Innovative Due Diligence Approach for VAT

Statistical sampling has the added benefit of allowing the determination of the exact amount of a tax assessment. For this reason, the Dutch tax authority considers statistical sampling as their preferred tax audit method.

Due diligence

A due diligence investigation not only serves the purpose of mapping the material risks, but quantification of these risks is also essential.

A traditional due diligence investigation normally involves completion of standard questionnaires and retrieval of standard information, which is provided by the vendor via a specially designed data room. When possible incorrect VAT determination is detected, a rough estimation of the magnitude of the VAT risks is made on the basis of turnover and sales figures.

This is not ideal for both vendor and purchaser, as it concerns much guesswork and thus usually provides an insufficient framework in price negotiations.

In order to quickly gain insight into the level of tax risks i.e. calculation of the potential assessment, statistical sampling can be used.

By selecting a few elements euros, the reliability of the composition of tax items can be determined to a high degree of certainty, and on the basis of identified errors in the sample, the exact amount of additional tax assessment can be calculated.

Incoming and outgoing invoices provide important information about the scale of indirect tax risks within a company. By selecting just a limited number of transactions via a statistical sample a quick insight can be gained into the level of VAT risks with minimal human effort needed.

The advantages of statistical sampling

Statistical sampling has the added benefit of allowing the determination of the exact amount of a tax assessment.

A sample is not solely relevant for due diligence of the purchaser. Also the selling party can benefit from sampling with regard to preparatory work for a prospective takeover. When a statistical sample is drawn and the results are acceptable, the conclusions can be proactively taken into a data room. This can serve as extra evidence of implementation and maintenance of an effective control framework.

Moreover, in the Netherlands the possibility exits to align the results of the findings with the Tax Authorities, which provides more certainty regarding the adopted tax position. All this can positively contribute to the sales negotiations, including the amount of guarantees and/or discounts that are to be provided.

For the tax function, statistical sampling is an efficient and effective way to test the effectiveness of its Tax Control Framework. The results could be used to get indirect taxes higher on the priority list, since managing of material risks that are quantified fall within the KPIs of senior management.

Our approach

In our working method, we use the same parameters as the Dutch tax authority during a tax audit.

Delivery
The client provides data files following the instructions of the KEY Group
Sampling
The KEY Group conducts the sampling using audit software. The client is instructed to gather the selected (physical) invoices, declarations, receipts or other documents
Assessment
The KEY Group evaluates the delivered material and determines the correctness of the VAT entries
Quantify
In case of incorrect VAT entries and errors, we calculate the potential VAT assessment
Remediation
The KEY Group could provide support remediating findings
Via the 'single audit' method, it is possible to extend the scope to other tax areas such as corporate income tax and wage tax.

Core team

1. Ferry Geertman has a background in Applied Mathematics and has vast experience in data analysis, including the design and evaluation of statistical samples as part of internal and external control. In addition, Ferry has extensive experience in advising about and evaluating of (IT)- risk management and internal control for multinationals.
2. Hein Kloosterman used to be the chairman of the IT audit professional practice office and chairman of the statistical knowledge group of the Dutch Tax Authorities. Hein has extensive experience with integrated audits (single audits). Hein has been involved in the education in accountancy, both at Nyenrode and the Erasmus University.
3. Robbert Hoogeveen was the Indirect Tax System and Technology Leader at Shell International. Prior to that period, Hoogeveen worked as an IT Auditor for the Dutch Tax Authority for 11 years. Robbert is specialized in the design of solutions in which tax requirements, business processes, and system functionality are integrated, the implementation and the assessment of VAT functionality in SAP and/or tax engines, the design of VAT return processes, and the audit of indirect taxes by means of statistical sampling and data analysis.
4. Richard Cornelisse assists medium-sized and large companies in improving the efficiency and effectiveness of their Tax Function and Tax Control Framework. He has authored many articles on Global Indirect Tax Management.

Both Ferry and Hein are members of the Steering Committee Statistical Auditing. This steering group is connected to the Limperg Institute and aims to promote the proper (effective and efficient) use of statistical methods and techniques in auditing and related audits of financial statements and reports.