A unified VAT system in the Gulf Cooperation Council (GCC) states is now a fait accompli. All businesses which meet a yearly income of DH 375,000, as ascertained by their annual financial documents are obliged to register with the VAT system and pay 5% VAT for most goods and services. As such, businesses have no option but to ensure their systems are compliant with VAT. The need is, even more, pressing in the UAE, which is the pioneer of introducing VAT in the GCC.
The basic requirement to get SAP ready for VAT is to tune the ERP system to comply with the VAT regimes. VAT impacts all sales and purchase transactions, and integrating VAT into SAP, to ensure compliance can be a complex exercise. Much of the data and reports required for VAT compliance may be added to SAP, but it does not come out-of-the-box and has to be manually added.
How to get the SAP ready for VAT in the GCC, and especially in UAE.
Stage 1: Plan and Analyze the Implications
Enterprises running ERP systems need to prepare for VAT well in advance, as implementing VAT related changes take time and involve some amount of trial-and-error and fine-tuning.
The other key consideration is to detail out all implications of the changed financial infrastructure on incumbent business operations. VAT impacts all areas of business operations, including procurement, planning, pricing, distribution, inventory, cash flow, and more.
With every transaction in the business likely to have a VAT component, getting SAP ready for VAT requires extensive configuration changes on the transaction data. Getting the system VAT ready requires close collaboration with the business and accounts team, to trace the path of each transaction, and make sure the VAT competent is added to the transaction data at each stage. Careful planning is the mantra for success.
Stage 2: Assess the Impact of VAT on the Business and Internal Systems
On the face of it, VAT rate in UAE is fixed at 5%. Many services such as education, health services, local transportation, oil and petroleum, medical supplies, and export of goods outside the GCC member states, as well as transport between intra-GCC and international transport, has a zero VAT rate. However, the rules get complex at the implementation level.
The challenge lies in ensuring all rules are co-opted to the SAP systems and process flows. Many of such rules can be complex, and require fine interpretation, depending on the specific nature of the business. For instance, an unregistered individual importing goods purchased outside the GCC has to pay VAT directly, whereas VAT is payable through the reverse charge mechanism when a VAT registered individual or business imports goods.
Again, while life insurance is an exempt financial service for VAT, general insurance is taxable. Likewise, sale and lease of commercial properties come under the ambit of the VAT, while residential properties enjoy a zero-rate for the first sale. Tax on free zones adds a layer of complexity for businesses, especially considering each member-state will lay down their own rules on how they can govern the free zone’s tax. Again, while fee-based financial services may attract VAT, margin-based financial products may be VAT-exempt.
Another point of contention is businesses exempt from the VAT not being able to recover the tax incurred on the cost of an item or a service not exempt from the government. The business will have to decide, based on its competitive and market strengths, on whether to pass on the VAT cost to the consumer. But when businesses have zero-rated services and goods they can reclaim from the government any VAT they have paid on costs.
Understanding the business process thoroughly and adapt prominent aspects is important to ensure a seamless transition and compliance necessities with 100% accuracy. It also sets the groundwork for an efficient process. VAT compliance is a non-revenue generating process, and enterprises need to make sure it works smoothly in the backend, without having a debilitating effect on overall efficiency.
Stage 3: Implement VAT Enabled SAP
The best practice is to study the business, understand the requirements, and create a roadmap to carry out the highest level of VAT transition. Mapping the business transaction in accordance with the framework is the most critical task in the entire process. The time and effort to undertake this task depends on the business complexity and volume of transactions.
There are two broad approaches to implementing VAT in the business environment:
- Customizing the SAP configuration
- Connect with SAP’s TaaS using SAP Localization Hub. The prerequisite for this option is access to the SAP Cloud Platform and integrating it with all invoicing and billing.
Technically, a new VAT account may have to be added in SAP, and co-opted to the purchase, sale and other systems. Additional review processes may also be required, for validation purposes.
Most VAT process and accounting calculations take place in the Finance Module of SAP. However, VAT has implications for every transaction, and the impact spreads far beyond the finance module. Consider the case of a Sales Quotation generated in the Sales and Distribution Module, or Goods Flow calculations which originate in the SAP Materials Management Module. All these modules have to be customized, to co-opt VAT, and to enable embedding of VAT in SAP. There is also a need to establish process controls to minimize risks and continual improvement.
Another important component of VAT implementation reports. While the uncertainty and extremely fluid nature may make it expedient to process VAT returns manually in an Excel sheet, the SAP should be ready to auto-generate reports as required, with minimal manual intervention. Business managers would anyway require intuitive drill-down reports on the VAT, and all general financial reports would also require tweaking to co-opt the VAT component.
Technical integration of SAP ready for VAT is only one part of the process. The immediate SAP support staff, and in fact the wider workforce requires training. An effective training seeks to impart a comprehensive understanding of the VAT system, including the commercial impact of VAT in the SAP ecosystem, how to identify and add new transactions, and processing of VAT at the transactional level.
Stage 4: Go Live with the Tweaked System
Once the system is in place, all tweaks have been ironed out, and the staff trained, the system is ready to go live. Make sure the system goes live as and when VAT is implemented, or the business becomes liable for VAT compliance. The exact date may differ depending on the member nation.
Compliance with VAT is essential to avoid fines and penalties, besides irrevocable damage to reputation. With VAT provisions allowing businesses to make a recovery on business inputs, accurate and strict compliance with VAT regulations makes financial sense for businesses as well.
Businesses seeking to get their SAP ready for VAT would do well to true-up with a partner who has proven expertise in getting SAP ready for VAT. A competent and resourceful team, who are able to understand business requirements and reconcile it with technical and regulatory challenges, helps.