Page 1 of 7
Measuring risks is often based on the balance between output and input VAT, not the total VAT/GST throughput (also called ‘VAT under management’).
The findings listed above are not surprising, as often the question is asked what risk management even has to do with VAT/GST. The reasoning behind this question is that VAT/GST is typically cost-neutral for most businesses: “a cash in and cash out” scenario. However, every indirect tax function knows that deductible input VAT and liable output VAT must be managed separately to avoid substantial VAT assessments, penalties, and interest payments.
It is a risky business to monitor only the balance between output VAT and input VAT. Neutrality can only be achieved – better is the word ‘earned’ – if specific formal and material requirements are met. It starts with the people in the organization becoming aware of the amounts at stake and the risks of something going wrong.
Benchmark studies repeatedly create the same picture: too little control and too few KPIs. When a mistake is made in the control, it usually concerns large amounts of money.
Due to technological innovations, tax authorities have become increasingly better at executing their tax audits. The probability that the tax authorities will issue additional assessments and penalties soon increases by the day because errors in indirect tax are being detected. Tax authorities collect and analyze indirect tax data (e.g., SAF-T and e-invoicing for VAT).
The focus is on timely and accurate VAT reporting and whether an effective tax control framework exists in high-risk areas. Tax risk management methods are assessed.
Due to regulations, a tax trend is that companies will have to become transparent about their attitude to tax risk, appetite, and approach to their relationship with tax authorities. It will cover the governance framework describing how a business makes decisions on taxation, including information on the systems and controls in place to manage tax risk.
It is therefore essential that your (automated) tax control framework be documented and that a logbook—risk register—is kept of all identified inconsistencies. This logbook should always give the internal tax function insight into the areas for attention. Tax managers can set the right priorities and take measures on time.