A relevant indirect tax strategy—correctly implemented—will allow the new business to function effectively from go-live, from both a tax and commercial perspective, so that it can move inventory, generate sales and invoices, face fewer disputes with non-paying customers, remain tax compliant, and integrate the business on time and on budget.
With indirect taxes intertwining through the day- to-day operations of a company—raising sales invoices, moving inventory, paying suppliers, collecting cash—indirect tax risk can have a distinct and domino-like effect on the commerciality of an organization. The impact can increase exponentially in the event of for example a merger or acquisition. But do these taxes and tax planning opportunities get the attention they need, especially in light of increasingly complicated and globalized business models?
Transactions in today’s business world
A 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.
'As Is' situation to benchmark at
Does it fit or not?
Indirect tax function still a reactive one? A common factor among organizations with an increased risk profile is often the absence of a clear strategy to manage both the technical and operational risk issues associated with indirect taxes. Most major multinationals include one or more VAT specialists within the tax function.
However, the way in which organizations seek to utilize this specialism tends to mirror the traditional consulting model: the specialist adviser holds a central position within the tax function, responding to individual queries raised by logistics managers, accounting staff and local business units.
The role is often a reactive one, relying on the ability of colleagues with an operational or local market focus to identify potential areas of indirect tax risk and refer them to the tax department for specialist review.
As a consequence, central visibility of the VAT compliance issues affecting local country operations tends to be patchy at best, with little or no continuity in the management of local VAT risk across the enterprise.
There is no ‘one-size-fits-all’ approach to the design and implementation of an operational indirect tax strategy. However, the goal should be to create an indirect tax function that is fit for purpose and fully aligned with the operational priorities and risk appetite of the business.
Is this realistic? Through the design and implementation of effective controls, the objective of the internal indirect tax function should be to assume overall strategic responsibility for the operational integrity of VAT-critical systems and processes.
Unless there are measures in place to capture and control the end-to-end VAT accounting process, the result will be an incomplete risk management strategy that is essentially unreliable. By contrast, an improved tax risk management model should involve periodic testing of controls to guarantee the effectiveness of VAT-critical processes.
By redefining the indirect tax strategy, giving it an operational as well as a technical focus, and aligning the strategy to the key business objectives of transactional integrity and financial reporting accuracy, the in-house VAT function can make a valuable contribution to the organization as a whole.
From a big 4 survey follows that only 25 percent of companies say their company has specifics indirect tax metrics. Most of these measures relate to basic compliance, rather than activities that could improve the bottom line and drive cash ow improvement. From that outcome I conclude that a strategic indirect tax plan with SMART individual objectives set have not been developed or properly rolled out.
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.
Big4 survey findings 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.’
Survey tax findings
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.
In response to increased scrutiny from senior management, tax administration and other regulators, many businesses are now formally documenting their indirect tax strategy and implementing formal processes to evaluate and approve planning ideas.
"A strategy may be defined as a plan or method for obtaining some goal or result. The responsibility of management to identify the key processes of their organization, measure their effectiveness and efficiency, and initiate improvement of the worst performing processes."
For leading companies, a tax strategy is a dynamic framework that is shaped by internal and external drivers. An indirect tax strategy should cover all business locations and should be aligned to the overall business strategy.
Potential benefits of a documented indirect tax strategy include:
Potential benefits of a documented indirect tax strategy
Obtaining clarity around the business' indirect tax risk appetite, which should facilitate the identification of planning opportunities appropriate to the business' wider commercial objectives
Providing the business with a consistent and efficient review and evaluation process over tax-related matters
Raising the profile of indirect tax with key business and finance stakeholders
Monitoring and strengthening governance procedures in decentralized and overseas jurisdictions
Identifying improvements in indirect tax-related systems, processes and controls
Identifying areas where additional indirect tax resources or funding may be required
The indirect tax preparation and roll out process may involve
Initial scoping to confirm the relevant stakeholders and to clarify the objectives of the project. At this stage the Board’s expectations on indirect tax performance and indirect tax risk appetite should be considered
Workshop attended by indirect tax and key business and finance stakeholders. Workshop discussions will include overall business strategy, indirect tax risk appetite, stakeholder requirements from Tax, indirect tax function objectives, and planning evaluation and review processes.
Indirect tax strategy document to be drafted, reviewed, agreed with key stakeholders and approved by the Board
Roll-out of the strategy to entire tax and the wider business to ensure a shared understanding of indirect tax risk appetite and acceptable planning. The roll-out may include workshops and conference calls with Tax, Finance and the business.
At this stage the most appropriate formats for the strategy document should also be considered. These may include a strategy document stored on the Intranet, an interactive decision tree to evaluate planning, hard copy tax guidance manuals etc. To move the (indirect) tax strategy from paper into practice the roll-out may also include organizational changes, and improvements to processes and systems.
|Ongoing review and update of indirect tax strategy and documentation, and ongoing indirect tax strategy effectiveness reviews.|
Introduction and overview
The strategy and the group’s overall approach to indirect tax compliance, risk management and indirect tax planning should be clearly documented, signed-off my senior management and regularly reviewed to ensure that consistent minimum standards are defined and implemented.
The approach should also implement an effective communication plan, as part of the change management process, to ensure all impacted entities understand what is required of them and clarify their commitment to the strategy.
Group business strategy and indirect tax objectives
Document and challenge the overall indirect tax strategy of the group to ensure there is clear linkage to the business strategy and how the indirect tax strategy contributes value to the business’s overall objectives.
