A sound tax audit defense
Tax authorities are besides optimizing traditional tax reporting systems increasingly implementing in addition electronic (almost) 'real-time' transaction reporting systems. It is expected that tax authorities due to technological innovations become increasingly better and faster in executing their tax audit.
Complementary to the existing and more traditional tax reporting in countries like Austria, France, Lithuania, Luxembourg, Norway, Portugal, Spain already (close) to real time data request have to be submitted and/or should be available on short notice when a tax audit is announced:
- How to get ready in time for SII Spain
- Italy - Quarterly informative report VAT invoices data
- SAF-T what is next ... Lithuania
- SAP and SAF-T Poland
- Norway introduces SAF-T to improve tax inspections
- Mandatory electronic audit files a worldwide trend
- Tax authorities peeking at your data
- Building blocks of a sound tax audit defense
What is next on the agenda?
- Italy - the VAT invoices data informative reports must be filed with the tax authorities on a six-monthly basis starting by September 16, 2017 for Invoices issued and purchases registered during the first half year 2017. From 2018 the deadlines will be on a quarterly basis. [SAP add-on solution ready]
- Hungary - real time invoicing is postponed to 1 July 2018. Companies need to have a solution implemented that is capable of real time data transfer by 1st of July 2018 at the latest. [SAP add-on solution is in development]
Aim: faster and better tax audits
It is however not clear how the tax authorities actually will analyse the data received. That might change soon as their strategy is to improve tax audits and combat VAT fraud.
Most realistic is that specific data analysis software will be developed or is already in development. Such data analysis can also show how transactions are processed and how IT systems are set up for VAT.
Data integrity is therefore becoming a greater risk factor when transactions are booked in any given country and are not properly evaluated for tax purposes.
It could be that the financial data in the system does not reflect the business model design, that any change of the business has not been properly managed or the submitted data contains VAT errors with a root cause incorrect VAT SAP configuration.
From a VAT perspective the tax authorities will most likely check the submitted data with the filed and signed VAT reporting. Does it actually reconcile?
VAT reporting and these data requests have both the same source and that is SAP itself. When the VAT treatment is not properly configured in SAP such data analysis will detect VAT errors.
The submitted data that the taxpayer leaves behind at the tax authorities - sometimes for many years - will be used not only for as said faster and better tax audits but also to argue the amount penalties to be imposed.
Penalties might increase when it becomes clear from that data that tax risks were more or less accepted for many years as an effective tax control framework was apparently not operational.
Risk Management: how can you defend yourself?
A VAT configuration review can be used as a counter measurement as part of sound tax audit defense. The outcome of such a configuration review should show where VAT errors in SAP occur.
The deliverable has to provide a clear understanding of how changes in the business model, master data or legislation had an impact on the SAP VAT configuration at hand.
When starting such an exercise the objective is to understand first the operational business model and the current SAP VAT set-up.
Best practice is to start therefore with an interview to get a good grip of that model and subsequently download based on our instructions the SAP VAT configuration and condition tables. More efficient might be to grant remote access to SAP to download these tables directly.
The deliverable should provide an overview of:
- Material VAT risks and SAP VAT weaknesses
- Quick wins to resolve, and
- Any remaining VAT issues how to remediate in the mid or long term
Examples of SAP VAT errors
- Ineffective design of VAT condition tables. This can result in “non-maintainable” condition tables and/or incorrect VAT results
- Ineffective use of available VAT sensitive data in orders. This can result in the standard VAT calculation generating incorrect results
- Incorrect derivation of VAT registration numbers for cross-border transactions caused by incorrect SAP configuration
- Not applying local reverse charge for foreign registered companies in some EU countries
- Incorrect configuration of the tax codes and sub-optimal use of standard SAP functionality and reporting options
- Blocked iDocs (electronic interface documents) because of errors in the OBCD design
VAT fraud - roadmap for an effective control framework
Attached a roadmap for your own internal use to properly manage VAT risks relating to VAT fraud in the supply chain.
Companies should create awareness and setup customized counterparty acceptance measures as well as using detection and prevention tools, preferably as part of an overall tax risk management approach.
The challenge is to cause as little disruption to daily business as possible and to embed reasonable and practical measures.
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.
Relevant chapters for further detail
- VAT Control Framework
- VAT Control Framework: how to get from A to B
- VAT fraud
- New EU study confirms billions lost in VAT gap
- European Commission - Action Plan on VAT
- Towards a definitive VAT system and fighting VAT fraud
- European Commission - VAT lost across the EU is estimated at €168 billion
- Quick reaction mechanism
- Fighting tax evasion and avoidance: a year of progress 2013
- What is tax avoidance?
- Tax Fraud: commission looks at how VAT collection and administrative cooperation can be improved
- Study to quantify and analyse the VAT gap in the EU-27 member states 2012
- OECD - Co-operative Tax Compliance - Building Better Tax Control Frameworks
- Elements of GST Control Framework - Singapore
- 'Governance', 'operation' and 'infrastructure'
- Tax position exceeds external auditor's materiality
- Spreadsheets and VAT Compliance
- Tax Authorities peeking at your data
- VAT throughput calculation
- Statistical sampling: quantification of tax risks
- Statistical sampling: ‘single audit’
- Data analysis
- Check EU and local invoicing rules
- SAP VAT Configuration review
- Audit defense strategy
- Migration to new jurisdictions
- Change of business models
- The Intersection of VAT and shared service centers
- M&A integration: managing the moving parts before, during, and after a transaction