With human error added into the equation, some defects are going to occur. If the tax function only has MS Excel to perform data transformation to make the data tax ready, the volume of procedures and controls will have to be significantly greater.
The problem is that in Excel altered data can lose its audit trail back to its source: mismatches with a companies ERP system. A point of attention as ERP data is the source of truth by the tax authorities (e.g. e-audits such as SAF-T).
Richard H. Cornelisse:
Many multinationals run various versions of ERP systems or legacy systems without harmonization. The ERP set-up is often per business unit and thus multiple set ups per country are possible. This could be the root cause that:
- running of system's exception reports to look for missed opportunities, underclaimed VAT and potential fraudulent transactions is still a challenging exercise
- a lot of manual (re)work is often needed to file the VAT reporting and reconcile the VAT numbers due to the use of multiple spreadsheets and various data sources (divisions, different systems)
Inherent risks The latter is interesting as spreadsheets are usually found at critical points in the audit trail. And are often designed by non-specialists with no system expertise. A spreadsheet formula error could result in substantial tax exposures. A spreadsheet has as advantage that the user is able to transform the data in the right format with some modifications such as adding extra columns, or calculations, or descriptions, etc. However, as soon as the data goes into a spreadsheet the data will bear certain inherent risks.
Spreadsheets are difficult to analyze and the amount of data presented can give cause to misinterpretation and historical data can get lost when spreadsheets are updated. Performing a trend anlysis or data comparison will be a challenge.
Research by PwC recently conducted of 100 manufacturing companies revealed that three-fourths (74 percent) of organizations surveyed don’t have a tax technology strategy in place – nor plans to develop one — and even fewer have thought about adding the use of data analytics to their tax function. Almost three-quarters (73 percent) said they don’t have a dedicated tax technology role in their organizations.
What should be considered from an audit defense?
The SAF-T standard, originally created by the OECD (similar as BEPS), is intended to give tax authorities easy access to the relevant data in an easily readable format for bot corporate income tax as VAT. This leads to much more efficient and effective tax inspections. Data analytics will become the most efficient and effective way of future tax auditing.
From the chapters: ERP systems and tax engines and Tax authorities peeking at your data
Be operationally efficient
Hidden factory or hidden operation definition: the rework and cover ups, the hours and days of wasted time in a company of people who constantly correct mistakes (unnecessary rework). The objective is to make the hidden factory visible (measure/calculate ROI) and as result returns precious time and money to the business. It is about extra man-hours, additional costs due to rework (credit/debit notes) and retrospective corrections and/or disclosures. Example: how much rework is required before numbers received from finance systems can be used?
Does the process of preparing and compiling the client’s VAT return take more than 5 man days? (starting from the moment of VAT-data collection until the VAT return is approved and filed).
During assessment of any solution determine the amount of increase of workforce efficiency, how much rework is avoided, risk exposures are decreased but as well how visibility and awareness are improved by which the tax function is able to set better priorities. The objective is to make the hidden factory visible (measure/calculate ROI) and as a result, return precious time and money to the business.
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Written by Richard Cornelisse
Richard advises multinational businesses in improving the efficiency and effectiveness of their Indirect Tax Function and Tax Control Framework.
He started his career as a manager at Arthur Andersen and then became an EY partner where he led the indirect tax performance team for Netherlands and Belgium. Currently, he is a managing director of SAP Tax Consultancy Firm.
Richard has over 20 years of experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service center migration, and post-merger integration work.
