Of all the issues SAP customers have to address when updating IT infrastructures and ultimately moving to SAP S/4HANA, tax compliance, at first blush, seems to be one of the most mundane. There’s not much excitement in making sure financial systems are compliant with global regulations for enforcing value-added tax (VAT) laws.
But mishandling tax compliance could lead to the wrong kind of excitement, the kind that costs money, dents cash flow, leaves companies susceptible to audit, and derails digital transformation and SAP S/4HANA migrations.
Closing the Tax Gap with E-Invoicing
Seeking to close the gap between the revenues a business earns and the VAT amounts it pays along the supply chain, governments are inserting themselves into business-to-business transactions. Mandates for electronic invoicing, or e-invoicing, have existed in Latin America for more than a decade and are now popping up in Europe and Asia as well.
E-invoicing models vary by country and constantly change as governments introduce and evolve mandates. In some countries, such as Brazil, Mexico, and Italy, the government must validate a transaction before a seller and buyer can complete it. In others, the government replaces or supplements monthly VAT returns with requirements to report digital files detailing individual transactions much more frequently.
There are a few consequences that SAP customers face if they mismanage their e-invoicing compliance – such as an inability to simplify their IT architecture, to innovate, and to plan for SAP S/4HANA implementations. Let’s take a deeper look at each of these consequences in turn.
Consequence 1: Inability to Simplify IT Architecture
The splintered nature of e-invoicing mandates provides a prime example of how mishandling e-invoicing compliance can hold back digital transformation efforts for SAP customers. As companies set out to simplify their IT architecture as part of a move to SAP S/4HANA, they will seek to reduce the number of systems they have to build, monitor, and maintain.
But falling out of e-invoicing or digital reporting compliance can lead to invalidated transactions — and then to cash flow problems, damaged relationships with suppliers and customers, and even financial penalties or the shuddering of the business in a particular country. However, many tax and IT leaders think that they can continue the time-honored practice of decentralizing responsibility for local transaction taxes to local subsidiaries — even as requirements shift from periodic to real-time controls.
That kind of piecemeal development of core transactional systems flies in the face of simplifying and streamlining IT. Babysitting multiple tax compliance systems in multiple countries leads to sprawl, not consolidation. It’s impossible to manage sprawling e-invoicing compliance systems and consolidate IT operations at the same time. Mishandled tax compliance, then, can provide a very serious hurdle to the kind of consolidation most SAP customers are likely to seek in moving to SAP S/4HANA.
Consequence 2: Inability to Innovate
Mismanaging e-invoice compliance can also stifle innovation, which is critical to any successful digital transformation. Managing disparate tax compliance systems leads to an endless process of gluing bits and pieces of systems together. That activity ends up being all-consuming, leaving no room for creativity in rearchitecting and restructuring IT and financial capabilities.
For CIOs, maintaining tax compliance can turn into a never-ending series of fire drills. Global expansions, mergers, and acquisitions bring new challenges in every country into which an SAP customer expands. New tax jurisdictions mean new sets of e-invoicing compliance requirements to follow and keep pace with as requirements shift.
Mandates change constantly, sometimes giving companies only a few months to respond to a major new requirement. For instance, back in November, Peru gave large companies just five months to comply with a requirement to partner with a certified Operator of Electronic Services (OSE) for clearing e-invoices in real time.
Falling out of e-invoicing compliance simply isn’t an option in most countries with e-invoicing mandates. In Italy, for instance, the tax authority recently introduced real-time e-invoicing. If an invoice doesn’t clear the country’s real-time e-invoicing system, no Italian customer is going to pay it. Imagine not being able to invoice a $10 million customer at the end of a quarter. Tax compliance is no afterthought but a precondition for doing business in a growing number of countries.
Consequence 3: Inability to Plan for SAP S/4HANA
In fact, without being compliant, SAP customers won’t be able to roll out new e-commerce systems as part of the move to SAP S/4HANA. They’ll have to continue to manage multiple disparate e-commerce applications rather than deliver on the promise, cost saving, and efficiencies of centralization.
That obviously puts a major dent in plans to move to SAP S/4HANA. The value proposition of SAP’s new offering revolves largely around finally moving all critical financial data from a splintered group of systems provided by different vendors into a central repository, beginning with the central finance system and ultimately moving to SAP S/4HANA.
If an SAP customer has to keep multiple disparate systems in compliance with mandates every day in order to keep doing business in certain countries, the company will have a very hard time consolidating financial data as part of the SAP S/4HANA migration. The migration will fall into the same trap that catches IT innovation: It’s impossible to execute a plan for tomorrow while devoting an outsized number of resources simply to keeping operations going today.
Tax Compliance at the Core of Digital Transformation
SAP customers need to move compliance to the core of their digital transformation strategies and make it an integral consideration as they plan their migrations to SAP S/4HANA. Implementing a single system to manage compliance in multiple countries and dynamically shift as mandates change will remove the barriers noted previously and open up additional opportunities to streamline trading partner data interchange.
Centrally managing e-invoicing with local compliance in all markets removes the burden and risk of sinking resources into chasing mandate changes in different countries across the world. Only by consolidating tax compliance functions can SAP customers safely accomplish their goals of simplifying IT infrastructure, freeing their teams to innovate, and ultimately delivering on the single-source promise of SAP S/4HANA.
Christiaan Van Der Valk is Vice President, Strategy, at Sovos. Elected a World Economic Forum Global Leader for Tomorrow in 2000, Christiaan is an internationally recognized voice on e-business strategy, law, policy, best practice, and commercial issues.