SAP S/4HANA Transition: Key Insights for Tax Departments

What a tax department should know about, Part 2

In this second article I would like to focus on the consequences of the differences between the SAP S/4HANA? On-Premise vs. Cloud version and the big challenges for the tax department in terms of implementation, migration and maintenance.

SAP S/4HANA On-Premise refers to an application that is installed and hosted on the organisation’s own servers and data centres. SAP S/4HANA Cloud refers to an application that is a cloud-based solution where SAP manages the infrastructure and software updates.

SAP’s Cloud Strategy

CEO Christian Klein announced in a statement in July 2023 that SAP’s newest innovations would only be available with SAP S/4HANA Cloud, public edition or SAP S/4HANA Cloud, private edition delivered by GROW[2] with SAP or RISE with SAP[3]. They (= the newest innovations) will therefore not anymore be available in On-Premise deployments of SAP S/4HANA[4].

As you can imagine this aforementioned announcement was highly criticised by SAP customers. For example, “Cloud-first yes, cloud-only no!”[5] is the motto of the (very powerful) German-speaking SAP User Group e.V. (DSAG). Nevertheless, for a tax department it is crucial to understand that the future is in the cloud.

Differences between SAP S/4HANA On-Prem and SAP S/4HANA Cloud in Terms of Customization

In the first article I mentioned that an ERP system is not built to meet all global and local tax requirements, therefore flexibility and the possibility of customization is extremely important if a tax department wants to do as much as possible[6] in an ERP system. Customization in general allows an organisation, in our case the tax department, to tailor their systems to meet (specific tax compliance and reporting) needs.

In a S/4HANA On-Premise setup, tax departments have – from a pure technical perspective[7] – various customization options, allowing them to adapt the system to their precise tax processes and compliance requirements. On the other hand, SAP S/4HANA Cloud will provide only limited or no customization options. The reason is to maintain the stability of the cloud environment and to ensure seamless updates.

One out of many key topics for a tax department is the operationalisation of a tax control framework. In an On-Premise setup, tax functions have the ability and the flexibility to customise and integrate the system seamlessly with their established tax control framework. In contrast, SAP S/4HANA Cloud again may offer only limited or no integration options, potentially impacting the tax department’s ability to align with their desired control framework.

Another key topic is reporting (the submission of various tax reports (returns)), especially in terms of new Compliance and Reporting requirements as Real-/Near-Time or also SAF-T Reporting. In an On-Premise setup, a tax department can customise and optimise more related to the reporting functionalities needed. Again, in contrast, the SAP S/4HANA Cloud version may offer only limited or no flexibility in terms of E2E reporting and compliance functionalities.

Implementation and migration challenges

The main[8] implementation approaches are:

1.???? Greenfield Implementation

In a greenfield approach, organisations start with a clean sheet by implementing SAP S/4HANA from scratch. It is about redefining business processes, data models, and configurations to align with SAP S/4HANA’s best practices. While it offers a fresh start, it may require substantial time and resources for implementation and data migration.

2.???? Brownfield Implementation (System Conversion)

A brownfield implementation involves converting an existing SAP ERP system to SAP S/4HANA. It’s like an upgrade of your current system to the latest version due to the fact that it leverages existing configurations and data structures.

3.???? Bluefield Implementation (Selective Data Transition)

The bluefield approach combines elements of both greenfield and brownfield implementations. It allows organisations a selective transition of specific processes, data, or functions to SAP S/4HANA. This approach provides flexibility to redesign and optimise certain processes while retaining (other) critical aspects of the existing system.

Greenfield implementation is especially a big challenge for a tax department. For all implementation approaches, the truth is that It’s all about early Involvement! Tax departments should be integrally involved in the ERP implementation process from the right from the beginning to ensure that tax requirements are considered, addressed and implemented effectively. Collaboration with IT and Finance is crucial! The tax department needs to work closely with IT and finance teams to ensure that tax requirements are aligned with broader organisational goals and that tax technology aligns with IT initiatives.

The key task is defining the tax-specific requirements and to communicate them effectively within the project. Different stakeholders within the organisations may not fully understand tax processes and regulations. Ensuring active participation from tax professionals in cross-functional workshops may be challenging but needed to explain the need of specific functionalities and features and especially to align with the other stakeholders to end up with a solution that is supported by all (relevant) departments.

Maintenance challenges

A very high-level overview in terms of maintenance. Related to S/4HANA On-Premise the maintenance of the application has to be done by the organisations who have to plan, test, and control all system upgrades, which happen yearly, giving them full control over the maintenance process. Related to S/4HANA Cloud, the cloud edition automatically upgrades the software quarterly without customer intervention, ensuring that businesses always have access to the latest features. There is then no control for the organisations over the maintenance process, they get informed about it.

Summary

Two key takeaways for a tax department are:

• Although SAP S/4HANA On-Premise offers more flexibility and customization, a broader set of functionalities, and more control over maintenance and upgrades compared to SAP S/4HANA Cloud, The future is in the cloud. Therefore, the tax department has to be aware of these trends and think about a broader approach in terms of architecture and especially about integration of S/4HANA with a tax platform.
• Integrating tax requirements into broader business processes – within a S/4HANA implementation project – needs an alignment with other departments (stakeholders) that have very often different goals and objectives.

[1] The tax department is a specific organisational unit or group accountable and responsible for tax. The tax function refers to all resources which are needed to manage taxes regardless whether they are part of the tax department or not, e.g. accounting resources.

[2] GROWS is SAP’s new offering for new customers and midsize companies to get started quickly and easily with SAP S/4HANA

[3] RISE with SAP is a managed cloud service that helps organisations using on-premise ERP software, including SAP ECC and SAP S/4HANA, to migrate to the cloud

[4] https://sapinsider.org/blogs/saps-newest-innovations-will-be-cloud-only/

[5] https://dsag.de/presse/sap-should-reopen-the-door-to-innovation-for-all-customers/

[6] In my opinion, from an architecture point of view I would look into a more broader architecture approach and use the ERP system in a standard way.

[7] The tax department should always be aligned with other stakeholders, e.g. Finance, Accounting and of course the IT department.

[8] There exists also a hybrid approach: the implementation of different parts of SAP S/4HANA using various methods or a landscape transformation that? involves a more comprehensive overhaul of an organisation’s IT landscape or even a system consolidation.