The tax function in today’s multinational business is subject to constant change whether it be legislative or company re-organisation, geographic expansion, mergers & acquisitions, new business units, new sourcing, or new complex product lines. These influences all impact VAT determination.

The manual process of updating SAP systems to cope with changes requires IT and Finance resources. Even when systems have been updated, the weakness of native SAP in multinational VAT determination may still leave the company exposed to potential errors, creating issues for tax declaration and the auditing process.

Alternatives for tax determination in SAP

Many multinational companies with complex purchasing and sales structures are using native SAP with a heavily customised setup. But there are also the other alternatives of an add-on to SAP, a tax engine or the latest option of adding a tax determination application to a cloud platform such as SAP Business Technology Platform (BTP).

Native SAP

In many companies the original investment the SAP system is still considered significant, so rather than adding a plug-in or tax engine, the system may be customised over time as the company grows and evolves. There may also be an in-house SAP team who customise the system on an ongoing basis. However, often the tax department have limited control over the native approach, as changes are complex, take time and can involve costly IT projects. Customisation also means the tax department cannot maintain the VAT tables themselves.

Tax Engine

A tax engine is connected to the SAP ERP via an external API. The tax engine enables you to manage tax codes and rates via tables rather than within the ERP, meaning updates and changes could be maintained by business users, rather than expensive SAP IT resources.

A tax engine can connect to multiple ERPs and operate across multiple regions. It can also update tax rates centrally. However a drawback is that the engine sits outside SAP and hence the master data needs to be copied over to the tax engine. This can be complex and take time and updates can also be challenging. Furthermore, tax engines can be expensive as they tend to charge per transaction, hence as your business grows, tax operational overheads will increase in proportion to revenue.

Add-on or Plug-In

A plug-in or add-on sits within a single SAP instance and does not require connectivity to an external data sources. Similar to a tax engine, an add-on or plug-in allows you to manage tax codes and rates via tables rather than within the ERP, meaning updates and changes could be maintained by business users, rather than expensive SAP IT resources.

An add-on is typically focussed on a single region. For example, the Meridian VAT Add-on is specialised in EU VAT determination, so is particularly strong in areas such as triangulation or intra community acquisition. Again, similar to a tax engine, changes to tax rules and legislation are updated centrally by the Add-on provider and made available to the entire installed base.

A unique plug-in or add-on is required for each SAP instance, but the lower operational costs would still result in significant savings for companies with fewer instances.

Tax Determination for Cloud Platform (SAP BTP)

The latest generation of tax determination solutions combine many of the benefits of a Tax Engine and a Plug-in, as well as forming a part of the larger enterprise IT application platform. Meridian Arco is an application developed for SAP Business Technology Platform, and communicates via API to S/4 HANA instances, on-premise and cloud. Arco also allows you to manage tax codes and rates via tables rather than within the ERP, meaning the tax team can keep the system updated.

Arco tax determination provides all the functionality of the existing VAT Add-on, but a significant development is that only one Arco application is needed for multiple SAP instances. Also, implementation and management is further simplified with cloud based applications that test tax tables for implementation and provide full details on automated tax decisions.

As the Arco application is BTP based, this also means that tax determination can also integrate with other applications hosted in SAP Business Technology Platform.

For further details on automated tax determination options, please contact the Meridian Expert Tax Team