VAT Control Framework: Transitioning from Concept to Implementation - Establishing Adequate Control Mechanisms

Page 2 of 8: Establishing Adequate Control Mechanisms

Establishing Adequate Control Mechanisms

To effectively manage risks, a comprehensive VAT Control Framework must align with the organization’s Business Control Framework and overall Tax Control Framework. From a governance perspective, the indirect tax department needs a clearly defined position within the organization. It should be equipped with the necessary tools—such as adequate budget and resources—to achieve its strategic objectives.

Accountability and the Value of a Tax Policy

Accountability should always lie with the process owner responsible for specific business processes. The published tax policy must foster awareness of tax risks and clarify decision-making authority—specifically, "who can decide what and when" from a tax perspective. Consequently, it is the responsibility of the head of each corporate department to ensure that all team members read, understand, and effectively implement this tax policy.

The indirect tax department faces significant challenges in the absence of a formally documented tax policy, tax objectives, or planning processes. Without clear overall tax guidance, the company lacks essential "dos and don'ts." It is imperative for senior management to endorse and publish agreed-upon objectives and risk tolerance levels for tax planning and risk management—essentially establishing the company’s "tax rules of the house."

In practice, the initial step toward an effective tax function often involves drafting a tax policy that outlines these "tax rules of the house" and facilitates decision-making regarding new tax regulations. Execution of these rules should be seen as a realistic goal, with compliance monitored regularly, and performance assessed.

Without a tax policy in place, the impetus for change relies heavily on the initiative of VAT employees, which often leads to a fragmented approach. If not all stakeholders within the company are convinced of the need for amendments, this can hinder the establishment of standardized VAT controls and the implementation of "best practice" approaches. More critically, an organization becomes overly reliant on individuals, creating increased risks if key staff leave or are reassigned.

Such risks can be mitigated when the tax department’s strategy, objectives, and risk tolerance are well understood across the organization and enforced as mandatory rules. A robust tax policy can guide employee behavior towards achieving overall tax function objectives. This is illustrated in the following operational framework:

• Governance: How do we decide to introduce new rules?
• Design: How do we determine the necessary rules?
• Existence: How do we ensure the rules are embedded within the organization?
• Operation: How do we confirm that our rules are effectively executed?

Under these circumstances, employees are responsible for adhering to these internal tax rules. The tax department, internal audit, or risk management can more easily assess whether tax rules are being properly executed by posing a straightforward periodic control question: "Have you operated in accordance with the tax policy?"

This process transcends mere paperwork, as it ensures that tax policies (both overall and specific to VAT) are actively enforced, with designated individuals held accountable. This proactive framework significantly streamlines the remediation of VAT risks through preventive or detective testing of tax controls. Furthermore, the indirect tax department should receive immediate attention when a process owner fails to meet their obligations, with collective support from the tax department to close any identified gaps as quickly as possible.