Forced SAP upgrade is big on tax transformation agenda

Migrating to S/4 HANA is necessary to avoid higher costs because SAP is phasing out its support for older enterprise resource planning software (ERPs). Tax professionals call it a "golden opportunity" to adjust reporting processes.

Businesses with an SAP ERP system are upgrading to S/4 HANA before their old systems are phased out from SAP support in 2025. Tax technology specialists said that tax considerations must be part of business-wide system migrations because of the increasingly digital international tax landscape.

“Upgrading to S/4 HANA is an IT question, but it is also a lot more. It is a business transformation at the same time and in my humble opinion, you [taxpayers] should use this opportunity to fix, or future proof, your tax determination and reporting,” said Johannes Laxafoss, tax partner at Deloitte Denmark.

While the migration to S/4 HANA may be a forced upgrade, it is an opportunity to adjust tax determination and tax reporting for long-term tax certainty. The migration to S/4 HANA can curb typical errors such as booking the wrong invoices, putting multinational businesses on an equal footing with each other for ongoing tax transformations such as automation.

"We are talking about tax and it's changing all the time, so you will have to automate things. That's for sure," said one tax director at a manufacturing company about the complexity of navigating VAT codes across countries. "We use SAP in our group and could maybe automate 98% of what we do, but it is not a simple task. You need to move to a better system."

Staying up to date with digitalisation efforts is increasingly challenging for many businesses operating with legacy systems on their tax transformation journey. However, it is an important step because data management and consolidation within the business have significant implications for the tax department as they tend to be the biggest consumer of financial data.

One head of global taxes at a retail company said: "The migration to S/4 HANA is relevant because there are so many [SAP] users, but migration I believe will improve tax consolidation and get us closer to an ideal system."

"We are using SAP and upgrading to their newest platform, and that's a positive," added the head of global taxes. "We are moving closer to a single instance of chartered accounts and a global data warehouse approach where more data is centrally located with identical formatting in one system as opposed to getting cloned in multiple systems where they may not be identical."

The real-time reporting challenge

The rise of real-time reporting in tax with measures such as Making Tax Digital (MTD) in the UK and Immediate Information Supply (SII) in Spain has increased the stakes in standardising financial and tax data across each business. More digitalisation efforts from tax authorities such as scrutiny of transfer pricing under digital audits and increased data gathering methods have changed the tax landscape.

"All these real-time and transactional reporting requirements means that companies simply do not have the time to manually review and correct any potential errors before submitting data to the tax authorities, so there is an immense pressure on companies to make sure they have their tax determination and reporting set up correctly in their ERP from the offset,” said Laxafoss

Taxpayers and advisors emphasise the need for better data management and analytics tools to stay ahead of authorities and form a comprehensive corporate tax picture under the rapid expansion of data for tax.

"Each country is starting to impose their own digital regimes for quick submissions and transactional tax will be different from one jurisdiction to another," said one tax director at an electric services company. "This looks similar, but it is not the same and I don't see this harmonising for the time-being," he added.

The domestic variations across digital tax reporting regimes started a trend where larger taxpayers developed unique, in-house customisations to streamline their reporting processes. This is a risk because an increasing number of internal customisations can restart taxpayer reliance on a cottage industry of patchwork solutions to comply with real-time reporting.

Taxpayers utilising patchwork solutions to comply with varied reporting regimes can create a greater divide in international tax at a time when tax uncertainty is at a record high.

S/4 migration risks

Some businesses isolate the management of the migration to S/4 HANA to their IT department, but in-house tax teams are starting to take a more active role in helping upgrade their business's technology and system processes. This has become more feasible following a rise in demand from advisories and companies for tax technology specialists that can manage the setup and maintenance of such systems.

Tax technology specialists said there are concerns that patchwork solutions and other customisations on older systems can become redundant on S/4 HANA. Some risks include failing underlying computer logic transposed from modules from the older system. S/4 HANA may have features, including modules that utilise different computer logic from the earlier SAP systems.

"It is seldom a group is capable of maintaining everything on a single system," said one head of tax at a media company. "There will almost always be a configuration of systems that feed into each other to consolidate and present group results," he added.

It will be risky to keep older SAP systems in place past 2025 given that support for the product will be limited to just a select number of external vendors as SAP will no longer offer support for ECC6, which is the core enterprise resource central component of its product. The limited number of service providers following the phase out of older systems after 2025 is expected to increase maintenance costs for system modifications and adjustments.

With some businesses in the middle of migrating to S/4 HANA, the code written for tax patchwork solutions needs to be replaced in order to maintain international tax compliance. This forced system migration is expected to adjust tax determination and reporting processes for the next phase of wider tax digitalisation too.