No new VAT codes are required when VAT rate changes

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Numerous multinational companies are facing issues with the SAP 2-character tax code design. In the event of rate changes, new tax codes will be required and because of the multiple recent VAT rate changes around the world some companies are almost running out of available tax codes.

Although this issue has been raised to SAP many years ago, SAP is not providing a new tax code design on short notice.

In our integrated Tax Code Solution’s timestamp design no new VAT codes are required in case of VAT rate changes. Only the effective VAT rate dates need to be changed in SAP. There will be a major reduction in maintenance effort, the risk of a shortage of tax codes is eliminated and since the name and description of the tax code remains the same, the VAT compliance processes and templates can remain the same as well.

It provides companies with a logical tax code structure in which the different tax categories in each country have the same designation. Moreover, these are retained despite of legal amendments afterwards. This results in each country applying the same logic for the categorization of various VAT results.

By this, the description of the code of the standard VAT rate in The Netherlands corresponds to the codes that are common in other countries for instance.

This logical design of the tax code structure allows centralization of functions regarding indirect tax compliance in Shared Services Centers, as well as the taking of control measures in an efficient and effective way. This leads to substantial cost savings.

It is even possible to implement the Taxmarc™ Tax Code Solution for the existing tax codes in SAP in order to reduce the number of required changes in SAP.

Taxmarc™ Tax Code Solution is a flexible solution and can be implemented with a new tax code structure (case study 1) or on top of the existing tax code structure (case study 2).

In practice, case study 1 is applied in case of a substantial SAP upgrade or migration to SAP.

Case study 2 is often preferred in case a shortage of tax codes has to be solved with minimal impact on tax logic and current business processes.

Case study 1: new tax code structure

In SAP is it necessary to create new tax codes in the event of VAT rate changes. Due to the many VAT rate changes in different European countries, many new tax codes had to be created.

With a new SAP implementation, companies usually start with a new tax code design with specific ranges of tax codes for particular countries. The tax code in SAP consists of 2 characters; the first character is used to identify a specific country, the second to identify the applicable tax type.

An example with the following structure:

  • 1st character defines the applicable country: B= Belgium, N= Netherlands, E=Spain
  • 2nd character defines the applicable tax type: 1= Standard rate output, 2= Reduced rate output

This case study describes only the changes for the standard rated tax codes. The company is therefore starting with the following tax codes:

Taxmarc_ Tax Code Solution pc1

The standard VAT rates have been changed in the Netherlands and Spain as follows:

  • The Netherlands: increase from 19% to 21% on 01-10-2012 with new tax code NG
  • Spain: increase from 16% to 18% on 01-07-2010 with new tax code: EF Spain: increase from 18% to 21% on 01-09-2012 with new tax code: EN

As a result the following tax codes are set up in SAP:

Taxmarc_ Tax Code Solution pc2

Foreign VAT registrations

In case a Belgium company code is also registered in the Netherlands and is using a specific country ‘Tax Procedure’ in SAP, another tax code has to be created for the NL VAT rate change. The new tax code is not by definition the same as the new NL tax code NG. Foreign registrations have in practice less defined tax codes and the next available tax code for the Netherlands in the Belgium tax-procedure might have been NE.

The consequence is that countries will have different SAP descriptions for the same standard VAT rates. This is to the detriment of the transparency and logic, which causes more necessary (manual) control to monitor risks and (business) changes. Since October 2012 the following tax codes are applicable for the standard VAT rate in this case study:

Taxmarc_ Tax Code Solution pc3

With Taxmarc™ Tax Code Solution the original name of the VAT rate (tax code) is maintained after rate changes. Moreover, a tax code is unique within the client and the applicable rate will be assigned to a transaction based on the tax point date. The actual used VAT rate will be concatenated to the description of the tax code.

Taxmarc_ Tax Code Solution extra

The result is a tax code structure that is and will remain logical. Due to Taxmarc™ Tax Code Solution time stamp design, the risk of shortages will be eliminated.

Case study 2: using existing tax code structure

Based on our practical experience companies prefer minimal changes in their SAP environment. This rule is also applicable for the tax environment as every change in SAP causes additional activities that need to be managed and communicated. Tax codes are used in many SAP tables, modules and business processes and companies will therefore prefer to preserve the existing tax code design and configuration as much as possible.

Because of these business preferences, Taxmarc™ Tax Code Solution has developed a tailor-made solution with the companies’ existing tax codes as a starting point. A snapshot is taken of the active tax codes, with the actual VAT rates, and these tax codes will be used for the time stamp design. This means that these tax codes will no longer change in case of future VAT rate changes.

An example based on data from the case study 1. The existing tax codes used are:

Taxmarc_ Tax Code Solution extra 2

The active tax codes in this example are NG and EN.

By using a snapshot of the existing tax codes as starting point the changes in the SAP system will be minimal for existing business processes and staff (ie AP, AR, tax accountants). Especially from a user interface and change management perspective this could be a preferred solution as the existing business processes and work-instructions remain the same.

The future tax code design for standard rated tax code will be as follows:

Taxmarc_ Tax Code Solution pc7

Due to historical rate changes the tax code is less logical but the advantages are that in the event of new VAT rate changes the tax codes will remain the same, and that (end) users will have to deal with little change with respect to their present situation.

Tax Code Solution One Page Flyer

 

Taxmarc Tax Code Shortage front

 

About Richard Cornelisse

I advise multinational businesses in improving the efficiency and effectiveness of their Indirect Tax Function and Tax Control Framework. I started my career as a manager at Arthur Andersen and then became a partner in EY where I led the indirect tax performance team for Netherlands and Belgium. Currently I am a senior managing director of Phenix Consulting. I have over 20 years’ experience advising clients on international VAT issues. I am specialized in the tax aspects of financial transformations, shared service centre migration, and post merger integration work. I am also somewhat of a mentor, giving back to the profession. If you are interested in conversation and discussion, please feel free to contact me.
This entry was posted in Automating complex VAT flows in SAP, Control Framework, enhancement implementation, SAP add on, SAP enhancement point, SAP for VAT, SAP implementation, user exit, VAT automation, VAT Control and tagged , , , , , , . Bookmark the permalink.

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