Corporations are required to collect and remit tax on the sales and purchases of goods and services. These are known as “indirect taxes.” It is levied by various tax regimes around the world and called by different names like sales tax, value-added tax (VAT), goods and services tax (GST), etc. Order and invoicing transactions originating from SAP BRIM system(s) may require the computation of indirect taxes depending on the nature of the goods or services being sold or purchased by the enterprises, the place of destination, and/or the receiver enterprise(s). When it comes to indirect taxation on goods and services, SAP supports broadly two options to calculate tax on sales and purchases of goods and services.
These options are:
- Internal Tax Calculation
- External Tax Calculation
In this blog, I want to focus on the external tax calculation via a third-party tax solution such as Vertex. SAP provides a tax interface system that is capable of passing required data to an external tax system that determines tax jurisdictions, calculates taxes, and then returns these calculated results back to SAP. The tax interface system also updates the third party’s software files with the appropriate tax information for legal reporting purposes. External tax systems, such as Vertex, can integrate with subscription order management and contract accounts receivable and payable to calculate sales, use tax externally, and record the tax data for a later tax return.
What is Vertex Tax Solution?
Vertex Tax Solution is a third-party tax software that integrates with SAP to automatically calculate the indirect taxes on sales and purchases of goods and services. It is an exception-based system. By default, all the transactions are considered “taxable,” unless you identify an exception.
Vertex calculates tax based on jurisdiction and various data elements provided in the transaction, such as the order date, invoice date, company code, registration ID, etc., and automates compliance and reporting for your organization. It has the capability to provide over 100 different fields in a report that can be configured to meet organisation-specific needs.
Vertex’s product range includes various series, but the “Vertex Indirect Tax O Series” is the latest one. It can be deployed on the SAP cloud, on-premise, or as a hybrid. The below depicted diagram explains the general process flow of the Vertex O Series:
How does taxability determine?
Indirect taxes are calculated on sales and purchases of goods and services. The taxability of a business transaction depends on “What, Where & Whom” as highlighted below:
What attributes determines the goods and/or services that are being sold or purchased by the enterprise.
This can be identified by configuring appropriate material group in SAP ERP at product level. For example –
Material groups are mapped to a Vertex category (Taxability deriver) that determines the taxability of the product.
Where the goods and/or services are delivered. The tax rate is determined based on the ‘Ship-To’ and/or ‘Sold-To’ address.
Addresses are maintained at Business Partner level in SAP ERP.
Vertex needs following location information to calculate correct tax.
Whom you are selling goods and/or services. Basically, ‘Whom’ attributes provide additional exemptions (details) that would otherwise not be available based on only ‘What’ & ‘Where’ attributes. For example –
Exemption Certificate is a customer specific record that provides exemption from sales and use tax for a specific company code in a specific jurisdiction.
Data Flow between SAP S/4HANA-BRIM and Vertex Tax Solution
In SAP BRIM, tax on sales and purchases of goods and services is calculated during the order capture in Subscription Order Management (SOM) and during the invoicing in Contract Accounts Receivable and Payable (FI-CA). Tax calculated during order processing is considered “estimated tax,” and tax calculated during the invoicing process is considered “final tax.”
The following graphic illustrates the process of transactional data flow for tax calculation between S/4 HANA-BRIM and Vertex Tax Solution.
Subscription Order Management leverages SAP S/4 HANA central pricing to determine the prices for the products and/or services, which makes it easy to integrate with an external tax solution such as Vertex. Further, the Vertex accelerator installed within the SAP S/4HANA system gathers all the required information for the tax calculation during order processing via BAdI and passes it to the Vertex tax solution engine.
Contract Accounts Receivable and Payable is a type of subledger accounting that is tailored to the requirements of specific industry sectors and cross-industry sectors. It can integrate with SAP Finance modules (such as General Ledger, Special Ledger, etc.) and other solutions to accomplish additional business tasks. During the invoicing process in Contract Accounts Receivable and Payable, taxes on sales and purchases of goods and services are calculated in real time. The data related to invoicing, such as customer ID, registration number, product details, etc., is passed to the tax interface through Vertex Accelerator. In the standard system, contract accounts receivable and payable supply the interface to the external tax system only per line item. You can choose an alternative approach at event 1110. For documents from invoicing, at this event you can transfer the complete business partner items to the external tax system.
Amit Kumar Shaw
SAP Specialist, Acuiti Lab