SAP BRIM Integration with Vertex Tax Solution

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:

 

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:

WhatWhereWhom

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 –

  • Subscription
  • Support
  • License

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.

  • Ship-To-Address
  • Ship-From Address
  • Bill-To-From Address

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 –

  • Customer Exemption Certificate
  • VAT/Tax Registration Number

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.

 

Data flow for tax calculation between SAP 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.

Author,
Amit Kumar Shaw 
SAP Specialist, Acuiti Lab

The economics behind digital business models and how they have evolved in recent times

The world as we know it today is continuously changing, and one of the fundamental drivers is digital transformation. Across industries, new digital business models have emerged—many in response to the pandemic as companies are forced to innovate their ways to meet customer demands. During the COVID-19 lockdowns, many digital-based subscription business models fared well due to their promise of convenience and strong business continuity. Organizations now more than ever feel the pressure to leverage digital investments to innovate with existing or add new monetization models.

According to Gartner’s predictions, digital business models (such as subscription-based business models) will continue to evolve for competitive advantage. Gartner also proclaims that organizations can turn continuous change into an asset if they sharpen their vision. Now, what does it mean? To put it plainly, digital business models are here to stay and have tremendous potential to grow in the years to come. These predictions bring us to our next BIG question.

How big is a digital transformation market?

A recent report from Grand View Research evaluated the global digital transformation market size at USD 608.72 billion in 2021 and is expected to expand at a compound annual growth rate (CAGR) of 23.1% from 2022 to 2030. Similar projections were made by Fortune Business Insights in their report. They predict that the global digital transformation market will grow at a compound annual growth rate (CAGR) of 22.1% from 2021 to 2028.

Looking at these figures, it is abundantly clear that digitally driven industries are growing faster than any other industry globally. Companies across industries are adopting different monetization models either to stay relevant in the market (survival) or to uncover new revenue streams (growth). One of the best examples is Kahoot!, the Norwegian educational gaming company founded in 2013 and now valued at roughly USD 2.2 billion. The company was born as a free platform for social learning, targeting particularly the education industry. It then changed its model and started to also target businesses with a commercial subscription offering that provides customers with premium features such as the number of participants.

According to IDC’s Digital Monetization Models report, 55% of organizations globally will focus on the digitalization of their products, services, and customer experiences. The key focus area for 2022 will be the revenue engine – in other words, how companies can leverage digital technologies to create new revenue streams and new monetization opportunities. This includes:

  • Enhancing the customer experience by leveraging new digital interfaces
  • Creating new ways to charge and monetize, such as subscription and usage-based models

Types of Digital Business Models

On a broad level, digital business models can be classified under four major heads. These are:

  • Free (ad-supported) or Freemium business models are business models where users get free access to a basic version of the product for free (ad-supported). If users want to use premium features, then they can upgrade to the premium version by paying service fees. A great example would be Spotify, LinkedIn, etc.
  • Subscription-based business models are business models in which a customer pays a recurring fee on a regular interval period for using products and/or services. Examples like Netflix, Office 365, Salesforce, etc. are moving from transacting with customers to building long-term relationships and recurring revenues.
  • Usage-based business models are the new business models in which customers pay according to the usage of resources. In contrast to the subscription-based pricing model, the consumption-based pricing model charges customers based on the per-unit usage of the resources rather than a fixed price. Examples like AWS, Abertis, AXA, Uber, etc.
  • E-Commerce or Marketplace business model is a business model where a seller and a buyer use a third-party platform to trade their goods and services. Examples include Zalando, Amazon, Facebook, etc.

These heads can be further classified into sub-heads such as On-Demand business models (examples like Uber), Access-over-ownership models (examples like Airbnb) etc., depending on the digital offerings.

 

Digital Business Models
Among all the different digital business models, the e-Commerce subscription business model is the largest in terms of annual revenue and is expected to expand at a compound annual growth rate (CAGR) of 25% from 2022 to 2025, as per the UBS Wealth Management report, followed by streaming services (18.74% CAGR) and cloud computing services (17.9% CAGR).

How do Acuiti Labs fit in this economy?

The boom in the digital business model economy over the past decade has also led to the growth of businesses supporting those models. Major players like SAP, Salesforce Cloud, Zoura, Stripe, Nami ML, etc. have seen tremendous growth in recent years. Further, digitally driven innovative consulting firms like Acuiti Labs, Deloitte Consulting, PwC Advisory, etc., are not far behind. Acuiti Labs, being a specialist consulting firm in the field of “Consume-to-Cash” or “Quote-to-Cash” business processes, is uniquely placed with expertise to deliver business technology and digital transformation by deploying subscription and billing management tools such as SAP BRIM on S/4HANA, SAP CPQ, SAP Subscription Billing and Entitlement Management. With a proven track record in delivering the most complex business use cases with 100% efficiency, it has helped organizations globally to transform their manual or semi-manual billing environments into the fully automated billing process. Considering the current growth trajectory of the digital transformation market, Acuiti Labs can be hugely benefited from its expertise and experience in providing technical support and digital transformation for B2B and B2C customers. Currently, the company caters to multiple industries, from shipping to media, from SaaS to postal services, etc., and has also developed different industry-specific accelerators (for example, AcuitiMobi for public transport; AcuitiPay for connected vehicles; Acuiti Subscription Manager for subscription management; AcuitiPort for seaports; AcuitiMedia for media and entertainment; and AcuitiAirport for automating aeronautical and non-aeronautical billing) to meet the industry’s needs.
Author, Amit Kumar Shaw SAP Specialist, Acuiti Lab
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An introduction to Equipment Integration (Device-as-a-Service)

In the S/4HANA release of 2020, SAP introduced a new feature called as ‘Equipment Integration (Device-as-a-Service)’ in response to changing customer behaviour and evolution in the subscription business models.

