The indirect tax objective is to make sure that VAT processes and controls operate as effectively and efficiently as possible. That means determining whether the current processes operate satisfactorily 'as is' or need to be improved, factoring in any potential or existing differences and taking into account the complexity of the existing processes and the variations between these processes in each of the business units to be supported.
In order to allocate resources to risk and reward areas that matter, the maximum level of risk appetite of the company in the worst case scenario need to be determined. This facilitates that resources do not spend time on further reducing risks that are already at an acceptable level.
If you know the company's risk appetite, you have to identify the lowest performing indirect tax processes that have ‘the most direct impact on the company’s business objectives.
Based SSC and VAT some benchmark examples
Inability to comply with local VAT rules — Although the root cause will vary from one company and country to another, the risk is likely to arise because of the fundamental lack of resources with local knowledge, clear VAT policies and procedures, technology enablement and controls and metrics to facilitate and monitor compliance. In most cases, there is some combination of these causes.
System incompatibility — It isn’t uncommon to find that the ERP system or other available technologies do not support SSC staff as fully or effectively as required in making sound decisions related to VAT.
Processes not clearly defined — SSCs sometimes find themselves operating without clear descriptions or instructions as to how certain processes should function internally. That typically includes specific division of duties and defined responsibilities for every task and the person assigned to perform it, as well as the protocols for communicating with the tax office to receive updated information, escalate issues and solicit valuable feedback. The more pieces missing, the greater the risk.
Non-existent or inadequate processes and documentation — Since indirect tax guidance is not typically part of the SSC brief, SSC staff may not have access to VAT training, manuals or web-based technology to support their decisions and activities relative to VAT.
Insufficient communications — Staff may also be hampered by inadequate or unorganized communications between the SSC and other operational business units (e.g., IT, logistics, group tax department) within the organization, making it very difficult to identify and address any crossover issues relating to VAT.
Non-existent or inadequate compliance controls — An indirect tax control framework and key performance metrics that focus on relevant indirect tax risk must be in place to provide the stability and transparency required to both enable and sustain compliance. None of these “risk drivers” are insurmountable or prohibitively complex to overcome. That said, there are some equally significant VAT-specific rewards in migrating to a well-run and well-founded SSC:
Performance improvement — Companies have seen a reduction in both manual effort and error rates in VAT processes from automating VAT decisions in an ERP environment and (or) using technologies available on the market such as tax engines and certain web-based applications.
Better time management — More time is available to tax staff to set up and implement VAT strategy and planning. Since part of the VAT functionality is transferred to the SSC, problems can be anticipated at an earlier stage and action taken to pre-empt or solve them.
Process improvement — With the SSC doing a good portion of the “heavy lifting,” the organization has more time and resources to review, adjust, structure and optimize existing VAT processes. It may also lead to the development of a VAT team to operate as part of the overall international tax team.
Consistency and flexibility — An efficient and effective SSC/VAT relationship can provide the company with a consistent operating model as well as flexible organizational design to support growth, profitability and compliance. Once the company has evaluated the risks and rewards and conducted any other due diligence, the processes begin for identifying the VAT-critical functions, diagnosing the current state and designing the structure that will enable the effective migration of VAT to SSC.
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.