ERP, CLOUD & TAX NAVIGATING MAJOR DECISIONS IN YOUR BUSINESS

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1 ERP, CLOUD & TAX NAVIGATING MAJOR DECISIONS IN YOUR BUSINESS

2 ERP, cloud and tax Are you planning ahead? AN INVESTMENT IN A NEW ENTERPRISE RESOURCE PLANNING (ERP) SYSTEM IS A MAJOR DECISION. UNFORTUNATELY TAX IS ALL TOO OFTEN A NEGLECTED CONSIDERATION. THIS BROCHURE PROVIDES A BRIEF INTRODUCTION TO THE ISSUES INVOLVED. For most organisations, the business case for a new ERP is not only about a new IT system but about more efficient and scalable business processes. Many businesses use the opportunity an ERP project presents to streamline their operations and potentially even review their entire operating model. The tax implications of this are often profound and sadly often over-looked until late in the project. An ERP project can cause you to change your business structure, your supply chain, your operating locations and your payroll arrangements and each of these can have tax implications. Unless these are planned in advance, you may end up with a sub-optimal tax position. A key consideration is the choice of cloud versus on-premise ERP. An increasing number of organisations are attracted to the flexibility and scalability that cloud ERP solutions such as NetSuite offer. For smaller and mid-sized organisations a big attraction is that cloud ERP allows you to spread the cost of the investment to a much greater extent than with traditional systems. Capital expense is largely replaced by operating expense. Plus there may be the chance to reduce or even close legacy data centres, with their associated overhead costs. Cloud ERP opens up a range of options to mobile-enable your workforce, which can have implications for operating locations and hence also for tax planning. On top of this, there could be tax credits available if your ERP system investment contributes demonstrably to new research and development (R&D) for example through support for new product lines or by making core R&D business processes more efficient. Certainly the new system needs to be able to generate the data you need to validate your R&D tax credit claims. Our experience is that organisations that take these factors into account at the start of their ERP journey stand a much better chance of delivering a positive return from their cloud ERP investment. RSM is a leading accounting, tax and business advisory firm who can help you plan your ERP journey and assess the tax implications, ensuring you are on the front foot from the start and that your cloud ERP business case incorporates tax as well as operational benefits.

3 The return from an ERP investment won t come from the new system alone. It comes from the wider organisational change that the ERP programme delivers, and tax-efficient structures are a fundamental part of that. Chris Knowles, Partner and Head of Technology Consulting, RSM

4 Where to start? IT IS NEVER TOO EARLY TO START THE TAX PLANNING FOR YOUR ERP INVESTMENT. INDEED, TAX CONSIDERATIONS ARISE AT EVERY STAGE OF AN ERP IMPLEMENTATION JOURNEY. WE ADVISE SEEKING PROFESSIONAL HELP FROM THE START. SOME OF THE KEY TAX CONSIDERATIONS FOR A CLOUD ERP PROJECT ARE OUTLINED HERE Selection Initiation Analysis and design Build 1 Selection The starting point is choosing an ERP system that will deliver the best possible ROI for your business. Fundamental to this is can it support your organisational structure and your tax reporting needs? Businesses that operate internationally need to be certain that the ERP system can support their local tax compliance needs. Cloud ERP systems often have the advantage when it comes to adding international subsidiaries quickly and easily. Check whether the providers provide tax compliance functionality out of the box for the geographies that you trade in. Using up an ERP system in an overseas territory can, in some cases, have VAT or corporate income tax implications in the territory concerned, such as it giving rise to a taxable fixed or permanent establishment respectively. 2 Initiation As you prepare the business case for your ERP project, be sure to include all relevant tax considerations. And as you prepare your implementation plan, take care to ensure that you have factored in sufficient time to assess the tax impact of your organisational and system design. Could you get R&D tax credits as a result of your investment in your new ERP? If the ERP will be supporting new R&D processes or if the software solution is a non-trivial technological enhancement that creates new knowledge in the market place, the costs of development may qualify for enhanced tax relief. 3 Analysis and design For many organisations, this is when you start to question your operating structures and processes. What are your target business processes? Where will your staff be located (greater support for mobile working may be one objective of a cloud ERP project)? How should your corporate entities trade, report and consolidate? Where will you hold inventory? Which entities will contract with suppliers? All of these questions can have a material impact on transfer pricing arrangements and on customs duties, VAT and corporate income taxes. And with imminent changes to the international tax system making it mandatory for many businesses to provide corporate information to tax authorities in a variety of countries, a greater level of transparency around group operations will be required. Professional advice should be sought at this stage to assess the tax impact of any proposed changes to your operating model.

