VAT in the Digital Age: Navigating technical challenges in SAP systems

Author: Laura Parri Royo, Marketing Director, TJC Group | Co-author: Patchanok K, B2G Team Lead, TJC Group

As the global implementation of VAT in the Digital Age, (ViDA), gains more traction to modernise VAT reporting and enhance compliance, businesses everywhere need to adapt quickly to meet the new regulations being mandated in every country. Aside from the mind-blowing array of rules specified by different countries, this shift presents numerous challenges, particularly for international organisations using complex SAP systems.

VAT in the Digital Age in a nutshell

As a quick recap, ViDA is an initiative by the EU Commission that aims to modernize the European VAT systems. The ViDA initiative represents a series of essential modifications to the standard VAT regulations throughout the EU, featuring three main components and phased implementation timelines. Its objectives are to enhance VAT compliance, combat tax fraud, and modernize VAT regulations to align with the demands of the digital era.

NOTE: The Council approved the ViDA proposal during the ECOFIN meeting on 5 November 2024. The updated information in the press release: Taxation: Council of the European Union

Learn more on ViDA principles: https://www.tjc-group.com/blogs/what-is-vat-in-the-digital-age-vida/

Requirements for Pillar 1 Digital Reporting Requirements (DRR)

Electronic invoicing become a norm

Electronic invoicing will become the standard method for issuing invoices. However, member states may authorise alternative formats for domestic supplies if needed.

Definition of electronic invoices

Invoices issued, transmitted, and received in a structured electronic format allowing automatic processing qualifies as electronic invoices. These should generally align with the European Standard EN16931.

E-invoice issuance for cross-border transactions

Suppliers must issue electronic invoices for B2B cross-border supplies within 10 days of the chargeable event, which is the date of supply or, if earlier, the prepayment date.

Timely reporting requirements

Certain Invoice data reporting must occur at the same time as issuing the e-invoice or within five days in cases where self-billing applies.

Customer reporting requirements

Customers must digitally report intra-Community acquisitions and purchases subject to reverse charges within five days of the e-invoice issuance. Member states may choose to waive this obligation for customers.

Recapitulative statements to be abolished

The current requirement for recapitulative statements (EC sales listings) will be replaced by the DRR for all cross-border supplies of goods and services.

Optional e-invoicing and digital reporting for domestic supplies

While e-invoicing and digital reporting for domestic supplies remain optional, any system implemented must conform to EU standards by July 1, 2030. Member states with existing e-invoicing and digital reporting systems as of January 1, 2024 (e.g., Italy, Romania, Poland, France, Germany), have until January 1, 2035, to align with EU standards.

Prohibition of additional transaction-based reporting requirements

Member States can continue implementing additional measures to ensure accurate VAT collection and prevent evasion. However, they may not impose additional transaction-based reporting requirements beyond DRR, except where necessary at a national level for preparing and submitting VAT returns or for audit purposes. This allows Member States to maintain their existing domestic reporting schemes such as SAF-T systems and reporting obligations which are not general like cash registers.

Allowance for summary invoices

Summary invoices will be allowed for transactions occurring within the same calendar month, as long as they are issued within 10 days following the month’s end. Member states may designate certain sectors as “fraud-sensitive” and impose specific exclusions for these areas.

Implementation Timeline

July 2030

Digital Reporting Requirements (DRR) will become mandatory for intra-EU transactions and remain optional for domestic transactions.

January 2035

Harmonisation of reporting for domestic and intra-community transactions will take effect. Member states that have already implemented DRR or received a derogation before January 1, 2024, must adapt their e-invoicing models and obligations to align with EU standards. This includes countries such as Italy, France, Germany, Poland, and Romania.

What are the key challenges of ViDA compliance for global SAP users?

Requirements for real-time transaction reporting

Reporting specifics may vary between countries, but ViDA requires every organisation to report on its VAT transactions in real-time. In a multi-national organisation, this will involve having to make significant alterations to SAP systems in order to capture and report transactions instantaneously. For example, a multinational company will need to ensure that every single transaction, from procurement to sales, is reported in real-time to the various EU tax authorities. This will require integrating whatever SAP database is being used – S/4HANA or ECC – with real-time data processing tools. It is a complex and resource-intensive task.

Requirements for e-invoicing mandates

VAT in the Digital Age involves having to issue and process electronic invoicing (e-invoicing) for every single transaction to streamline VAT processes and improve information processing transparency. When e-invoicing is first implemented, it will involve extensive SAP system integration and customisation by the organisation. For example, an organisation that is operating across multiple countries will need to adapt its SAP systems and find a suitable e-invoicing solution to be able to generate, send, and receive electronic invoices in formats that comply with each country’s regulatory requirements. This requires the SAP system to be configured so that it can handle the many different e-invoicing requirements and ensure seamless data exchange.

