Several countries in Europe, but also in other regions, voted to change their VAT rates in reply to the economic impact of the Coronavirus pandemic crisis. Whether a VAT rate change (either increase or decrease) is a proper tool, especially when it is temporary (like in Germany, Austria, Belgium, Cyprus, Czech Republic) is not yet clear. This article will instead focus on the ERP considerations that a tax function should keep in mind in case of a VAT rate change.
The VAT rate change and its impact on businesses
From a non-tax professional point of view, changing a VAT rate may seem a routine task. An ERP update, however, has several steps even for a “simple” VAT rate change and these should be planned properly.
Many countries applying a new VAT rate as of Q2/2020 decided to end the temporary VAT regime at the end of 2020 or in Q1/2021. This means that many companies have been busy adjusting their ERP systems recently. The temporary VAT regime is a phenomenon specific of these times, which means that all changes should be reversed after a short period. A temporary drop in VAT could also be relevant in combination with operational changes in supply chains, modifications of go-to-market terms and/or agreeing new vendor conditions. These aspects will have to be re-considered at the end of the temporary regime period.
Step by step planning
Multi-national companies operating a global ERP platform that have a central IT (tax technology) support team should first understand which jurisdictions are impacted, secondly which business units are in scope and finally which ERP modules, tax engines and software / applications will be affected. Other, just as important, elements of the planning are:
- knowing the go-live date of the VAT rate change (in a temporary change there are already two dates to keep in mind)
- understanding whether there is a grace period during which the companies can delay the implementation without negative consequences (for instance, in Germany the month of July was given as a transition month for B2B transactions),
- understanding whether there is a grace period at the end of the temporary regime (for instance, in Germany January will not be a transitional month. Instead, the strict cut-off date is 1 January 2021) and
- being aware of the possible legal consequences in case of non-compliance.
Adjusting the ERP coding step by step
After the scoping, the company’s (in-house, outsourced, co-sourced) tax function should define the tax rules and the logic informing the VAT determination for all identified business cases and contracts - alone or with the help of an external provider. The VAT (tax) function should collaborate with all business unit leaders, team members of order management, indirect tax technology colleagues and, ideally, pull it together with the help of a project manager officer (PMO). The bigger an organization is the higher the need to have a PMO to support the tax function’s coordination, as this is a vast task in larger corporations.
One of the challenges during a system adjustment is to find a stable and sustainable systematic solution instead of dealing with manual workarounds where the potential for human error is great. This challenge is much more difficult if a tax regime change is temporary because building a sustainable environment may take longer than the timeframe of the regime itself (for example, 6 months). Companies could naturally use a manual workaround, but what is key is to still have the entire process under control. Why a business unit selected an exceptional workaround, the factors considered for decision making and who are the parties responsible for the steps needed to be documented internally (we recommend preparing a KPI, RACI, or at least a simple responsibility matrix).
Once the project team is ready with the scoping, deadlines are clear, the project team has agreed on the meeting schedules, the VAT (tax) function of the organization should closely track all discussions and stand by for consultation. It is advisable to prepare a comprehensive document describing the logic of the timing of the VAT rate change in detail with examples. The wording of such document has to be straightforward because the reader of such a document may not be a tax professional but
- a colleague who has to deliver an IT logic and design an invoice layout;
- an order management colleague who has to deal with customer queries;
- a procurement and/or AP team-member who validates vendor invoices or
- an account manager who negotiates pricing.
The latter is a sensitive topic as contracts have to properly define whether the price includes VAT or not. In such cases the legal department may also suddenly become a part of the VAT rate change project because contracts need to be analyzed from a civil law perspective
What is relevant from a VAT perspective?
How should transactions be categorized? In Germany, for example, companies should focus on transactions like recurring deliveries; partial deliveries; advance payments; price adjustments due to transfer pricing and/or rebate schemes; long-term contracts; employee car and eBike programs; differentiating the supply of goods from that of services, imports, intra-EU acquisition of goods, replacements etc.
Once you have listed all your transactions and categorized them according to the VAT law logic in that given jurisdiction, the tax function should state a driver that can be coded into the invoicing process. What triggers a taxable event? When does the old VAT rate and when the new VAT rate apply?