Service providers offer their customers bundles of hardware devices (such as laptops, desktops, tablets, printers, or mobile phones), software, and services for a monthly subscription fee as part of a single contract (such offerings have come into the picture due to change in customer behaviour and technological advancement and commonly referred as Device-as-a-Service model). Solution quotations combine hardware and services.

To support such models where the subscription is for the hardware or the subscription(s) are dependent on the hardware, this feature of integration between the equipment master and the subscription contract has been provided. The ability to bundle different kinds of products (hardware, service, and subscription) already existed and hardware products resulted in the creation of SD Sales Orders from which downstream processes such as Delivery, Goods Issue etc. could be carried out. This has been taken further now, where if the hardware resulted in the creation of Equipment, then such Equipment can be linked back to the related Subscription Contract. With this integration, dependent processes such as those below can be built.

  • Activation of subscription and start of billing only after the hardware is delivered to the customer and installed
  • Cancellation of subscription if the related hardware is deactivated

The following graphic illustrates the process of transactional data flow for Equipment Integration between S/4 HANA SOM and S/4 HANA SD.

Transactional Data Flow - Equipment Integration

In a business scenario, where the equipment ID is not known before a hardware device is delivered to the customer, the activation of the subscription contract depends on the equipment delivery status. SAP provides the following example implementation where the physical device is a sales sub-item of the contract’s main item. The sales item is processed for delivery where the equipment ID, linked to the serial number of the sales product, is assigned in the delivery document. On the POST GOODS ISSUE of the delivery document, the equipment status is updated to ECUS.

The subscription contract will not be distributed and activated until the equipment ID’s are maintained and the relevant status (e.g. At Customer, Ready for Use) is set on the equipment.

This is achieved by using the ODI framework. A standard example schema EQUI has been provided with steps:

Step ID Description Use
EQUM Equipment data maintained This step will be executed only if the equipment ID’s are maintained on the subscription contract.
EQUA Are all Equipment active This step will be executed only if the linked equipment has a status of ECUS (At Customer).
PCEA Call FICA Message contract activation This step will trigger the creation of FICA and CC contracts which will be executed only once the above two steps are successful.

Features

The equipment integration provides the following features to support the Device-as-a-Service business model.

  • Maintenance of equipment IDs on subscription contract – Equipment IDs for a subscription item in subscription order or solution quotation can be maintained under the object List. The maintained equipment IDs are copied to the subscription contract item on submit/accept. Additionally, you can search for equipment based on their Equipment ID, Serial Number, Reference Product ID and so on.
  • Auto-update of equipment IDs based on serial number assignment – SAP has delivered an example implementation of how equipment ID’s can be automatically maintained on a subscription contract based on serial number assignment during the delivery of the sales item. If the equipment master is created and activated when serial numbers for a product are created, then during the delivery it is possible to identify the relevant equipment ID’s. By tracking back from the delivery, it should be possible to identify the relevant sales item in the subscription order or solution quotation. If the products are structured in such a way that the sales item is a sub-item of a subscription item or vice versa then that subscription item is the one on which maintenance of equipment ID’s is required. By leveraging the still open-for-change subscription order or the ‘Maintain Equipment IDs’ change process, equipment ID’s can be maintained on the relevant subscription contract. This system-based auto-update is achieved by using Event Type Linkages.
  • Trigger subscription contract activation on equipment activation – Like above, an example implementation of how subscription contract distribution and activation can be triggered based on the status of the equipment has been provided by SAP as an out-of-box functionality.

  • Billing start date based on equipment activation – Generally, with a subscription contract, the date from which the recurring charges are applicable is the same as the contract start date. When equipment is in the picture, we have scenarios where the recurring charges are applicable only once the relevant equipment is activated. Additionally, it could also be ‘once the equipment is activated’ or ‘X number of days after contract start’ whichever is earlier. To support such scenarios a Date Type CONTBILS (Start of Billing) has been provided.
  • Equipment ID as a technical resource – The ID associated with the hardware (Serial Number or Equipment ID) might be relevant in the calculation of usage-based charges in CC. To facilitate this, equipment IDs maintained in the object list are copied to technical resources and distributed to the CC Contract.
  • Early distribution when equipment activation is delayed – Typically, early distribution of subscription contracts is applicable only when the start date is in the future. With equipment, we have the scenario where the contract start date might be immediate, but the actual activation and distribution should happen only once the related equipment is activated which could be in the future. With Revenue Accounting and Reporting in the picture, an early view into such a contract might be required even though it is not yet active. To support this, a feature has been provided that allows for the execution of early distribution even when the start date is immediate, but the actual distribution is to be deferred.
  • Distribution and activation of the subscription contract
  • Changes process (BTMF) – Scale up/down equipment and Replace equipment
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