Page 5 of 7: A real-world example
A multinational company based in France decided to centralize and transfer functions to Switzerland. Not only did they neglect to document the processes and thoroughly analyze the VAT impact, they also lost staff familiar with the functions.
As a result, the company also lost access to the historical data for preparing VAT returns and had employees unfamiliar with the methods for preparing the returns or making manual adjustments.
When the VAT audit was announced, a major panic ensued, and the SSC staff had to work around the clock to obtain more insight into the original processes and collect information to reconstruct the VAT returns.
The company was at risk of the full VAT amount and penalties of up to 100% of the VAT owed. In short, the potential benefits of the SSC migration were largely overshadowed by the additional time and money spent on this emergency response and the disruption to orderly operations.
As MNCs move increasingly to the shared service model to meet their varied objectives, the responsibility for indirect taxes migrates with them, especially in the case of VAT and goods and services tax (GST). Also, complexity in managing these taxes increases exponentially when cross-border activities are involved, especially in today’s VAT environment, where controls are often external, processes are manual, and procedures are not documented.
One of the most common side effects of a migration that cannot be fully realized is invoicing. For example, many payable invoices are not correctly coded, so VAT is not deducted (in time).
One critical way to ensure that the company reaps the benefits is to anticipate possible problems at the planning stage before they arise in practice. A change in business model can create not only VAT risks but also commercial risks, such as logistics problems in getting goods into a country and delays and hold-ups of shipments, resulting in disruption of daily business.
There are a couple of root cause examples: the company forgot to register for VAT or procurement forgot to agree with the supplier who was importing the goods.