CFOs / Head of Tax apparently still focus more on direct tax than indirect tax. This is interesting as from a tax revenue perspective the current trend is a shift from direct tax to indirect tax by decreasing direct tax rates and increasing VAT/GST rates. Corporate income tax rates are continuing to fall in many countries.
OECD Trends Consumption Tax Trends 2016 highlights that VAT revenues are the largest source of consumption tax revenues in the OECD, and have now reached an all-time high of 6.8% of GDP and 20.1% of total tax revenue on average in 2014.
Global indirect taxes can amount to as much as 75% of the overall corporate tax burden, with VAT and sales/use tax outlays nearly 40% of total business tax expenditures — almost twice as much as corporate income tax. More than 160 countries have a VAT regime.
In the EU, between 2008 and 2013, the average EU standard rate increased from around 19.5% to more than 21%. The EU average VAT rate is now approximately 21.5%. VAT accounts for more than 20% of total tax revenue (OECD).
Governance and risk management Not only are the amounts in the indirect tax cycle continuingly rising internationally, these surveys also reveal that the Tax Authorities, due to technological innovations, have become better at executing their tax audit.
Tax authorities collect and analyze already indirect tax data (e.g. SAF-T for VAT). The focus is not only about timely and accurate VAT reporting but as well whether on high risk areas an effective tax control framework is in place. Tax risk management methods are assessed.
Netherlands: Tax revenue in 2015
Indirect tax revenue in NL was in 2015 EUR 74,9bn compared to Corporate Income Tax EUR 21,3bn. Wage tax and income tax was EUR 133,7bn.
Managing this indicator is the responsibility of senior management
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Surveys are alarming
Senior management and external auditors considering indirect tax not material and a high priority
The low risks qualification of indirect tax likely results in budget constraints
Lack of specific VAT/GST measurable performance goals visible to the CFO
Lack of proper prioritization between lower value activities and higher value activities
Indirect Tax function has many competing priorities and insufficient time or resources
Historically, the tax function in general focused on other areas, allowing other departments and local offices a free hand to deal with the company's indirect taxes
In most companies Finance and Accounting is accountable for indirect tax
It seems that the (indirect) tax department is often the last to know what is going on, is forced to be the show stopper when other parts of the business thought they were are ready to ‘go live’
59 percent of respondents (53 percent in 2014) expect the personal liability of compliance officers to increase in 2015, with 15 percent expecting a significant increase.
Compliance officers or its Executives at firms as diverse as Swinton Insurance, Bank Leumi, Bank of Tokyo-Mitsubishi, Brown Brothers Harriman and Deutsche Bank (DB: VAT fraud) having been fined, banned or jailed (or a combination).
Criminal charges and jail time
More often tax and public prosecutors‘ offices file criminal charges for tax-related scenarios with consequences for nor only the businesses reputation wise but also the executives and employees that could be jailed.
Prosecutors said they were investigating 25 bank staff on suspicion of severe tax evasion, money laundering and obstruction of justice, and searched the headquarters and private residences in Berlin, Duesseldorf and Frankfurt.
"Two of Deutsche Bank's Management Board members Juergen Fitschen and Stefan Krause are involved in the investigations as they signed the value-added tax statement for 2009," Deutsche Bank (DBKGn.DE) said in a statement.
Financial impact: an AR & AP example
Above the line costs The supplier is responsible for ensuring that all the conditions for applying the zero VAT rate are met. If not, the tax authorities will seek to recover tax due from this supplier via a levy of a tax assessment. If the applicable VAT rate is 25%, the tax assessment will be 25/125 of the consideration charged. This assessment has to be increased with interest and penalties to determine the total tax burden.
Something as basic as a billing error leading to invoices issued in the wrong name could not only delay revenue receipt but also result in nonrecoverable VAT. The penalties for incorrect invoicing can be a percentage of the turnover, so amounts can quickly become material—up to 25 percent VAT in Europe (Hungary 27%) on the turnover plus penalties.
In many countries indirect tax returns are not audited by the tax authorities. Tax certainty about tax positions taken will exist once the statutory time limits are exceeded.
That might change when e-audits approaches are standard implemented as audit method or other VAT fraud measures come into force.
A single operational failure in the systems and processes that manage the flow of Indirect Taxes through the supply chain can have significant consequences in terms of additional assessments, penalties, blocked VAT refunds and delayed payments from customers.
How to manage change
Increase tax function's visibility Likewise, the VAT work stream should be integrated with contingent technology and finance projects.
This may prove challenging as a number of initiatives, particularly those that deal with systems development and technology enablers, are often not visible to the tax function — another point that underscores the need for transparency and upfront communications.
Failure to align with initiatives that can intersect with VAT can result in a VAT design that is inefficient from a process perspective and not a “best fit” for the business.
In order to get buy-in from senior management it is often about setting the right priorities, understanding the root cause of underperforming and select a method for measurement that best fits.
The deck explains what a tax function could do to get indirect tax higher on the priority list of senior management.
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.