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Why tax engagement in an ERP overhaul delivers business-wide benefit

SAP S/4HANA® can help drive increased cashflow and profitability, mitigate tax risk, and enterprise-wide operational efficiency. 

In brief

  • Tax leaders should develop a compelling business case for ERP tax sensitization, highlighting the data-driven, enterprise-wide benefits.
  • SAP S/4HANA implementation finally gives organizations an opportunity to improve compliance by aligning corporate and legal entity reporting at source.
  • Alignment will bring compelling benefits for the tax function, but with an additional “bill of work” required, ERP project leaders may need convincing.

For years, the corporate tax department has typically been one of the most under-served functions from an enterprise resource planning (ERP) perspective. Experience suggests the cause of this is rooted in four potential misconceptions that finance and technology leaders have made about tax, and in doing so companies may have underestimated valuable opportunities to deliver enterprise-wide benefits. Those misconceptions include:

  • Focusing on ERP-level indirect taxes
  • Addressing tax requirements through a discrete, instead of integrated program workstream
  • Not fully taking into account customized taxed data needs
  • Inadvertently underestimating the tax function’s requirements and the important role it plays in the success of the wider enterprise.

Todd Bixby, Principal, Tax Technology and Transformation at Ernst & Young LLP, says that the transformational focus has instead been placed primarily on operational finance, cost-center management and the production of consolidated accounts, rather than direct tax, legal-entity support and statutory accounting.

“The biggest issue is that most organizations are primarily focused on management and or business unit reporting rather than legal-entity reporting, and this has created a fundamental disconnect,” says Bixby.

As a result, the process of aligning management and legal-entity reporting (on both an actuals and forecast basis) is, for many tax functions, one of the most time-consuming challenges they have to deal with from a data wrangling and reconciliation perspective.

This is because common use of manual spreadsheets tends to result in inefficiencies within tax functions. Legacy tax teams can now spend around 70% of their time cleansing data, and tax leaders have created an expensive and complex landscape of standalone rather than fully integrated and holistic solutions in an effort to bridge the direct tax data gap.

Tax is a significant consumer of corporate data, which it uses to fulfill a wide range of business-critical tasks, such as compliance and reporting obligations. When this data is not forthcoming, and these needs are not appropriately addressed, there is a greater risk of negative outcomes such as double taxation, penalties, fines and adverse tax controversy.

These are just some of the tax-specific challenges triggered by spreadsheets and legacy ERP systems – yet more have been created for the wider enterprise. The result is an extraordinary mismatch between economic impact and system support.

However, with the implementation of modern ERP systems – such as SAP S/4HANA – tax leaders now have an opportunity to tax-sensitize the entire end-to-end ERP transformation process. With the right business, tax and technology planning, these tax problems cease to exist, the complex landscape of bolt-on tax solutions is no longer needed and tax practitioners can focus on solving new challenges because SAP S/4HANA enables customers to achieve real-time compliance at minimal cost.

To provide this tax-sensitized ERP transformation, however, tax leaders must be fully engaged early in the process, lobbying for improved capabilities, and ensuring program leaders are aware the business-wide benefits significantly outweigh any additional cost.

Reasons why the tax team should care about ERP transformation

The tax function is currently under mounting pressure from both internal and external forces.

The external pressures are mainly coming from two directions; a global shift by governments toward digitalized tax compliance and reporting and coordinated action at the OECD level with initiatives such as BEPS 2.0, which require unprecedented transparency around the international tax profiles of multinational companies. The result is that companies need to generate increasingly granular data, faster and more often. Unless companies respond by digitalizing and automating their own tax processes in response, they can expect a significant increase in routine penalties for non-compliance.

“For example, in the Middle East, tax authorities are leveraging leading-edge technology to actually compute and calculate taxpayer reporting figures,” says Sveinung Baumann-Larsen, EY, EMEIA Tax Technology & Transformation Leader. “This is leading to increased data scrutiny – using artificial intelligence and predictive analytics – and an increase in filing frequency.”

The internal pressure comes from the inability to drive efficiencies, due to an under-investment in tax technology solutions, leaving tax teams with little or no time to comply with governments’ increased reporting requirements.

This is at a time when companies expect all corporate functions to be focused on driving efficiencies. Indeed, one of the key reasons companies undertake ERP transformation is to realize automation benefits.

The good news is that solutions such as SAP S/4HANA can mitigate these pressures and deliver real benefits for tax, as well as across the wider business. For example, rather than focusing primarily on the indirect tax data needed to compile management accounts, SAP S/4HANA creates a single, near-real-time and fully tax-sensitized source of the truth, for both direct and indirect tax, with tax reporting fully aligned to financial reporting.

This gives direct and indirect tax data equal focus, so there is no need for additional end-point solutions and no requirement for manual processes, such as data extraction and cleansing.

This transformation is now more accessible thanks to cloud-based solutions such as the RISE with SAP solution, which delivers the software, tools and technical managed services required to move to hyperscalers such as Microsoft Azure. This approach enables tax teams to:

  • Quickly scale agile and responsive fit-for-purpose cloud solutions
  • Utilize a portfolio approach to best-of breed cloud infrastructure
  • Increase collaboration across supplier and partner ecosystems
  • Identify and rapidly deploy automation to enable process transformation.

