While there are many reasons to make an ERP change or upgrade, tax or regulatory issues are rarely among the top reasons for the decision to make a change. Such changes or upgrades are usually necessitated by the need to stay competitive through better decision-making and improve user experience. The decision for an ERP upgrade ultimately rests with the information technology (IT) manager and the finance functional manager.
ERP however covers all areas of business operations, finance, accounting, procurement, customer sales management, logistics, asset management and supply chain. With today’s ever-changing environment, tax should be part of the foundation of any such discussion regarding ERP changes or digital transformation in general. Precisely because all areas covered by ERP have tax implications. From supply chain (which has tax and customs implications) to asset management (withholding taxes, capital cost allowance calculations), from human resources (PAYE) to sales (VAT and related levies).
It is essential that the internal tax function and/or external tax advisors all play a role from the planning stages of any ERP upgrade through to the final testing stages before any new ERP is deployed. This inclusion in the planning stages will avoid penalties and save a business entity potential compound interest for non-compliance with tax laws.
In a recent survey conducted by Deloitte, where a quarter of respondents had an ERP system and is operational, nearly 78% of tax functions/executives played a leading role in shaping the design of the ERP. This shows that the understanding of the tax impact of any digital transformation is gaining ground and that in the future, tax issues should continue to take into account all the reasons for embarking on digital transformation.
Any such upgrade should also aim to address current specific tax challenges, including accounting for cost of sales and its implications for withholding tax and indirect taxation. It is expected to help by providing supporting documents during tax audits conducted by the Ghana Revenue Authority (GRA) in the future. This is achieved through digital record keeping which should facilitate access to records such as receipts and legal contracts to support tax positions during tax controversies and dispute resolution processes. Not only must the information be readily available, but the quality of the data must be such that it gives a business the confidence to support tax positions and the necessary justification.
Differences Between Tax Accounting and Financial Accounting
ERP changes or upgrades should not only meet financial accounting reporting objectives, but also aid in tax accounting and compliance while helping to assess tax liability. There are often tax areas in which knowledge of local tax accounting can be useful for the implementation of an ERP. One of them is that of cash inflows and the payment of tax debts.
Indeed, the timing of receipts and payments under tax legislation sometimes differs from accounting rules. A typical example can be found in the Value Added Tax Act 2013 (Act 870), which defines the timing and payment for a supply of goods, which will not always coincide with the processing and disclosure of the financial Accounting.
VAT law provides that a supply has been made if the goods have been transported and delivered from Seller A’s business premises to Buyer B (even if Seller A has not yet received payment in cash from Seller A). buyer B).
Therefore, at the end of the following month, Seller A would have to declare and pay the VAT amount, all other things being equal.
For accounting and cash flow purposes, payment terms could mean that Seller A would be paid in 90 days. The decision and pricing will have a tax impact.
An important feature to keep in mind when modifying or upgrading the system is the ability of this new system to support decision-making and model the impacts of future tax law changes on the current business model. What will be the impact on business of the new tax proposals announced in the government’s budget? This is a question that the board of directors and CFOs usually ask themselves. If taxation is considered during the planning stages of the upgrade, the answer should be easily provided to facilitate business decision making.
In another Deloitte survey, tax executives said not having the right data at their fingertips (52%) and outdated ERP systems (35%) were the top barriers to creating strategic value for a company beyond the obligation of tax compliance. has grown from a simple compliance issue to supporting strategic decision-making. There should be data readily available to help a business make the right decision.
A future requirement of any such upgrade will be to facilitate the easy implementation of tax rate changes into the system within a short period of time after legislation is passed. If Parliament changes the VAT rate for example, will it take more than a month before the ERP system is changed? If the law goes into effect before the system is changed, you run the risk of incurring penalties and interest for charging the wrong rates and paying the wrong amounts of taxes until the ERP is put in place. up to date with the rate change. Therefore, it is advisable, if factored into the planning stages, to include the ability to make such changes with the right internal controls.
Transfer pricing requirements
The new TP Regulations, 2020 (LI 2412) have added to the disclosures to be provided by a taxpayer in connection with related party transactions. The new disclosure requirement includes country-by-country reporting which requires multinational entities to disclose the financial information of specific related entities within the group. Disclosures include income from related and unrelated parties, income tax paid in cash versus that paid on an accrual basis, and property, plant and equipment other than cash and cash equivalents. Sometimes this information may not be readily available except through some sort of consolidation, and may need to be done manually. A powerful ERP will not require this new information to be generated outside of the system, but rather should be readily available at the click of a mouse.
Identifying tax risk, cash flow planning, and assisting with tax modeling around various scenarios ranging from inflation rate adjustments to changes in the tax environment are some of the areas where software Future-proof ERP can help.
Specific tax areas such as indirect taxes and other transaction taxes have proven to be well suited to manage for ML purposes, while corporate taxes are not as well suited to take advantage of ML (currently). Nonetheless, any new ERP should consider using these advanced technologies to improve internal processes such as tax accounting and planning and to overall improve a company’s competitive advantage.
Finally, what happens to the old system and the documents you leave behind?
Make sure the data from the old system is secure and available for any future tax audits. The Tax Administration Act 2016 (Act 915) requires records to be retained for a period of at least six years from the end of the tax year or the end of the accounting period for which the document is relevant. In some cases, such as when a tax audit is in progress, it may be necessary to keep the document for a longer period. This was confirmed by the High Court in Taylor and Taylor Limited v The Commissioner-General. If it is not possible to retain the documents due to ERP upgrade or change, you will require written notice from the Commissioner General of the Ghana Revenue Authority to release you from this six-year document retention period.
In conclusion, as the tax and general compliance landscape continues to evolve, it can seem difficult to comply with tax laws and complex financial reporting rules. With the right structures, from planning to implementation, this should lead to an efficient system to deal with the burden of compliance and at the same time for the tax reporting system to help in business decision making. Digitization, being one of the mega trends changing every aspect of life, now provides a platform to align data and technology for better regulatory compliance and aligns data and technology for better regulatory compliance and beyond.