Not only Finance but also Tax needs access to data that shows how transactions are processed and how IT systems are set up. Data integrity is an operational risk factor when transactions are booked in any given country and are not properly evaluated for tax purposes.
It could also be that the financial data in the system does not reflect the business model design or that change is not properly managed. Besides that in the current 'as is' it is often a challenge to get access to the relevant tax data that must be reported to regulators, investors and tax authorities in every business unit and country in which a company operates.
Effectiveness and efficiency of operations, the reliability of tax reporting, and compliance with applicable laws and regulation
For a tax function to produce timely deliverables and satisfying the requirements of the board and other stakeholders, the effectiveness of tax department’s 'governance', 'operation' and 'infrastructure' are essential enablers.
This article sets out the business challenges and areas of improvement for these enablers.
Governance - challenges and improvements
The tax function will face challenges when no formal documented strategy, objectives or planning exists to direct the tax function or tax department or when senior management does not have written and agreed-upon objectives and risk tolerance levels in formulating tax planning and strategies.
Without a proper tax policy it depends on your personal influence within your organization to kick-start a change. Often that results in a fragmented approach, as not all stakeholders will be convinced. The outcome is that this will negatively impact defining standardized and global controls.
This will improve if the tax department’s strategy, objectives and risk tolerance is understood by everybody in the tax department and throughout the organization and signed off by senior management.
The indirect tax department objectives and strategies should also be aligned with the company's business objectives and overall tax strategy as a whole. When the tax department does not have direct relationships with key stakeholders, including CFO, audit committee, internal audit and tax authorities, efforts should be made on creating and maintaining productive and proactive tax stakeholder relationships.
When a tax risk policy, including definition of risk tolerance levels associated with tax planning does not exist, this should be set up as this will support effective management of tax risk when allocating resources. Important is as well that the organizational structure meets the tax department requirements. That means that it should be mutually aligned and periodically updated between the indirect tax department and the corporate finance function, procurement, legal, IT, business and other stakeholders and is designed to support stakeholder needs.
A split should exist of roles, functions and responsibilities between tax department and the business are well documented in manuals, procedures and working instructions. This documentation should be available on-line for all stakeholders in order to optimize that the tax department professionals are involved in time to support multidisciplinary teams in projects and programs and that the added value of the tax department is also clear for the business.
The tax department should be up to date with the latest developments in the organization to be able to perform its advisory role to the business. This means there should be a well-equipped learning & development environment to keep tax staff up to date with latest developments.
External representation and lobbying to influence policies on various levels of government (local, national and European scale) has to be considered as it builds and maintains relations with government and other industry stakeholders and will support indirect tax planning.
Operational - challenges and improvements
In practice we often see that no (or few) performance targets are set or monitored resulting issues remaining unresolved as no one feels responsible. From a best practice perspective, we expect that targets are set and technology enabled KPIs are in place to enable frequent monitoring (formal and informal) and that these targets also relate to the interaction between tax and the business and other stakeholders.
Often we see that clear procedures for critical VAT processes do not exist and consistent evaluation criteria for VAT planning is lacking. Critical VAT information utilized for compliance, financial reporting, and other tax activities cannot be generated easily during the year. Such critical information should be available and generated frequently throughout the year to provide objective evidence and supportive arguments for business and tax decisions.
There should be a systematic approach to tax planning and evaluation criteria should exist for example how external advisers should be used. For example when corporate entities obtain advice and assistance from external advisors. The policy could be that for example the written advice and assistance has to be in the English language and in case of material tax items the tax department is informed prior to consulting such advisors.
Tax risk management should continually influence operating decisions and strategic direction. An uniform tax risk process for a structured and consistent evaluation has to be implemented to make that happen. Tax risk management relates to potential events, which might have an adverse effect on the goals of a company. This therefore also includes missed opportunities (i.e. savings).
The resources and budget is aligned with the outcome of the tax risk assessment. Due to limited resources time should be spent on high-risk areas. Indirect tax department identifies opportunities to optimize tax planning across all jurisdictions, business units and taxes
Upon non routine significant business transactions such as M&A transactions, all indirect tax liabilities are identified prior to the transaction or implementation. All regulatory, legal and enterprise record retention requirements are considered and all relevant indirect tax risks are taken into consideration (in consultation with indirect tax)
The indirect tax department risk management strategy differentiates between strategic, operational, and financial and compliance risks and contains detailed action plans for managing these risks. That means as well that the tax department has to adopt an efficient internal control framework that is fully implemented for all tax functions across the globe and reporting on internal controls is part of its performance indicators.
Infrastructure - challenges and improvements
It is important that hard copies and electronic corporate documents, tax files, and tax records are organized and retained and accessible and for example not stored on employees’ hard drives. Besides easily accessible it should be backed up under company’s IT policy. Tax audit adjustments including settlements are documented and archived for future use.
When no documentation exists for critical tax processes tax authorities or corporate record retention requirements have not been considered it is important to set up a process for documentation. This process should be reviewed frequently and has to be updated for changes in operating environment.
Effectiveness of the tax department could be improved when the tax department has adequate supporting technology and tools and/or systems that don not need significant manual input. Tools and technologies are used in an integrated manner and tax data is only collected once and reused. The indirect tax department formally engages with key stakeholders on a regular basis to exchange knowledge and such contribution are supported by technology.
ERP and other systems are properly configured for VAT to support compliance, financial reporting and planning and there is dedicated IT support for tax. The tax department has access to critical systems and applications and the right VAT configuration is implemented and maintained accordingly moving forward.
A substantial improvement is available if technology tools and systems to increase effectiveness and reduce risks could replace spreadsheets. Systems and processes should also be in place to maintain critical data needed for tax and strategic decisions on a periodical basis considering reporting, compliance, auditing and planning needs.
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.