Ensuring data accuracy to meet e-invoicing compliance

e-Invoicing requirements may involve collecting additional information currently unavailable in the system, such as the tax identification numbers of business partners, which will require data gathering, cleansing, and updating within the system. Ensuring data accuracy from the outset is crucial, as traditional correction methods are no longer applicable. Key considerations include distinguishing between goods and services, marking the self-billed indicator when buyers issue e-invoices on behalf of suppliers, referencing applicable provisions for tax exemptions, and indicating “Reverse charge” when the customer is liable for VAT. Corrective invoices must also reference the original invoice number. Additionally, ViDA initiative encourages the use of Digital Reporting Requirements (DRR) for B2C transactions alongside B2B, so business should ensure their systems can differentiate between B2B and B2C transactions.

These changes may require both system adaptations and process transformations, highlighting the importance of proactive change management to ensure a smooth transition to e-invoicing era.

What technical challenges of ViDA are specific to SAP systems?

Coping with multiple and complex tax jurisdictions

Managing multiple tax jurisdictions, each with distinct VAT regulations, is never going to be anything but highly technically complex. SAP users will need to configure their systems to accommodate these diverse requirements, and many companies will not have the internal skills to do this work efficiently. For instance, a multi-national company with operations in Germany, France, and Italy will need to ensure that its SAP system is able to handle different rates of VAT, different VAT exemptions, and country specific VAT reporting requirements. This requires in-depth customisation of SAP’s tax configuration settings and complex enhancement.

Ensuring data accuracy and consistency

Ensuring data accuracy and consistency across various platforms and jurisdictions is critical under ViDA. Consider the example of an international retailer that needs to ensure its sales data from online and physical stores located across Europe is accurately captured and reconciled in its different SAP systems. For this, organisations have to integrate individual SAP databases with multiple sales platforms while ensuring regular data archiving.

Shifting from traditional multiple solutions to standardised e-invoicing

As true electronic invoicing gains traction, many companies currently relying on certain solutions may find them becoming less relevant. For instance, OCR technology will lose significance as electronic invoices conforming to EU standards eliminate the need to convert paper documents into digital formats. Similarly, existing EDI solutions may not meet forthcoming regulations, particularly with the planned phase-out of EDI in Germany effective January 1, 2028.

As e-invoicing becomes standardised, the need for separate supplier invoice portals may diminish, allowing suppliers to submit invoices directly in the required formats. This streamlining reduces the overhead associated with managing multiple entry points, simplifying the overall invoicing process. The widespread adoption of the Peppol 5-corner model enhances interoperability between business partners and tax authorities, promoting seamless data exchange and compliance, ultimately leading to more efficient invoicing processes. This requires a holistic review of current systems and processes to adapt to new standards in the evolving e-invoicing landscape.

Requirements for enhanced data sharing and security

One of the main reasons for introduction of VAT in the Digital Age is because it mandates enhanced data sharing between taxpayers and the different tax authorities. This could create security vulnerabilities, which means ViDA increases the need for secure and compliant data transmission. For example, a global company must implement robust encryption and security protocols within its entire SAP infrastructure to ensure proper protection of any sensitive financial and tax data.

E-invoicing and e-reporting solutions should be certified to industry standards such as ISO 27001 and ensure high system availability while complying with GDPR to guarantee data security, integrity, and regulatory compliance. These minimise downtime, enhance operational efficiency, and protect sensitive information from breaches, ensuring solutions can scale effectively adapt to evolving regulatory requirements.

Advanced reporting and analytics

The requirements of ViDA compliance over the coming decade will introduce a much greater level of data management and reporting complexity for international SAP users. VAT in the Digital Age requires the adoption of real-time reporting, e-invoicing and enhanced data sharing.

Unified global platform for e-invoicing

Organisations require electronic invoicing solutions that provide a global coverage and diverse range of services while ensuring both flexibility and scalability to effectively support business growth. Implementing a single global e-invoicing platform enables compliance across multiple jurisdictions while delivering a unified user experience. Furthermore, the ability to easily customise and tailor the solution is crucial for addressing specific business requirements. Leveraging AI and generative AI technologies can enhance the e-invoicing process by improving error handling and correction, ultimately streamlining operations and boosting overall efficiency.

The SAP Document and Reporting Compliance (DRC) is a game-changer for the e-invoicing and e-reporting world for SAP customers. Organisations not only can streamline their operations but also enable them to stay compliant with electronic invoicing mandates and statutory reporting requirements in today’s evolving digital world.

How TJC Group supports global SAP users?

As SAP data management and tax compliance experts, we are your trusted partner to support your transition to VAT. We can support you with SAP DRC implementation; provide an initial assessment to analyse the regulatory requirements for each country, mapping with business scenarios to define potential gaps.

TJC Group offers a wide range of SAP-certified software solutions and consulting services for tax compliance as well as SAP Data Extraction for audit purposes. These are customised to allow SAP users to navigate the complexities of ViDA compliance, without a significant impact on business operations.

Find out more about Tax compliance in SAP: https://www.tjc-group.com/sap-data-extraction-for-tax-and-audit-readiness/

Contact us now to get in-depth insights on the tax landscape from our experts.