Transactions in today’s business world
Different approach to business indirect tax advice Even as the world is shrinking, businesses and their growth strategies are becoming more complicated. A schematic drawing of the functions of a typical multinational today might look like a Rube Goldberg contraption—a complex of moving parts that must connect one to another for tax, regulatory, and reporting purposes.
And unlike the more contained structure for handling income-based taxes, responsibilities and key drivers for indirect taxes may be spread throughout the enterprise, residing not just in the tax department but in any of such diverse departments as finance, information technology, supply chain management and logistics, human resources, and beyond.
Added is the growing trend toward shared service centers (SSCs) that are responsible for operational processes including accounts payable and accounts receivable as well as other outsourced functions for tax, finance, and treasury. Tax determination and reporting for the entire operation may be governed by one or more enterprise resource planning systems, which in turn may be integrated to varying degrees, with or without the benefit of sophisticated technology tools.
All these factors make for a changing and increasingly sophisticated business environment that requires a different approach to business indirect tax advice.
The tax function should be able to understanding business activities/objectives including R&D and get aligned with other functions like legal, HR and IT. The tax objective is to mitigate risk and identifying opportunities to support company's supply chain.
Surveys are alarming
Managing risk is about making decisions at all levels of an organization, to limit the effect and likelihood of threats happening and to increase the effect and likelihood of opportunities Benchmarking exercises against trends in the indirect tax market can be done via global surveys that capture info on tax function, attitudes and priorities. These surveys are useful as they give insight into what others are facing or have faced and how you could improve yourself.
According to big4 surveys, the related control mechanisms are still inadequate. Not only can an error in the accounts lead to major additional tax assessments and substantial penalties, with amounts like these, it can be devastating for the reputation of a listed company.’
The global bench mark study on VAT / GST of KPMG among multinationals (clients and relations), inter alia, shows that most companies haven’t yet developed an effective VAT/GST approach.
‘The chance that the Tax Authorities will issue additional assessments and penalties in the near future because errors in indirect tax are detected, increases by the day.’
Tax Authorities, due to technological innovations, have become increasingly better in executing their tax audit. The probability that the Tax Authorities will issue additional assessments and penalties in the near future because errors in indirect tax are detected, increases by the day.’
Benchmarking yourself against your peers
Lack of central ownershipThe surveys of the Big4 are clear: we are talking about extremely large amounts of money that lack appropriate control, but because KPIs have never been developed for this particular purpose, the risks remain outside the CFO’s field of view.
Ownership is often lacking around indirect taxes as no one is actually responsible for the entire end-to-end process causing operational gaps most visible when (cross border) changes occur.
However, CFOs / Head of Tax apparently still focus more on direct tax than indirect tax. At multinational companies we’re easily talking about amounts of over 5 billion euros of indirect tax flowing through the books. Yet according to big4 surveys, the related control mechanisms are still inadequate. Not only can an error in the accounts lead to major additional tax assessments and substantial penalties, with amounts like these, it can be devastating for the reputation of a listed company.
Because of the structure of determination and control within organizations, indirect tax is dealt with completely differently than direct tax.
The Head of Tax is responsible for all taxes in the company, but it appears that the main focus is on direct tax. The Indirect Tax Function often reports to the Head of Tax, who, in turn, reports to the CFO. This is one of the reasons that hardly any KPIs are determined for VAT/GST and the CFO almost exclusively attends to direct tax regarding tax risks.
The most important reason is that the CFO has a lot on his plate. Indirect tax has still no priority. Due to economical circumstances, choices have to be made regarding budgets for internal control. And because indirect tax has traditionally received little attention, it will surely not get more in times of crisis.
That is a bit strange since I assume that the results of the benchmark studies are not only shared with clients, but especially within the organization itself, including colleagues in the audit department.
In terms of quality and providing integrated service, it can be expected that a position be taken each year concerning materiality and thus the necessity for further examination during the annual audit. It is therefore essential that financial auditors also read the surveys, acknowledge the risks and discuss them with the CFO.
The best outcome would be if the indirect tax would be controlled by default in audit or if a stand point would be taken not to do that.
Understaffed and no budget The deployment of expensive fiscal knowledge therefore usually remains limited to control of direct tax. The Indirect Tax Function is aware of the fact that it is understaffed and that budget is too limited to optimally execute its tasks, but they often don’t know how to change this and get it on the agenda of the CFO.
Shift from direct tax to indirect tax
VAT accounts for more than 20% of total tax revenue CFOs / Head of Tax apparently still focus more on direct tax than indirect tax. This is interesting as from a tax revenue perspective the current trend is a shift from direct tax to indirect tax by decreasing direct tax rates and increasing VAT/GST rates.
Global indirect taxes can amount to as much as 75% of the overall corporate tax burden, with VAT and sales/use tax outlays nearly 40% of total business tax expenditures — almost twice as much as corporate income tax.
