The ever-changing landscape for large corporate taxpayers has elevated the expectations for managing indirect tax obligations. Research indicates that tax authorities worldwide are increasingly vigilant, seeking to enhance tax remittances on behalf of often heavily indebted governments.
The days of merely submitting VAT or excise returns and filing them away until the next month are long gone. Tax authorities have become more aggressive and inquisitive, demanding more from taxpayers. This includes scrutinizing tax numbers, conducting ratio analyses, and performing contemporaneous risk reviews, either before or after tax return submission.
These developments present new challenges for the Head of Tax and the CFO. The increased activity surrounding indirect taxes generally means spending more time on audit issues, which draws attention away from strategic planning and tax optimization. This can result in a greater demand for resources and an increase in external advisory costs.
A potential solution is the 'VAT/GST Control Framework,' which is increasingly becoming an essential tool for large corporations. This framework enables companies to engage proactively with tax authorities. Evolving from the Sarbanes-Oxley Act (SOX) requirements, today’s VAT/GST Control Framework offers numerous benefits to tax and finance functions with relatively low maintenance.
This information may particularly appeal to cost-conscious multinational corporate functions seeking real value. We will examine the key success factors for implementing an effective VAT/GST Control Framework.
A significant challenge is demonstrating increased control of tax risks to the audit committee; however, this can be addressed through careful planning and tailored responses to individual circumstances. In practice, this is accomplished by targeting control gaps and implementing detective and preventive controls, which are formalized in monthly or quarterly sign-off documents. For CFOs and Heads of Control, this process provides a high degree of assurance regarding tax and general ledger numbers and facilitates knowledge transfer to the internal audit team.
The accuracy of tax data is crucial for minimizing the likelihood of tax errors and misstatements. An effective Indirect Tax Control Framework ensures that both the Head of Tax and the CFO sign off on tax remittances, providing an additional layer of certainty after confirming that key checks have been performed before submitting the tax return. The framework also clarifies the responsibilities of the tax and finance functions, avoiding interpretative issues.
The key benefits of the Tax and Finance functions include reducing tax authority risk ratings and consistently assessing tax risk across multiple jurisdictions where the corporation operates. Ultimately, this improves the tax and finance functions' profile and efficiency with internal and external stakeholders.
In the article on the VAT Control Framework, we provided narrative examples related to the management of important indirect tax risk areas. Below, we offer further explanations along with flow charts that outline the roles and responsibilities of the various departments involved.
Please note: These flow charts are just examples and should be customized to fit the specific circumstances of your company.
Master Data controls are essential and fully justify the need for SOX controls, as they influence the tax decision-making process. The solution is to implement formal SOX controls that allow the Indirect Tax Manager to contribute to the design and periodic review of the flowcharts used in Master Data Management (MDM).
Review by exception to invoices AP is also common and generally materiality is used to filter out the volume.
Written by Ferry Geertman
