In response to increased scrutiny from senior management, tax administration and other regulators, many businesses are now formally documenting their indirect tax strategy and implementing formal processes to evaluate and approve planning ideas. A strategy may be defined as: "
a plan or method for obtaining some goal or result. The responsibility of management to identify the key processes of their organization, measure their effectiveness and efficiency, and initiate improvement of the worst performing processes."
For leading companies, a tax strategy is a dynamic framework that is shaped by internal and external drivers. An indirect tax strategy should cover all business locations and should be aligned to the overall business strategy.
The benefits of a well-defined and documented Indirect Tax Strategy that is linked to the overall business strategy include:
- Increased clarity of a business’ risk tolerance for indirect taxes. This should facilitate the coordination of opportunities with the broader commercial objectives
- Improvements in the consistency and efficiency of indirect tax processes
- Indirect Tax put on the agenda of important business and financial functions
- Strengthens the monitoring and management of indirect taxes in decentralized and geographically dispersed locations
- Identifies opportunities to improve systems, processes and controls
- Identification of areas where extra resources for indirect tax are necessary
The key elements within an indirect tax strategy are:
The strategy and the group’s overall approach to indirect tax compliance, risk management and indirect tax planning should be clearly documented, signed-off my senior management and regularly reviewed to ensure that consistent minimum standards are defined and implemented. The approach should also implement an effective communication plan, as part of the change management process, to ensure all impacted entities understand what is required of them and clarify their commitment to the strategy.
Group business strategy and indirect tax objectives
Document and challenge the overall indirect tax strategy of the group to ensure there is clear linkage to the business strategy and how the indirect tax strategy contributes value to the business’s overall objectives.
Define the indirect tax risk management framework of the group covering processes both within and outside the tax function. This includes the development and maintenance of a group indirect tax risk register, and the review & oversight of processes of decentralized and overseas locations. Define the group’s overall indirect tax risk tolerance parameters which should be applied to all significant transactions.
Governance and performance
- Strategy Oversight and Sponsorship - Define the principles and policies on which the group’s indirect tax processes are based. It should also include the process on how the strategy will be approved by the Board and communicated to the business.
- Management reporting of indirect tax risk - Describe the reporting lines and its frequency from the operating teams to senior management e.g. indirect tax to Head of Tax, the CFO and Board/Audit Committee. Reporting should cover key indirect tax compliance and the reporting of issues globally including significant transactions and tax administration audits. Define the reporting processes from overseas and decentralized locations to the group indirect tax function relating to compliance, transactions, audits and exposures.
- Indirect tax objectives and key performance indicators KPI) - Define the KPIs for the indirect tax function to show indirect tax performance Indirect tax function KPIs should include performance measures on people, efficiency, growth and quality.
- Relationship with tax administration - Describe the requirements for dealing with the external tax regime, including who has authority to negotiate with the tax authorities in relation to potential audits and penalties.
People and organization
- Roles & responsibilities and reporting lines - Outline the indirect tax related roles and responsibilities (including review and reporting lines) of the Group including, but not limited to, the following stakeholders: the Board, Chief Financial Officer, Head of Tax, Business Units, Finance team, Tax Function, Local indirect tax teams,
- Resourcing - Define the skills and roles that are required to deal with indirect tax matters in each location. Document career development, role rotation and succession planning processes.
- Training - Describe the indirect tax training requirements for staff, and the awareness training to be provided by indirect tax to the finance and business teams and other stakeholders (e.g. procurement, IT, logistics, internal audit, HR, legal).
- External tax advisors - Provide guidelines on the use of external advisors (i.e. for industry insights, technical updates, and input and to cover skills and resource shortages) and the authority to approve the use of external advisors in various jurisdictions.
- Alignment with business units - Describe the responsibilities, quality levels, controls and reporting between indirect tax and the business units and ensure this is properly represented in Service Level Agreements.
Process and controls
- Indirect tax planning and significant business transactions - This should cover non-routine or significant transactions and the requirement for review & approval by the indirect tax function prior to execution of the transactions. It may also be appropriate to include more detailed guidelines around the type of indirect tax planning and whether this is allowed according the business’s tax policy. These guidelines should be approved by senior management and may include issues such as the likelihood of tax administration to challenge and litigate the potential change to the group’s indirect tax risk profile and key reputational risk issues. This may also cover documented planning evaluation and acceptance criteria, planning implementation review processes and an ongoing planning review and monitoring processes. Describe the requirements for other stakeholders (e.g. finance, procurement, IT, logistics, internal audit, HR, legal) to seek Indirect Tax input early in the process.
- Indirect tax compliance and financial reporting - Describe the requirements of the group related to indirect tax compliance and financial reporting (i.e. data gathering and review, and preparation and review of indirect tax returns and provisions) across all jurisdictions. It may also be appropriate to document specific responsibilities, controls and systems in relation to each process.
- Internal auditing of indirect tax - Describe the internal audit program, including any processes, policies and tools used, for indirect tax focusing on the testing of effectiveness of internal controls for key risk areas.
Technology and data
- Finance & business systems and data - Describe the finance and business systems used and the requirement for indirect tax training and input in relation to accounting and business systems (e.g. review of indirect tax set-up of accounting systems and indirect tax involvement in business system upgrades to ensure global consistency in their application).
- Indirect tax systems - Describe the systems used by the indirect tax function including how they control the integrity of data used for indirect tax filings.
- Workflow information and management - Document in detail the indirect tax operating processes and procedures including workflow and information management, resourcing and technology requirements.
- Reporting and Workpapers – Define the detailed preparation and retention guidelines for both paper and electronic documents. It may be appropriate to include guidelines on mandatory archiving.
What Phenix Consulting offers on indirect tax performance
Phenix Consulting developed a methodology and toolkit to assess and evaluate in an effective and efficient manner the effectiveness of a company's current indirect tax control/function framework, document the 'as is' situation, provide a gap analysis and set of solutions to close gaps.
A normative VAT Control Framework is used as a yardstick for comparison purposes and will indicate how the steps should be taken in an ideal world (gap analysis).