Baumann-Larsen explains that a tax-sensitized SAP transformation can be paired with a suite of ERP “layers”, unleashing significant value. This includes a transactional layer (SAP S/4HANA), data warehouse, platform technology and the business intelligence layer. Once these layers are in place, tax-specific apps can also be integrated into the SAP ecosystem.

“If tax is to take full advantage of ERP transformation, an additional bill of material is sometimes required,” Baumann-Larsen explains. “This includes specific SAP applications which natively integrate with the SAP landscape and the SAP S/4HANA digital core. They include SAP Document and Reporting Compliance, tax compliance, global trade services and third-party VAT code determination.”

“This full stack enables a tax function to report out on transfer pricing, direct taxes, filings, customs, trade, data quality and integrity, and so on.”

According to Bixby, the standard SAP solution also includes core capabilities that provide significant value for the tax function. “The tax department may not be aware of this fact, may not be familiar with the functionality, or may not know to apply it,” he says. “For example, many bundles include SAP Analytics Cloud, part of the SAP Business Technology Platform (SAP BTP) which brings together data and analytics, artificial intelligence, application development, automation, and integration in one, unified environment to fulfil the finance function’s requirements. The tax department may not be aware this functionality is present or it doesn’t realize it can be used by tax, so tax teams often try to procure an additional solution which may not be aligned with the enterprise, incurring greater capital and operational expense.”

How to win a seat at the ERP transformation table

The benefits for the tax function are clear, but tax leaders will likely need to build an enterprise-wide business case if they are to convince finance and IT leaders to invest their budget in increased tax capabilities.

“Historically the value proposition has been ‘how do we make the tax function more efficient’, but that isn’t what this is about. The business case offered now by leveraging SAP technology is much bigger and much more compelling. It’s about driving value right across the organization – and how the tax function can help. It’s no longer a tax function opportunity, it’s an enterprise-wide opportunity, which the tax function can help deliver” says Bixby.

To win a seat at the ERP transformation table, tax leaders are well advised to build a business case that shows how they can help deliver the following enterprise-wide benefits:

1. Avoiding non-compliance fines by managing tax and compliance risk

Without a doubt, tax’s route to the ERP table rests on the function’s ability to persuade the CFO and CIO that the risk of incurring non-compliance fines is real and growing. Non-compliance will also have a negative impact on brand reputation. Corporate missteps regularly attract media attention and these negatively impact shareholder value. Being compliant, therefore, is critical.

Thanks primarily to superior data integration and transparency, ERP transformation can help companies achieve a clearer understanding of their tax obligations and fulfil them in a timely and cost-effective manner, while actively preserving brand reputation.

For example, with an SAP ecosystem built on SAP S/4HANA, it is possible to automatically achieve improved data orchestration, data production and data integrity at a granular level. With tax data sensitized at source, it is also possible to automatically generate indirect tax reports and e-documents that reconcile with corporate reporting without the need for parallel systems or expensive, labor-intensive manual processes.

This speed, accuracy and granularity will be essential to compliance and risk mitigation going forward. Regulators increasingly want tax data delivered directly from a company’s financial system, or they want to reach into that system themselves. This leaves little time for unnecessary complexity, parallel systems and data reconciliation. ERP transformation not only helps companies protect their reputation by ensuring compliance, but it also makes it easier for tax teams to efficiently demonstrate this when they are subjected to scrutiny.

2. Reducing cash leakage

Based on previous SAP transformation projects implemented during the past decade, clients typically enjoy annual savings running into tens of millions of US dollars.

Modern ERP systems can identify such savings in a number of ways, not least by detecting overpayment of tax. This can free up much-needed working capital previously trapped in inventory.

3. Improving efficiency and accuracy

The lack of ERP focus on direct tax at a legal-entity level is highly evident in the area of forecasting, where tax functions have an unnecessarily difficult time achieving a reliable result. One of the biggest gaps is that planning and forecasting models deployed in an ERP program fail to pay sufficient attention to intercompany flows.

David Nickson, Principal, Tax Technology and Transformation at Ernst & Young LLP says, “Beyond the benefits for tax provision and transfer pricing purposes, having reliable intercompany transaction forecasts can help treasury functions drive quantifiable benefits in their foreign currency hedging and more generally in the efficiency of their subsidiary funding. This is incredibly important at a time of high exchange-rate volatility.”

SAP transformation powered by the RISE with SAP solution, however, sensitizes all tax data at source, giving greater accuracy around direct tax data and intra-company transactions. There is also an opportunity to leverage next-generation analytics and embed financial supply-chain planning at source. This means tax can drive company-wide value thanks to planning and forecasting capabilities that were previously well beyond reach.

Conclusion: It is time for tax leaders to evangelize

For the good of the wider organization, the tax function needs to engage the C-Suite and line-of-business leaders that are driving transformation throughout the organization early in the process to lay the groundwork for a truly real-time, tax-sensitized intelligent enterprise. Should program leaders push back against what they see as a large volume of new, non-standard requirements, tax leaders must be able to articulate not only the needs of their function but also the benefit in monetary terms for the whole business – as well as outlining the risks associated with inaction.

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    It is time for tax leaders to evangelize about the benefits of tax-sensitized ERP transformation. Aligning both direct and indirect tax data at source not only benefits the tax function, it also helps the entire organization.