When is Standard SAP sufficient?Standard SAP itself is only processing a transaction within one specific company code and the consequence is that standard SAP VAT determination logic and functionality for VAT determination should therefore only work for:
- AB scenarios
- Cross border intercompany
- AB scenarios: electronic invoices via EDI/iDoc
- Local ABC scenarios (e.g all legs in France)
- ABC scenario with a static business model (for instance leg B-C triggers always the same VAT treatment)
When is Standard SAP insufficient?However, standard SAP VAT determination logic and functionality for VAT determination does not work for complex dynamic business models (e.g. Principal-Toller-Agent model) with for example multiple VAT registrations, pick up and drop shipments, chain transactions between legal entities (ABC / ABCD scenarios).
Further explaining the root causeThe SAP VAT determination logic was developed a long time ago (1980s) and except for the “plants abroad” logic, SAP’s VAT determination logic has not changed much. This stands in con-trast with the VAT rules and business models as these have changed significantly.
The VAT landscape and rules have gone from fairly simple to rather complex. Cross-border transactions changed from solely export to a new category within the EU: Intra community transactions (goods and services) with distinct rules and new formalities to manage.
New business models have resulted in an increase of intercompany transactions, the use of chain transactions, drop shipments and pick up transactions.
These are causing IT bottlenecks to implement as Standard SAP VAT determination logic and functionality do not work for these complex dynamic business models.
The root cause is that both Standard SAP and bold-on tax engines exclusively focus on transactions within a single company; it only assesses the underlying individual transactions and fails to link the current transactions to the VAT results of previous transactions.
When more than 2 parties are involved, the VAT treatment depends on the VAT treatment of the prior transactions:
- ABC (D) transactions involving supplies of goods and which are transported to another Member State or Member States. In that case it is important to identify in which part of the chain the intra-EC supply and local supply or supplies take place (see below 'Cross border drop shipments')
- ABC transactions involving 3 parties in the supply-chain, which are identified for VAT purposes in three different EU countries, and for which the goods are transported directly from EU country A to EU country C. Under certain additional country specific requirements (not harmonized amongst the EU member states) such a transaction may qualify as triangulation, so that the re-spective “simplified triangulation rule” would be applicable
- ABC (D) transactions involving a supply of goods which are exported to a place outside the EU. In this case, it is important to identify in which part of the chain the export takes place in order to determine the impact on the VAT qualification of the other parties in the chain transaction (see Import / Export transactions ABC transactions)
- ABC (D) transactions involving a supply of goods which are imported to a place inside the EU. Again, it is important to identify in which part of the chain the export takes place in order to determine the impact on the VAT qualification of the other parties in the chain transaction (see Import / Export transactions ABC transactions)
That could be the case if party B request party A to deliver the goods directly to party C in another Member State (i.e. see below drop shipments). Standard SAP will determine the VAT qualification based on the ‘ship-from’, ‘ship-to’, ‘material’ and ‘customer tax classification’ information in SAP.
It will for instance not take into consideration the multiple VAT registrations from party B.
That would mean that not only the transaction A-B but also B-C cannot be derived correctly. From a legal perspective only one transaction can qualify as a zero rated intra-EC supply. In such ABC cases, one of the 2 transactions should be charged with local VAT.
An exception exists - second bullet above - when the supply chain fulfills all requirements of the simplified triangular. Under these strict conditions both transactions could be zero VAT rated.
The supplier is responsible for ensuring that all the conditions for applying the zero VAT rate are met.
Financial impactIf not the supplier does not meet the conditions for using the sero VAT rate, the tax authorities will seek to recover tax due from this supplier via a levy of a tax assessment.
If the applicable VAT rate is 25%, the tax assessment will be 25/125 of the consideration charged and thus impacts the business KPI EBITDA (profit margin erosion). This assessment has to be increased with interest and penalties to determine the total tax burden.
Without adjustment of Standard SAP setting, an incorrect VAT treatment would be determined causing non compliance risks.
Specific areas of attention
Cross border drop shipmentSpecific considerations about triangulation
- DK company code sells to DK customer
- Stock is not available and is purchased from NL Company code with NL stock location
- Direct shipment from Plant NL01 to customer
Root cause: Standard SAP is not able to link the VAT treatment of AP and AR as data is gath-ered at company code level and cannot be linked to AP and AR
Simplified triangulationSpecific considerations about drop shipments
- Country specify rules apply when triangulation is allowed (country by country deviation). Different local rules apply when Party B is VAT registered in ship-to country where the customer receives the goods
- If the supplier (plant or third party) is not set up in SAP the ship-from location will not be known during billing and sales
- Standard SAP requires manual intervention
Import / export transactions ABC transactionsSpecific considerations about export/import
- Define the correct legal partner for VAT
- Determine the correct ship-to country
- Differentiate between export/import and out of scope
Customer pick upSpecific considerations about customer pick up
- Country specific rules apply when a customer picks up the goods and the goods leave the country
- 0% VAT rate for intra EU is only allowed if supplier can prove that goods have left the country
- If proof is not available the tax authorities could assess the supplier for VAT
ServicesSpecific considerations about services
- Default place of supply rule should be the country of establishment of your customer
- Standard SAP: place of supply is by default ship-to
- Default rule has exceptions (e.g repair services connected to immovable property)