May 14, 2012
Enterprise Resource Planning (“ERP”) provides an opportunity for companies to track and monitor business flows. While this creates a significant benefit across the highly regulated and diverse landscapes in which companies operate, there is additional value to be unlocked through a carefully designed ERP system.
Organisations in the midst of implementing or upgrading an ERP system often overlook the importance of the tax department as stakeholders of the system. The organisations invest in deep operational improvements, but ignore broader issues of structural tax planning or they make supply chain decisions without understanding their full tax implications.
Taxes are directly affected by a company’s overall operating model and as such, constitute a structural cost. The choices made today – how contracts are negotiated, who controls manufacturing processes, how inputs are sourced, how products are distributed – determine the structural tax obligations in future. Only when strategic tax planning forms an integral part of the overall business vision will it be possible to drive down a company’s structural tax rate.
However, effective and long term tax planning requires an understanding of the group’s strategic objectives, goals and constraints. Simultaneously, businesses increasingly require their tax functions to provide insight for critical decisions. Fast, accurate delivery of the tax provision and tax calculations for financial reporting purposes, as well as reporting on tax compliance filings and for management decision making, are all minimum expectations today.
Frequently, the unique needs and requirements of the tax function are not adequately addressed when implementing an ERP system, as the current “as is” tax structure is implemented with the new ERP system, relinquishing potential tax benefits and forcing the tax department to continue inefficient manual processes for tax compliance, planning and forecasting.
Therefore, according to Forrester, “Smart (technology) buyers have started to include a new factor in their sourcing decisions: tax implications. Understanding how taxes will be affected can help companies make better sourcing decisions and fund new projects.” In many cases cash tax savings can often deflect the cost of the overall ERP system implementation.
Tax Enabled ERP Solutions: Direct and Indirect Tax Benefits
A well designed Tax Enabled ERP Solution can increase speed, accuracy and data integrity — all of which are important, particularly when working through last minute updates at either quarter-end or year-end.
These improved data collection processes also help companies better manage workflow, which in turn increases visibility. Furthermore, it provides greater control over information and the associated movement or flow of work allows the tax function to be more effective and to report virtually in real time. This makes the organisation more nimble when it comes to business decisions and the related tax implications of such decisions and frees up the tax department to spend more time performing value-added activities such as strategic income tax planning.
A large building materials company recently implemented SAP globally. Tax SAP specialists conducted a systems audit of tax processes, including reviewing and documenting the tax processes end to end, highlighting any controls and training needs going forward and recommending changes required to reduce the risk of tax mis-declarations.
Deficiencies were identified in the following areas: missing/duplicate SAP master data, ownership of processes/data, limited documentation / training, manual processes without robust controls and incorrect tax coding within the Shared Service Centre.
A Tax Enabled ERP Solution provides opportunities to benefit from tax savings ideas directly and indirectly associated with ERP implementations such as: maximising R&D tax credits and deductions, training incentives, transfer pricing, customs and excise, VAT optimisation and other appropriate strategies.
By considering the tax implications during the ERP design or transformation process, companies are able to ensure that the ERP system produces the critical tax-relevant data and information needed to streamline tax compliance processes, more effectively identify and implement tax savings strategies, and provide better audit support. Currently many ERP-systems do not give visibility of many indirect taxes (VAT and Customs) which results in much data manipulation outside the system to effectively manage these taxes.
A Tax Enabled ERP Solution should be designed and configured to easily provide financial information that may historically have been inaccessible and enable improved capture processing and reporting throughout the financial and tax processes. In addition, it should enable improved data collection processes, allowing the tax department to work more efficiently and to deliver value to the organisation in new ways.
A large international retailer serving over 200 million customers weekly was suffering from tax issues that included inability to track provisions in sufficient detail, lack of fixed asset information and insufficient P&L granularity. Tax SAP specialists were brought in to run the full tax work stream with the responsibility for all tax design, build, testing, remediation and go-live activities with the end result of Tax savings running into the millions.
As organisations redesign processes and install enterprise-wide systems to create a competitive advantage, they often consolidate legacy systems and initiate process improvements that at best, do not enhance the tax reporting process, and at worst: actually impede access to tax-sensitive information and do not take advantage of potential tax savings.
Tax Enabled ERP Solutions: Overcoming the Challenges Faced by Global Organisations
Operating a global organisation poses very specific challenges in the area of tax management and reporting. These may include unusual taxes being imposed (such as withholding taxes on administrative and technical fees); regulatory approval that is required for certain types of transactions, combined with a lack of relief in terms of double tax agreements. Group Tax Managers need to constantly be up to date with the issues existing in those countries to avoid lengthy delays in payments and penalties. While it is not possible to foresee all challenges, organisations that have, or intend having, a multinational presence can reduce one of their significant risks by ensuring that their ERP solution is tax enabled.
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