Dutch Financial Magazine 29 November 2007
Companies are running considerable risks when processing their VAT liabilities in shared service centers (SSC). Much expertise in the area of VAT tends to be lost when such service centers are set up and companies are running a serious risk of facing assessments, penalties and interest charges.
In the Netherlands, penalties can be as high as 25% to 100% of the original VAT imposed in the assessment. In other countries, penalties are even higher.
Chaotic VAT management is the result of not taking account of the consequences of centralization, particularly when merged departments are transferred to low-wage countries. The true experts, such as those with a thorough knowledge of VAT, are not usually transferred with the departments and leave the enterprise, often taking their specific know-how with them. The reason departments are clustered in SSCs is to save costs.
For (large) organizations, merging activities eliminates duplication and redundancy. Moreover, low-cost labor in countries such as India and Poland – which are popular locations for setting up SSCs – represents an additional saving, often enhanced by local subsidies.
As someone with wide experience in VAT consultancy, I know that decisions to establish an SSC rarely, if ever, consider the implications for specific VAT regulations. This is why, in practice, so many things go wrong in the area of VAT. The problems often have to be resolved without the support of those individuals with the relevant expertise.
The VAT experts have left the organization and the processes have either not been or inadequately described. Then all hell breaks loose when the tax inspector pays a visit. VAT regulations differ per country and are therefore highly specific. VAT regulations in Europe show very little harmony and a great deal of divergence.
Dealing with the VAT matters of a multinational’s various branches constitutes a considerable challenge for an expert like me, much more so for an Indian or Polish SSC employee. While many (administrative) processes can be automated, many VAT decisions require individual attention, something that is impossible without the relevant expertise and watertight procedures.
Any organization clustering services in an SSC must pay particular attention to VAT, which is and remains a local tax levy. This means local expertise must be on hand when decisions are taken and changes in tax regulations are incorporated into operations.
