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

• 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.”