See chapters: Setting the objectives of the tax function, How to realize objectives via best practice approaches, tools and methodology, How to increase indirect tax function effectiveness, Company's 'governance', 'operation' and 'infrastructure', Tax trends and Templates for VAT strategy plan
Risk management - strategic objectives
Define the indirect tax risk management framework of the group covering processes both within and outside the tax function. This includes the development and maintenance of a group indirect tax risk register, and the review & oversight of processes of decentralized and overseas locations.
Define the group’s overall indirect tax risk tolerance parameters which should be applied to all significant transactions.
See chapters: Why is management necessary and what needs to be done?, Indirect tax risks and rewards, zero measurement, Incorrect VAT numbers, VAT determination of incoming invoices, reputational risks, Tax risk management and governance review guide and tax trends
Governance and performance
Strategy oversight and sponsorship
Define the principles and policies on which the group’s indirect tax processes are based. It should also include the process on how the strategy will be approved by the Board and communicated to the business.
See chapters: Achieving stakeholder satisfaction and Writing a business case, problem statement and calculate Return on Investment
Management reporting of indirect tax risk
Describe the reporting lines and its frequency from the operating teams to senior management e.g. indirect tax to Head of Tax, the CFO and Board/Audit Committee. Reporting should cover key indirect tax compliance and the reporting of issues globally including significant transactions and tax administration audits.
Define the reporting processes from overseas and decentralized locations to the group indirect tax function relating to compliance, transactions, audits and exposures.
Indirect tax objectives and key performance indicators
Define the KPIs for the indirect tax function to show indirect tax performance Indirect tax function KPIs should include performance measures on people, efficiency, growth and quality.
Relationship with tax administration
Describe the requirements for dealing with the external tax regime, including who has authority to negotiate with the tax authorities in relation to potential audits and penalties.
See chapters: Audit defense, Tax authorities peeking at your data, VAT Fraud, Developing a common framework for disclosing tax information and Example of a public Fiscal Transparency statement
People and organization
Roles and responsibilities and reporting lines
Outline the indirect tax related roles and responsibilities (including review and reporting lines) of the Group including, but not limited to, the following stakeholders: the Board, Chief Financial Officer, Head of Tax, Business Units, Finance team, Tax Function, Local indirect tax teams, etc.
Define the skills and roles that are required to deal with indirect tax matters in each location. Document career development, role rotation and succession planning processes.
See chapter: Structure the tax function
Describe the indirect tax training requirements for staff, and the awareness training to be provided by indirect tax to the finance and business teams and other stakeholders (e.g. procurement, IT, logistics, internal audit, HR, legal).
See chapter: Training
External tax advisors
Provide guidelines on the use of external advisors (i.e. for industry insights, technical updates, and input and to cover skills and resource shortages) and the authority to approve the use of external advisors in various jurisdictions.
Alignment with business units
Describe the responsibilities, quality levels, controls and reporting between indirect tax and the business units and ensure this is properly represented in Service Level Agreements.
Process and controls
Indirect tax planning and significant business transactions
This should cover non-routine or significant transactions and the requirement for review & approval by the indirect tax function prior to execution of the transactions. It may also be appropriate to include more detailed guidelines around the type of indirect tax planning and whether this is allowed according the business’s tax policy.
These guidelines should be approved by senior management and may include issues such as the likelihood of tax administration to challenge and litigate the potential change to the group’s indirect tax risk profile and key reputational risk issues.
This may also cover documented planning evaluation and acceptance criteria, planning implementation review processes and an ongoing planning review and monitoring processes. Describe the requirements for other stakeholders (e.g. finance, procurement, IT, logistics, internal audit, HR, legal) to seek Indirect Tax input early in the process.
See chapters: Migration to new jurisdictions, Change of a company's business model, VAT and shared service centers, and M&A
Indirect tax compliance and financial reporting
Describe the requirements of the group related to indirect tax compliance and financial reporting (i.e. data gathering and review, and preparation and review of indirect tax returns and provisions) across all jurisdictions. It may also be appropriate to document specific responsibilities, controls and systems in relation to each process.
See chapters: Reporting functionality for VAT, EC sales lists and Intrastat and SAP, Tax position exceeds external auditor's materiality
Internal auditing of indirect tax
Describe the internal audit program, including any processes, policies and tools used, for indirect tax focusing on the testing of effectiveness of internal controls for key risk areas.
See chapters: VAT control framework and Elements of GST Control Framework - Singapore
Technology and data
Finance and business systems and data
Describe the finance and business systems used and the requirement for indirect tax training and input in relation to accounting and business systems (e.g. review of indirect tax set-up of accounting systems and indirect tax involvement in business system upgrades to ensure global consistency in their application).
Indirect tax systems
Describe the systems used by the indirect tax function including how they control the integrity of data used for indirect tax filings.
Workflow information and management
Document in detail the indirect tax operating processes and procedures including workflow and information management, resourcing and technology requirements.
Chapter: Spreadsheets and VAT Compliance
Reporting and workpapers
Define the detailed preparation and retention guidelines for both paper and electronic documents. It may be appropriate to include guidelines on mandatory archiving.
See chapters: ERP systems and tax engines, When is standard SAP (in)sufficient?, Everything you always wanted to know about VAT in SAP * but were not aware to ask, SAP Implementation and Tax engines questions to ask before you commit
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 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.