Higher up on the agenda of the CFO

Dutch version

While direct tax rates are decreasing everywhere across the world, the rates for indirect tax keep rising. For an average multinational company, a small mistake can make the different between profit and loss.

Despite these significant risks, the control mechanisms for indirect tax remain insufficient.

This conclusion followed from various surveys conducted by the Big4. A multinational company has amounts of over five billion euros of indirect tax flowing through the books and an error of one percent affects the earning per share.

The Global benchmark study on VAT/GST 2013 of KPMG, inter alia, indicates that the majority of multinationals still haven’t developed an effective VAT-management. Thus, control on indirect tax is rather neglected.

Comparable Big4-surveys conclude that due to technological innovations, the Tax Authorities become increasingly better at performing their audit task. The chances for companies of receiving additional tax assessments and fines from the Tax Authorities in the near future increase by the day.

Noteworthy is that companies hardly respond.

CFOs give low priority to indirect tax in deciding over budgets for internal control. Indirect tax traditionally receives less attention and times of crisis most likely won’t change this pattern.

The most important reason for this lack of attention is that VAT is managed completely differently than direct tax. With regard to the control of tax risks, the CFO, incited by the Head of Tax, usually solely focuses on direct tax.

It is often unclear how this can be changed and how indirect tax risks can be moved higher up on the agenda of the CFO. The Head of Tax to whom is reported obtains its information on direct tax mainly from corporate finance and to a lesser extent from within the organization, while that is precisely where indirect tax is administered.

Therefore, it is to him not visible on a daily basis how vulnerable the control on indirect tax actually is. Improvement in collaboration can result in VAT risks being brought more into the spotlight of the CFO.

Perhaps the most peculiar – given the alarm bells rang by the tax consultants in the benchmark studies – is that the accountants rarely point out the significant risks and insufficiently inspect the indirect tax position.

The reason is that tax consultants of the Big4 predominantly work with their own clients, with their own revenue targets and with a higher rate structure.

Moreover, the accountants apply competitive rates that allow for little room for expensive internal working hours spent on control of indirect tax. This means that the CFO cannot readily assume that all knowledge is shared within the walls of the big accountancy and tax consultancy firms.

The CFO thus receives insufficient signals promoting higher priority for indirect tax both from inside and outside the organization.

How can this impasse be broken?

The internal and external stakeholders are all chains in the process and if one isn’t cooperating, change will be difficult to be created.

A first step would be accountants reading the surveys of their own firms, acknowledging the risks and discussing these with the CFO. Optimally, control of indirect tax should be included as a standard part of internal audit, ór the position should be taken not to include it.

If control is necessary, all products and methods of the respective tax consultancy should be deployed in order to assure quality. This reaches the CFO and can subsequently through ‘top down’ influences result in new instructions for internal audit and/or Head of Tax.

Following this path, the indirect tax function can gain the mandate, resources and budget required for proper execution of its functions. It is then up to the indirect tax function to improve the collaboration with the Head of Tax.

By Richard Cornelisse