Details: Written by Richard Cornelisse; Parent Category: Content table; Category: Building Blocks of a VAT Control Framework; Published: 27 July 2017; Hits: 6969

A sound tax audit defense

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:

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.

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Written by Richard Cornelisse
Richard LinkedIn

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

Tax Risk Management - submitting tax relevant data to the tax authorities