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.
'As Is' situation to benchmark at
Does it fit or not?
Still a reactive indirect tax function? 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.
A further limitation on the effectiveness of the in-house VAT adviser is that he or she tends to focus on technical questions of strict VAT liability, rather than on the operational issues affecting the integrity of transactional reporting. An increasing number of in-house VAT managers however are facing the challenge of creating an indirect tax strategy that is more closely aligned with the business objectives of operational integrity.
Within most organizations there is no single person or department responsible for the end-to-end VAT accounting process. The finance department owns often overall responsibility for the sales and purchase processes, but the application architecture underpinning those processes is configured and maintained by the IT department.
The control environment surrounding manual intervention in the accounts payable and receivable processes remains the responsibility of the finance department. VAT-critical processes such as PO creation, invoice verification and AP tax code selection are subject to limited or inappropriate controls, while the attention of the internal VAT function remains focused on the provision of ad hoc advisory support to local business units.
Despite the potential impact of VAT errors on the audited accounts, the financial reporting responsibility of the in-house VAT specialist tends to be limited to VAT returns and associated filings (eg. EC Sales List, Annual Sales Listings, Intrastat).
What has changed over the years?
For a long time, the indirect tax profession has been an individual sport. Due to changes in the tax market and in client needs, the tax profession has evolved into more of a team sport.
The changing world from an adviser's perspective
What is different nowadays? When I started around 20 years ago, indirect tax specialists were scarce, there were hardly any in-house indirect tax functions and content, which nowadays is freely available on the Internet, could still be sold.
"In the land of the blind the one-eyed man is king"
An adviser could work more reactively. A comparison can be made with a doctor who has patients in the waiting room, can diagnose the patients, can find the problem and can then prescribe some pills to remedy the situation. We had full access to all kinds of VAT planning schemes, and the tax profession—both the buyer as the seller—was much more product-focused.
As advisers, we were targeting new patients. Many consultancy firms companies sold VAT content-based knowhow. In the past, that system was closed. Only a few organizations had access to specific content - often gathered via their worldwide network of people. At that time and under those circumstances, the content still represented significant added value for the client and therefore market value.
The system evolved from closed to open due to internet innovations such as search engines, and more people started to contribute and share content. Information can be posted, forwarded, shared and communicated. This is all free of charge: all kinds of content can be searched, found quickly and is available 24/7 as long as you have internet access.
Let’s do an exercise. Look back 5-10 years ago and think about the basic content that clients were willing to pay for and that content providers are now providing free of charge. Use Google’s search engine and enter that same question.
What do you see?
Google probably already has the answer to your question.
The consequence is that prices are going down and that the life cycle for this kind of paid product is at an end. Everybody can search and find it himself. The current impact of Google and Wikipedia is already huge since, from a pricing perspective, much content has become less valuable or even worthless.
When I started, the (starting) salaries were much lower, and that meant lower charge-out rates. Increased salary is one of the reasons why tax professionals now must grow up more quickly. A higher salary means a higher charge-out rate, and from the client’s perspective, a higher bill means higher expectations.
We must deliver higher quality and higher practicality; that is just a fact of life.
The changing world from the client perspective
In addition to the introduction of anti-abuse law, clients themselves (and their needs) have also changed. To continue our analogy of the doctor, the patients have become doctors themselves by setting up their own in-house indirect tax functions.
Thanks to tax industry networks and social media, tax knowledge is shared and communicated within the industry. The result is that the service and the ability of an external adviser have had to evolve as well. Changing client needs have also resulted from factors, including:
- the use of tax technology
- scandals such as the global credit crisis and Enron
- increased tax authority scrutiny (e.g. standard audit file for tax purposes)
- rapidly evolving global tax landscape such as global tax legislation and regulation resulting in tax transparency (e.g Country-by-Country Reporting / OECD’s Base Erosion and Profit Shifting / Accounting Directive), new tax norms, new reporting requirements, new key performance indicators
- automatic Exchange of Information in Tax Matters, etc.
See chapters: Tax Transparency and Enhanced Relationships
Discussions regarding accountability put both the external adviser and the in-house indirect tax function in a more proactive mode.
Add new talent, skills and competencies
Ability to connect the dots Because of these changes, technical tax expertise has become more a basic skill from the adviser’s perspective. Data analytics, IT and accounting capabilities as well the soft skills of the adviser are—and will become—the key differentiator. Due to all of the technological developments, this is already part of our present and future.
Technical tax advice must be implemented in systems, processes and controls. Instructions must be given to people who are outside of the tax function. Data has to be analyzed in an efficient and effective manner not only to measure the past but as well to predict the future. Alignment with the business is essential for the tax function to plan in a timely manner and to avoid future firefighting.
AdaptabilityIn order to challenge and support a client in his mission, an adviser should possess—in addition to excellent technical skills—a clear understanding of communication and collaboration, analytical/critical thinking, project management, change management, information technology, negotiation and leadership. All of these skills are needed in order to be successful.
The indirect tax profession has been an individual sport for a very long time. The profession is still about the individual’s technical tax strength and personal practical experience, and the future generation of advisors are often trained by that individual.
Get the right people in the right roles
It is my opinion that the indirect tax professional of the future will need to take a different approach.
It is simply no longer possible to excel at everything regarding global indirect tax management. Thus, some people can excel in certain areas of indirect tax, and the overall outcome of the team’s effort will make the real difference from a quality standard perspective.
In other words: "One man's weakness, is another man strength, so let's team up" - Richard Cornelisse
Get resources, systems, and skill sets in place to pursue priorities set
The right tax talent and priorities Benchmarking provides objective evidence. It can show whether or not you have achieved your objective set such as a 'mature' tax function' or make visible what needs to be done to make that happen. It might provide the extra arguments to realize change and get buy-in.
Gap between current capabilities and future need
Are enough resources available to operate effectively? 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. The deployment of expensive fiscal knowledge therefore usually remains limited to control of direct tax.’
The indirect tax department needs to consist of the right number of tax personnel and the right level of skills and capabilities to be successful.
Skills required and buy-in needed According to survey findings the size of the indirect tax team size is often (too) small. Direct tax has not only more staff but are often better positioned. If the Head of Tax and the indirect tax function would figure out how to cooperate more efficiently, they will also bring indirect tax more into the spotlight of the CFO. In order to realize the mission statement in the tittle of this paragraph the following also needs to be assessed to test whether set objectives can be actually realized.
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The skill set is historically focused on technical tax laws
Communicator, strategist and business leader
Invest in the right skills
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.