The intersection of VAT and shared service centers

When companies move finance functions into a shared service center, responsibility for value added tax (VAT) moves with them — and it is often the one consideration left out of the plan until it becomes a costly problem.

By Richard Cornelisse · Founder & CEO, KGT 

What is the relationship between VAT and a shared service center?

A shared service center is a centralized, frequently offshore unit that consolidates support functions — accounts payable, general accounting, intercompany settlements, tax filing, customer billing and order entry — from many business units or countries. The model is adopted to lower costs, standardize processes and improve efficiency. Because those functions generate the transactions that create indirect tax, responsibility for VAT and goods and services tax (GST) is transferred to the SSC along with everything else. In an Ernst & Young survey of global executives, roughly 27% said they planned to expand their use of shared service centers across functions ranging from accounting and HR to IT and customer service, which means this transfer of tax responsibility is happening at scale.

Why is VAT a hidden risk in finance transformation?

Historically, the transactions behind indirect tax were handled by in-country staff who understood local invoicing, liability, rate, accounting and reporting rules. These teams were stable, well trained and familiar with the company’s history. When their work migrates to a far-away center, that institutional knowledge is frequently lost: local staff are made redundant, new process owners lack historical context, and turnover at the receiving location tends to be high. For multinationals the challenge multiplies, because VAT and GST obligations touch finance, procurement, IT and HR across many jurisdictions at once — and complexity rises sharply when cross-border activity meets external controls, manual processes and undocumented procedures.

What are the risks and rewards of moving VAT to an SSC?

Because cost savings drive the decision, SSCs are often located in lower-wage countries such as Poland, Hungary, India, the Philippines or Ukraine, which also offer educated, multilingual talent. What the business case tends to underestimate is the depth of process knowledge and control that indirect tax demands.

In practice the risks cluster around a knowledge gap. A center may be unable to comply with local VAT rules because it lacks local expertise, clear policies, supporting technology and meaningful metrics. ERP systems and tax tools may not fully support the decisions staff must make. Processes are sometimes transferred without documenting who owns each task or how to communicate with the tax authorities, and VAT-specific training, manuals and reference tools may not be part of the SSC’s remit. Weak communication with other business units, combined with the absence of a control framework and key risk indicators, removes the stability and transparency that sustainable compliance requires.

None of these obstacles is insurmountable, and a well-run center delivers real rewards. Automating VAT determination inside the ERP environment — or through tax engines and web-based applications — reduces manual effort and error rates. Routine processing shifts to the SSC, freeing tax specialists to anticipate issues earlier and focus on strategy. With the heavy lifting handled centrally, the organization gains capacity to review and optimize its VAT processes and often to build a dedicated VAT team within the wider international tax function. Done well, the SSC becomes a consistent yet flexible operating model that supports growth, profitability and compliance together.

How do you migrate VAT to an SSC? The identify, diagnose, design framework

VAT should be considered at every stage of a migration, from concept through go-live and beyond. The work falls into three steps that are not one-time events — they should be revisited periodically to keep an existing center optimized and aligned with the business.

Identify

The first step defines the center’s scope. High-volume, VAT-critical processes such as accounts payable, general accounting, intercompany settlements, travel and expenses, tax filing, customer billing and order entry are the usual candidates. Document the current VAT processes for each local unit, decide which countries and processes the SSC will cover, and assess available technology and talent realistically. Because centralization shifts responsibilities, new protocols and communication lines must be established, documented and managed across the enterprise.

Diagnose

Diagnosis confirms that transferred processes will keep working effectively, accounting for the complexity of existing procedures and the variation between business units. A key opportunity is optimizing the ERP system’s VAT functionality: some platforms and tax engines use a condition table or decision tree to assign the correct tax code automatically, acting as a “virtual VAT manager.” That logic must stay current with changes in customers, goods flows and legislation, and must include controls so transactions outside its scope cannot be completed without expert review. Where multiple systems exist, consolidation may help — but because systems changes take months and involve many stakeholders, they belong on a medium- to long-term roadmap, never immediately before go-live.

Design

There is no standard blueprint; the only fixed requirement is that the solution be VAT-compliant. The design depends on transaction complexity and the technology and talent available. If it is built on the existing ERP system, understand from the outset how well that system supports the VAT processes and how far technology will handle electronic invoicing, tax engines and reporting in line with local rules. A patchwork of applications increases manual adjustment and therefore error risk — and where staff with limited VAT knowledge enter and manipulate data, the integrity of that data comes into question. Clear supervision, documented procedures, defined responsibilities and a robust internal control structure separate a dependable design from a fragile one.

Case study: what happens when VAT is ignored?

A French multinational centralized functions in Switzerland without documenting its processes, analyzing the VAT impact or retaining the staff who understood the work. It lost access to the historical data behind its VAT returns and was left with employees unfamiliar with preparing them or making manual adjustments. When a VAT audit was announced, staff worked around the clock to reconstruct the returns, and the company faced exposure to the full VAT amount plus penalties of up to 100% of the tax owed. Whatever savings the migration promised were overshadowed by the cost and disruption of the emergency response.

How costly is mishandling VAT?

The financial stakes are significant. Global indirect taxes can represent as much as 75% of a company’s total tax burden, with VAT and sales or use tax accounting for nearly 40% of total business tax expenditure — almost twice the cost of corporate income tax. As tax authorities sharpen their focus on VAT revenue, audits are becoming more frequent. The consequences of getting it wrong are concrete: companies have paid millions in VAT they expected to recover, been assessed hundreds of millions in taxes and penalties for missing documentation, forfeited multimillion-dollar refunds, and, in extreme cases, seen executives held personally liable. Not every outcome stems from the shared service model, but each shows the cost of mishandling VAT — and once an SSC owns the responsibility, it owns the risk.

Why does the organization need a clear service level agreement?

Underpinning the whole effort is transparent communication and a well-defined service level agreement (SLA) that everyone understands and supports. It should set out responsibilities inside and outside the center, the division of duties, and the protocols for resolving and escalating issues. Before any process is transferred, it should be vetted for efficiency, feasibility within the SSC model, the resources it requires, its impact on current operations, and the measures that define success. Rollouts are best reviewed as a portfolio so demands on resources and the return on each initiative can be managed together, and the VAT work stream should be integrated with related technology and finance projects — which is often difficult, because those projects are not always visible to the tax function. Failing to align with them risks a VAT design that is inefficient and a poor fit for the business.

Leading practices: managing VAT by design

With proper planning, the pain of noncompliance is replaced by the advantages of a leading-practice shared service model. That means managing by design: viewing every process and transaction end to end, building in the controls a compliant VAT process requires, and addressing the roles left behind as carefully as those being moved — capturing the local knowledge of how work actually gets done.

Companies that integrate VAT well share a common outlook. They treat VAT as far more than a simple consumption-tax “wash,” managing it proactively across the entire buy-and-sell cycle with transparent visibility into the controls and metrics at each stage. They use their ERP systems to automate VAT processing wherever possible, ensuring decisions are made at the right time by the right resource. And they regard the SSC not as the endpoint of a one-time project but as a vehicle for continuous improvement, able to flex with changes in the company, the industry and the global regulatory environment. For these organizations, VAT is not an add-on to the shared service model but a critical requirement that, managed well, makes the model stronger.