More than 160 countries have a VAT regime. In the EU, between 2008 and 2013, the average EU standard rate increased from around 19.5% to more than 21%. The EU average VAT rate is now approximately 21.5%. VAT accounts for more than 20% of total tax revenue (OECD).
Netherlands: Tax revenue in 2015
Indirect tax revenue in NL was in 2015 EUR 74,9bn compared to Corporate Income Tax EUR 21,3bn. Wage tax and income tax was EUR 133,7bn.
Plug into new trends
Combat fraud a top priority
There is also large-scale VAT fraud within the European Community
200 billion euros lost A recent European Union study (2013) says the bloc's 28 member nations may be losing almost 200 billion euros ($267 billion) annually in value-added tax revenues due to tax evasion and a lack of enforcement. EU Tax Commissioner Algirdas Semeta said the amount of revenues slipping through the governments' nets is "unacceptable, particularly given the impact such sums could have in bolstering public finances."
The study for the European Commission, the bloc's executive arm, found member states lost an estimated 193 billion euros ($258 billion) in VAT revenues in 2011, or 1.5 percent of the EU's economic output.
Based on VAT collection figures from 2013, published 4 September 2015, the overall difference between the expected VAT revenue and the amount actually collected (the so-called "VAT Gap") did not improve on 2012. While 15 Member States saw an improvement in their figures, 11 Member States saw deterioration.
The total amount of VAT lost across the EU is estimated at €168 billion, according to the report. This equates to 15.2% of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies and miscalculation in 26 Member States.
Actively combating VAT fraud is a priority for the European commission and local governments. New measures are being taken such as the introduction of individual liability for not remitting VAT if the buyer knew or should have known that he was buying from a fraud. To prevent such a condition of liability, the ability to demonstrate that sufficient control measures have been taken is essential.
Roadmap of effective processes and controls to avoid liabilities with VAT fraud
Data analytics will allow tax authorities to
in an efficient and effective way identify compliance breaches
no more guessing the numbers
Effectively testing of VAT/GST control framework
Investments and exchange of information In the Netherlands, the tax authority often uses statistical sampling as a control method during a VAT audit. The severity of the additional tax bill is determined based on the number of errors found. Foreign tax authorities cooperate intensively in the Fiscalis program. The Fiscalis program will be continued under the name of Fiscus and has a budget of 770 million for the period between 2014 - 2020!
Knowledge in the area of risk management is shared actively between tax administration.
Data analysis is known to be used for rapid insight into exactly where the risks lie and what the quantitative impact is of these risks. In this way, the tax authority can perform its audit of the books in a more directed manner.
Compared with sampling, data analysis has the benefit of no longer missing a significant treatment error.
Data analysis is already used in a number of countries. It is expected to become the standard audit method in the near future.
See chapter: 'Tax Authorities Peeking At Your Data'
Tax authorities and e-audits are becoming the norm
Risk management and governance Tax authorities collect and analyze already indirect tax data (e.g. SAF-T for VAT). The focus is not only about timely and accurate VAT reporting but as well whether on high risk areas an effective tax control framework is in place. Tax risk management methods are assessed. The slide deck starts with a trend overview of the author and subsequently relevant tax survey findings were gathered that relate to these trends spotted. The complete overview is relevant from a priotization and tax strategy perspective.
E-audits starts at slide 15 of the PowerPoint.
Recruitment of IT skill set The Dutch tax authorities announced on May 19, 2015 that 5,000 of its 30,000 employees will lose their current job, while at the same time 1,500 specialized data analysts will be hired as tax returns will be automatically assessed via data analysis. This is not exceptional as in various European countries taxpayers are already obliged to submit electronic audit files to the tax authorities.
The world how we know it is changing
A pending reorganization at the Dutch tax authority Belastingdienst will likely result in the elimination of 4,000 to 5,000 jobs. The staff cuts are due to improvements to computer systems that reduced the need for many spot checks done by workers, reports broadcaster NOS.
Improvements to information technology infrastructure will lead to better data analysis, and thus more accurate tax assessments, sources told NOS. This should not only reduce the amount of tax evasion, but also increase the amount of tax revenue received by anywhere from hundreds of millions to billions of euros every year.
This trend will continue due to the availability of data analysis software and the increased focus on VAT compliance by tax administrations. It is also expected that tax authorities will request more and more data from the taxpayers.
Both data analysis and sampling can be used by multinationals as a pre-audit to test the functioning of the tax control framework. There is, namely, an expectation that tax authorities will start testing the tax control framework for its adequate functioning in the future.
In the Netherlands (Horizontal Monitoring) and UK (Senior Accounting Officer sign-off) are examples of such initiatives (see for detail appendix of this chapter).
See chapter: a roadmap to a sound Audit Defense strategy
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 a partner in EY where I led the indirect tax performance team for Netherlands and Belgium. Currently he is a senior managing director of Key Group.
Richard has over 20 years’ experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service centre migration, and post merger integration work. Richard is also somewhat of a mentor, giving back to the profession. If you are interested in conversation and discussion, please feel free to contact him.