challenges


2.1 What is the Shared Ledger on SAP HANA?


The Shared Ledger on SAP HANA is a state-of-the-art digital ledger system specifically designed to enhance transparency, security, and accuracy in financial transactions. It holds special value for government agencies, particularly tax authorities, as it stands to revolutionize the way they record transactions and enforce tax compliance.

Imagine it as an 'intelligent ledger' that autonomously records every business transaction happening within a jurisdiction. These transactions are logged in real-time, leaving a tamper-proof and verifiable record, i.e., once a transaction is registered, it cannot be altered. This feature is paramount in curbing data manipulation, fraud, and tax evasion attempts.

This capability seamlessly integrates with solutions (including SAP’s very own SAP Document Compliance), thereby automating the capture of every invoice issued, whether for domestic or international sales. This automatic, error-free documentation is crucial for ensuring that all transactions are taxed accurately and that tax authorities have a real-time and comprehensive view of their VAT revenue.


Figure 3: Shared Ledger on SAP HANA: Real Time Verification: Bridging E-invoicing and Tax Administration

For government tax agencies, this advanced ledger is not just a record-keeping tool, it can serve as a key enabler in the fight against VAT evasion. The transparency it offers allows these agencies to detect any irregularities (in near real time), thus aiding in the identification and prevention of VAT evasion schemes.

In a nutshell, the Shared Ledger on SAP HANA merges the best of blockchain technology's security and transparency with the power and simplicity of traditional database systems. It provides government tax agencies with an efficient, secure, and effective solution to modern tax administration challenges, positioning them at the forefront of digital transformation in taxation.

Now it's time to get a little technical!

2.2 Superior Performance and Cost-Efficiency


Offering key ledger features through a blockchain-inspired data structure, the Shared Ledger delivers superior performance levels, significantly outperforming traditional blockchain frameworks. The adoption of this technology results in a drastic reduction of both costs and complexity compared to conventional blockchain implementations.

2.3 Secure, Append-only Transaction Table


This unique ledger system functions by generating and chaining transactions in a similar fashion to a blockchain. Data inputted into the ledger can only be added, resulting in immutable existing entries and creating a secure, append-only table of transactions.


Figure 4: Cryptographically linked blocks creating an immutable chain

2.4 Ensuring Data Integrity and Transparency


The design and functionality of the ledger ensure the immutability and auditability of the data, thereby preventing any form of manipulation. Cryptographic signatures and the incorporation of the Transaction Hashes into blocks - a concept borrowed from - provide an extra layer of security and transparency. This ensures that transactional data remains immutable, and the order of transactions is preserved.

2.5 Superiority over Traditional Enterprise Blockchain Networks


When compared to traditional enterprise blockchain networks, the Shared Ledger on SAP HANA offers a multitude of advantages. The Shared Ledger service is the only entity allowed to write to the ledger, eliminating the need for a distributed consensus protocol. This service also validates the consistency and authenticity of transactions, determining their acceptance and arrangement within the ledger. Despite the lack of a distributed consensus protocol, the high level of transparency ensures all transactions and behaviours are observable and verifiable, thereby providing a stronger guarantee of collaboration, immutability, and auditability than most enterprise blockchains without any transaction costs.

2.8 SQL Compatibility


From a data standpoint, the Shared Ledger operates just like a database table. Hence, applications can use SQL to access transactional data and execute complex queries, similar to any standard database. The data can also be merged with local business data for analytical purposes, eliminating the need for replication from a blockchain to a corresponding database.

Section 3: Advancing Tax Administration - The Shared Ledger on SAP HANA Value Proposition


3.1 Constricting the VAT Gap


By facilitating precision in tax collection at every transaction point, Shared Ledger on SAP HANA strikes at the heart of the VAT Gap issue. Through its immutable, secure record-keeping capabilities, it enhances trust between businesses and tax administrations while promoting improved compliance. This leads to a robust and effective counter-response to VAT evasion, hence significantly shrinking the VAT Gap.

3.2 Revolutionizing Tax Administration processes using E-invoicing


The Shared Ledger on SAP HANA elegantly integrates with e-invoicing solutions/systems, revolutionizing the invoicing process by making it more streamlined and less error-prone. As mandatory e-invoicing becomes a global norm, the Shared Ledger's ability to simplify and secure this process is indispensable, providing a major advantage to businesses and tax administrations alike.

The shared ledger and e-invoicing architecture provide a robust foundation that enables multiple use cases in tax administration. These technological advancements facilitate seamless collaboration, data sharing, and automation between taxpayers and tax authorities. One significant use case is the real-time extraction of VAT (Value Added Tax) from invoices for direct payment to the tax authority, which revolutionizes the tax collection process.

With real-time extraction of VAT, tax authorities can access and analyze invoice data as soon as it is generated by taxpayers. This enables efficient and accurate determination of VAT liabilities, reducing the risk of errors, fraud, and tax evasion. By integrating directly with the shared ledger and e-invoicing systems, tax authorities can leverage advanced data analytics and intelligent algorithms to automatically extract VAT information from invoices.


Figure 6: Integration with SAP S/4HANA Tax and Revenue Management

3.3 Pioneering Tax Administration 3.0


In the emerging era of Tax Administration 3.0, as explained by the OECD, the foundations provided by SAP’s Business Technology platform and its Shared Ledger on SAP HANA serves and an enabler to empower tax administrations by harnessing data, fostering collaboration, and enhancing transparency in an increasingly networked global tax environment. This positions ledger database management systems as a cornerstone technology for future-focused, efficient, and transparent tax administration, aligned with the highest international standards.

Conclusion


The Shared Ledger on SAP HANA (powered by SAP BTP) offers a transformative solution to VAT and transactional based tax challenges and e-invoicing complexities. By leveraging advanced technologies and aligning with the OECD's vision for Tax Administration 3.0, it not only addresses today's challenges but also prepares tax administrations for the future.

For more info on the Shared Ledger on SAP HANA and its other use cases or Tax Administration Innovation Topics please contact:

mineshladwa1 (SAP Global Industry Solution Management, SAP Public Sector)

benjaminstoeckhert#overview(SAP Senior Innovation Product Manager, Blockchain & Digital Ledger)

References

  1. VAT in the Digital Age. (n.d.). European Commission. https://taxation-customs.ec.europa.eu/taxation-1/value-added-tax-vat/vat-digital-age_en

  2. The E-invoicing Journey 2019-2025. (n.d.). Billentis. https://www.billentis.com/The_einvoicing_journey_2019-2025.pdf

  3. Mainelli, M., & Milne, A. (2020). Designing a distributed ledger technology system for interbank payments and settlement. https://arxiv.org/pdf/2010.07636.pdf