Managing SAP Tax Codes

What are tax codes and what are they used for?

Tax codes in SAP allow the system to determine a VAT treatment for either sales or purchase transactions.  Within SAP we have two digit tax codes.  All such tax codes will have certain tax code properties that would include things like what is the reporting country for that particular tax code, what is the VAT rate associated with that with the tax code relevant for the EU sales list or Intrastat.

Challenge of managing tax codes

Why managing tax codes in SAP is a challenge

Managing tax codes in SAP can prove to be a challenge over the long term and that's mainly because SAP tax codes are limited to two digits so that would include letters numbers and a few special characters.  An additional issue on top of that is that each time there's a VAT rate change, SAP requires you to create new tax codes and that is because each tax code can only have one VAT rate associated with it.  As such for clients who have a very mature SAP system and have operations across many different countries, it's quite possible that over time they will run out of tax codes for new VAT rates and new scenarios. 

How some companies try to get around the limitations  

There are not a huge number of options available in order to get around these limitations.   Some businesses will use special characters, but that's not particularly convenient particularly when operating in an international environment.  Another option is to create or replace a tax procedure but that involves a lot of work and is quite complex, and creates a lot of instability for businesses that openly trade in international markets. 

Getting around SAP tax determination limitations

expansion of SAP VAT codes

The Meridian solution

In order to get around these limitations Meridian has developed a specific tax code solution that involves using multiple VAT rates within the same tax code.  The way Meridian does this is to open up FV 11 condition record functionality that is hidden within SAP.  With that functionality it's possible to maintain more than one rate per tax code with associated validity periods.  The benefit of this approach is that it's no longer a requirement to create new tax codes each time there's a VAT rate change, and  as a result businesses are able to maintain a clean design of a tax procedure,  and furthermore the IT changes associated with the VAT rate change are minimal.

Who benefits from the Meridian solution and how ?

The Meridian solution is primarily beneficial to multinationals who have complex operations across multiple EU countries as those are the organizations most likely to be running out of tax codes particularly if they have a mature SAP system that has been around for a long time. The benefit of the Meridian solution is that they can rely on a standard design of a tax code procedure and be confident that each time there's a vat rate change they won't have to create new tax codes or worry about running out of code.  

A further benefit here is for the VAT and tax department they will no longer be required to change SAP codes each time there's a VAT rate change instead they're able to manage such changes through the Meridian VAT Add-on cockpit, and therefore not be required to carry out a change request each time there is a VAT rate change. 

Resources

Arco is Meridian's NEW automated tax determination solution designed for instances of SAP S/4 HANA, on-premise and cloud. The Arco application runs on the SAP BTP platform and enhances functionality of standard SAP for global VAT determination. Download the brochure

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. There are seven key reasons why businesses should look at automating their VAT determination in SAP. Read the story.

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. There are seven key reasons why businesses should look at automating their VAT determination in SAP. Download the guide