Building the business case and communicating your problem statement
The indirect tax department risk management strategy differentiates between strategic, operational, financial and compliance risks and contains detailed action plans for managing these risks.
VAT Throughput
Relying solely on the balance between output VAT and input VAT is a risky approach. True neutrality—better described as "earned neutrality"—can only be achieved when specific formal and material requirements are met.
Awareness within the organization regarding the substantial amounts at stake and the associated risks is essential. Surveys conducted by the Big 4 consistently highlight that indirect tax amounts can reach up to 5 billion euros. Benchmark studies reveal a troubling trend: inadequate controls, insufficient key performance indicators (KPIs), and significant financial repercussions resulting from errors in oversight.
A mere 1% error can mean the difference between profit and loss for a multinational corporation—an important point to communicate to your shareholders.
Moreover, tax authorities have become increasingly adept at conducting audits due to technological advancements. The likelihood of additional assessments and penalties arising from errors in indirect tax continues to grow.
As previously mentioned, indirect tax often receives low priority, with senior management primarily focused on the effectiveness of direct tax. To initiate a shift in this mindset, it is crucial to make VAT throughput—the total amount of VAT under management—visible. This can be calculated using data from the company’s annual report:
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The estimated amount of VAT/GST under management can be calculated not only as a total figure but also in terms of its potential impact on overall profits and earnings per share.
This approach speaks the language that CFOs understand. Consider this: a 1% error can determine the difference between profit and loss for a multinational corporation—something that shareholders need to be made aware of.
Secure Support from Internal Audit for Meaningful Change
One of the key objectives of Internal Audit is to provide comprehensive assurance to the Board and senior management that the company's material risk areas are managed efficiently and effectively through a risk-based methodology. Gaining their support can be instrumental in driving the necessary changes.
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Quantification of risks and root cause analysis
Following the VAT throughput exercise, statistical sampling can be employed to assess the company's current performance. This approach provides insights into performance and calculates any potential tax assessments imposed by tax authorities.
The findings from this analysis can elevate the priority of indirect taxes, as managing quantified material risks aligns with the CFO's key performance indicators (KPIs).
To conduct a root cause analysis, it is essential to ask the following questions to understand the underlying factors contributing to the outcomes:
- How did the results occur?
- Why did they occur?
- What were the specific causes?
A root cause analysis typically begins with data collection and analysis, including a review of the ERP system and a thorough understanding of existing processes. Gaining insight into the root causes is crucial for effectively controlling future outcomes.
From a savings perspective, it’s important to determine how to replicate positive results, while from a risk perspective, the focus should be on preventing negative outcomes in the future.
