When planning to switch to SAP S/4HANA, tax compliance won’t be on the agenda of every SAP customer.
Unfortunately, as they’ll find out soon enough, this will be an expensive oversight. Today, organisations that fail to comply with global tax mandates face financial penalties, costly audits, depleted cash flow, and fractured relationships with suppliers and customers. Non-compliance can even derail SAP Central Finance and S/4HANA migrations altogether. In some countries, it can bring an entire business to a complete standstill.
Here, the key lesson is that compliance has to be a prerequisite for any move to SAP S/4HANA, not merely an after-thought or add-on that pushes it to the periphery. Instead, compliance has to be the axle around which the wheel of digital transformation turns. As such, it’s vital to understand the tax compliance barriers that may have been previously overlooked. This way, it becomes possible to prevent roadblocks to a company’s ERP modernisation, ensuring that a roll-out isn’t derailed due to non-compliance.
In order to transition successfully, businesses will need to install an instance of SAP S/4HANA with the Universal Journal and SAP Landscape Transformation (SLT) replication server – this deployment model is known as “SAP Central Finance.” Following this, and enabled by the key benefit of the S/4HANA to run OLAP and OLTP workloads off the same system simultaneously, companies can start feeding data from other sources, and transitioning business process from legacy SAP and non-SAP systems in a methodical way which minimises disruption to critical business functions.
This typically happens in stages, over months or years depending on the complexity of organisations’ legacy system landscape with legacy systems being sunset incrementally as they become redundant to modernised SAP S/4HANA capabilities.
Digital transformation of tax and SAP S/4HANA Central Finance
However, there’s another possible threat to a successful SAP migration that hides in the shadows in the darker corners of most companies’ operations: the digital transformation of tax. All over the world, governments are starting their own form of digital transformation, seeking to capture billions in lost revenue by mandating real-time tax enforcement and new forms of detailed digital reporting. This is having a significant impact on many businesses’ plans for SAP S/4HANA migration, in particular via a staged Central Finance model. And if it isn’t, then that needs to change, fast.
Now that the technology exists to enforce continuous compliance, more governments are inserting themselves into every transaction a business makes and changing the taxation requirements wherever they see an opportunity for a tighter grip on revenue. Governments will not stop innovating and undertaking steps to increase revenue or reduce the tax gap, so organisations have to keep pace, or else the complexities — and, by virtue, the risks and costs — of digital transformation will spin out of control.
India is the latest nation to begin the process, launching a committee to examine the feasibility of e-invoicing in order to curb tax evasion under its Goods and Services Tax (GST) programme. As a global manufacturing powerhouse, India’s new system could have far reaching implications on many multinationals with a footprint in the country. Once implemented, a failure to understand the process — and so a failure to comply — could result in financial penalties and seriously affect a company’s cash flow. Also at risk are relationships with not only suppliers and customers but also authorities.
This is why it’s so important to look at how governments are changing tax mandates and the implications of doing so — and why compliance must now be at the core of an IT transformation plan. Thankfully, technology — particularly cloud-based solutions — can isolate the risks associated with the ever-evolving changes in tax mandates and automatically include them ‘as-they-happen’ in ERP, and disparate systems, as well as in SAP Central Finance.
This is important, as the modern digital financial core has a new set of requirements. Multinational organisations must isolate their core systems from constant regulatory disruption in order to meet compliance standards, no matter where or how frequently mandates might change. Only in this way can they continue to do business in countries where governments have made digital tax a priority.
The benefits of cloud power
A complete, connected, central, cloud compliance solution, backed by continuous support can provide the isolation from digital tax regulatory change disruption companies require to execute their IT migration unhindered. In particular, a centralised compliance solution is a perfect complement to the SAP Central Finance deployment model, or any extended migration project.
Cloud compliance solutions should offer the benefit of being able to serve both legacy and transformed systems simultaneously – a critical capability for successful phased migration. Considering the tremendous project scope and the sensitivity of the data involved for SAP customers moving to SAP Central Finance, tax compliance will likely begin as an afterthought in migration plans — but it shouldn’t be.
To power this, trusted third-party systems based in the cloud can help to ensure the wheels keep turning by foregrounding two systems for any transformation: the system for centralising finance functions and the system for centralising compliance. Global tax mandates are complicated and are in constant flux. They can also be invasive in a company’s business processes — and the consequences of failing to comply have been clearly underlined.
Mandates also have the scope to disrupt and add cost and delay to migration plans. For organisations that depend on being able to continue selling goods and services into countries where continuous compliance and tax enforcement are becoming increasingly complex, digital transformation of the financial core is crucial — and this is where the power of cloud technology becomes most apparent.
When tax compliance is managed wholly in the cloud by a relevant vendor, the result is continuous compliance updates, investment in maintenance, infrastructure, and innovation that offers savings — not only in cash but also resources such as time and personnel. This is because regulatory updates are delivered automatically, removing the manual intervention each time regulations change. Moreover, CTOs avoid surprises of an unknown point solution running custom code in another region and impeding their migration to SAP S/4HANA.
Compliance at the core
Inevitably, tax compliance is a topic that lends itself much more easily to discussion than execution — but that’s no excuse to rest easy. The complications of transitioning to SAP S/4HANA will be challenging enough without having to simultaneously grapple with compliance in-house.
To solve this, outsourcing tax compliance to a third-party in the cloud isolates systems from continuous disruption and allows IT professionals within a company to focus on other critical steps in the SAP Central Finance digital transformation journey.
SAP recommends tax calculations should take place outside the SAP Central Finance system, in a source system before reposting into SAP Central Finance. Again, a trusted supplier with a cloud-based solution can isolate changes in tax mandates and automatically include them in AP, AR and disparate ERP systems, as well as in SAP Central Finance, as a company moves data to the new repository.
It’s evident that, in an era replete with different kinds of digital transformation, businesses must now treat national tax authorities as major stakeholders in their core business processes. To do this, they need to keep pace with different formats and continually changing tax compliance requirements.
Consequently, the move to SAP S/4HANA with Central Finance and with a central modern tax compliance solution becomes part of every company’s quest to solve tax for good and banish compliance headaches forever — and the time to start is now.