‘Too Many Risks, Too Little Control’
Dutch shorter version in Accountant.nl
While the rates for direct tax are decreasing everywhere across the world, the rates for indirect tax keep rising. With multinational companies we’re easily talking about amounts of over 5 billion euros of indirect tax flowing through the books. Yet according to big4 surveys, the control mechanisms for these numbers are still inadequate. Not only can an error in the accounts lead to major additional tax assessments and substantial penalties, but worse, a mistake of one percent can make the difference between profit and loss for a multinational company.
The global bench mark study on VAT / GST 2013 of KPMG among multinationals (clients and relations), inter alia, showed that most companies haven’t developed an effective VAT/GST management yet. The study clarifies that there is still a long road ahead before all resources, processes and technology strategies will be embedded and responsibilities will be addressed to control the worldwide VAT/GST challenges adequately.
Similar big4 surveys reveal that the Tax Authorities, due to technological innovations, become increasingly better at performing their inspection task. The chance that the Tax Authorities will issue additional assessments and penalties in the near future because errors in indirect tax are detected, increases by the day.
It is remarkable that there is hardly any response from the big companies. CFOs have a lot on their plates in these difficult times, and indirect tax has no priority. Due to economical circumstances, choices have to be made regarding budgets for internal control. Because indirect tax has traditionally received little attention, it won’t suddenly get more in times of crisis.
The main reason that indirect tax receives less attention is because it is dealt with completely differently than direct tax. There are hardly any KPIs determined for VAT/GST and the CFO generally solely focuses on direct tax regarding managing tax risks.
The Indirect Tax Function is aware of the fact that it is understaffed and it receives too little budget to optimally execute its tasks, but they often don’t know how to change this and get it on the agenda of the CFO.
The Head of Tax mainly gets information from corporate finance and not as much from within the organization. That is precisely where the indirect tax is managed and must be operated. It is therefore often not visible for the Head of Tax how vulnerable the control on indirect tax is.
If the Head of Tax and the Indirect Tax Function would figure out how to cooperate more efficiently, they will also bring indirect tax more into the spotlight of the CFO.
Perhaps the most surprising is the fact that the financial auditor also points out the huge risks of insufficient control of indirect tax. On the one hand, it is strange, since it is the benchmark studies from the tax advisors of the same firms who sound the alarm bells.
However, the tax advisors primarily address their own clients, for which personal KPIs such as sales must be achieved, and therefore have an individual rate structure.
The financial auditors apply sharp rates in their market competition, and expensive internal staff hours spent on control of indirect tax are limited as much as possible. It costs a lot of money to hire internal knowledge and that money isn’t always available in economically difficult times.
As a consequence, it cannot be taken that all knowledge acquired within the walls of the large accountancy and tax consultancy firms is shared.
The bottom line is that both from within the organization and from outside, insufficient signals reach the CFO in order to raise priority of indirect tax.
How to break this deadlock?
The internal and external stakeholders are all chains in the process and if one isn’t cooperating, change is difficult to accomplish.
It starts with the financial auditors reading the surveys, acknowledging the risks and discussing them with the CFO.
The best outcome would be if the indirect tax would be controlled by default in audit or if a position would be taken not to do that. In case control is required, all methods and tools developed by one’s own tax consultancy department are to be deployed in order to ensure quality.
This influences the CFO externally, can bring about change top down and can lead to in new instructions for internal audit and Head of Tax. As a result, the Indirect Tax Function can have the tools (mandate, resources, budget etc.) necessary to execute its tasks adequately. Of course the indirect tax function itself has to improve its working relation with the head of tax.
More detail in Interview - Too many risks, too little control
By: Richard Cornelisse, editor of Global Indirect Tax Management