5 5 6 7 Test Deploy Operate 4 Build During this phase, attention must now turn to ensure that the ERP system is configured in a way that will allow you to extract the management information that you need to achieve your tax compliance reporting obligations. A good cloud ERP system will support much of this out of the box, but there may be requirements unique to your organisation. For example a manufacturer will want to ensure that the system is built in a way that allows it to easily extract data required to support a claim for R&D tax credits. A business that trades internationally across a group structure will want to ensure that transfer pricing arrangements can be reported accurately. 5 Test Here the focus is on validating that the ERP solution meets the business needs. From a tax point of view the key thing is to ensure that test scenarios incorporate tax reporting and compliance requirements. For example: Does the system provide complete and correct invoicing, with correct VAT rates and VAT numbers? Does it provide the data required to support tax compliance reports and R&D tax credit claims? Does it account correctly for tax deductible and non-deductible transactions? Does it support the accurate and timely generation of corporate tax, payroll and VAT returns? Does it allow you to confirm to the authorities that tax compliant transfer pricing strategies are in place? Does it have the necessary controls and segregation of duties in place? 6 Deploy Attention should now turn to validating that your staff have the skills they need to use the ERP system to support tax compliance and management reporting needs. Training plans should factor in tax awareness for finance and operations staff who play a role in tax reporting and filing. You may find that there are be more staff involved with this than before the ERP system was implemented. 7 Operate After the system goes live it is critical to ensure that controls are put in place to factor in tax considerations into any future enhancements or upgrades. As your organisation grows and starts operating in new jurisdictions for example, what business process is in place to extend your ERP to those geographies? Is there a control in place to ensure that your internal tax team or external tax advisers are consulted before making those countries live on your ERP system?

6 Conclusion BUSINESSES CONSIDERING INSTALLING OR UPGRADING AN ERP SYSTEM NEED TO ENSURE THAT IT IS CAPABLE OF DELIVERING THE OUTPUTS REQUIRED TO MEET THE COMPANY S TAX STRATEGY, AND THE WIDER TAX COMPLIANCE REPORTING OBLIGATIONS. Businesses also need to recognise that an ERP implementation can bring with it fundamental changes to operating structures, reporting lines and business processes that can have unexpected tax implications if not assessed early on. Before building the new system, our advice is that you should assess your tax strategy and how it might be impacted by the new system. Tax strategies are only of value if implemented and controlled effectively. If an ERP system is not aligned with the tax strategy, your business may be exposed to unnecessary tax, financial and reporting risks.

7 How RSM can help WE HAVE DEDICATED TAX AND ERP SPECIALISTS WHO REGULARLY WORK TOGETHER ON CLIENT PROJECTS. WE ARE AN OFFICIAL NETSUITE SYSTEM INTEGRATOR AND HAVE DEEP EXPERTISE IN THE CONFIGURATION AND INTEGRATION OF NETSUITE. Our services include: Providing a holistic approach to developing tax strategies our team of specialists can advise you on strategies that complement one another across transfer pricing, corporate tax and VAT. Our Tax and ERP teams work closely together to ensure tax considerations are baked in to your ERP project plans. Designing an operating structure that takes tax into account as you review your operating model and core business processes during the ERP system design phase, we can help you think through the tax implications for proposed changes to business locations, supply chain processes and transfer pricing arrangements among other factors. Ensuring your ERP system aligns with your tax policies we can help you validate that your procedures for identifying tax sensitive expenditure are reflected in your new ERP system in order to reduce risk of non-compliance and to improve the integrity of financial reporting data, particularly where it is used for tax compliance reporting. Evaluate eligibility for R&D tax incentives our research and development (R&D) tax specialists can work with you to evaluate whether the ERP project is eligible for enhanced R&D tax incentives and identify qualifying expenditure, as well as the data structures needed within the ERP itself to support R&D tax credit claims relating to other parts of your business operations.

8 For further information contact: ERP SPECIALISTS Chris Knowles Partner and Head of Technology Consulting T +44 (0) chris.knowles@rsmuk.com Alpesh Desai Director, Technology Consulting T +44 (0) alpesh.desai@rsmuk.com Chris Knowles Alpesh Desai TAX SPECIALISTS Ian Carpenter Partner and National Head of Indirect Tax T +44 (0) ian.carpenter@rsmuk.com Ken Almand Partner, Transfer Pricing T +44 (0) ken.almand@rsmuk.com rsmuk.com Ian Carpenter Ken Almand The UK group of companies and LLPs trading as RSM is a member of the RSM network. RSM is the trading name used by the members of the RSM network. Each member of the RSM network is an independent accounting and consulting firm each of which practises in its own right. The RSM network is not itself a separate legal entity of any description in any jurisdiction. The RSM network is administered by RSM International Limited, a company registered in England and Wales (company number ) whose registered office is at 11 Old Jewry, London EC2R 8DU. The brand and trademark RSM and other intellectual property rights used by members of the network are owned by RSM International Association, an association governed by article 60 et seq of the Civil Code of Switzerland whose seat is in Zug. RSM UK Consulting LLP, RSM Corporate Finance LLP, RSM Restructuring Advisory LLP, RSM Risk Assurance Services LLP, RSM Tax and Advisory Services LLP, RSM UK Audit LLP, RSM Employer Services Limited and RSM UK Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Baker Tilly Creditor Services LLP is authorised and regulated by the Financial Conduct Authority for credit-related regulated activities. RSM & Co (UK) Limited is authorised and regulated by the Financial Conduct Authority to conduct a range of investment business activities. Whilst every effort has been made to ensure accuracy, information contained in this communication may not be comprehensive and recipients should not act upon it without seeking professional advice RSM UK Group LLP, all rights reserved