Het Financieele Dagblad Thursday, 26 June 2008

Wrongfully paid VAT € 55 million

At a large multinational, a software error resulted in the company paying too much VAT over an 11-year period. The software registered when a customer was repaid the remaining portion of his subscription following its cancellation.

What the system did not register was that the customer also received a VAT refund over the remaining portion. The total amount of wrongfully paid VAT eventually rose to around € 55 million, of which the tax authorities were only prepared to return € 20 million.

In the case of another company, a software error resulted in the opposite situation: it had deducted € 40 million in excessive input VAT.

Many organisations lack an ‘indirect tax control framework' for defining a strategy, systems and control mechanisms to manage risks linked to reporting VAT. With an indirect tax control framework, companies determine the management level that is responsible for the entire VAT reporting process, from beginning to end.

The risk that VAT errors will compromise companies' financial positions and reputations is a growing one. With globalisation of business, the complexity of transactions in terms of VAT is increasing.

The root of an operational VAT problem often lies in the inadequate modification of an IT system following a takeover or merger, international expansion or a change in the VAT qualification of transactions, as can happen when tax legislation is amended or a country joins the EU.

Reduce costs by improving operations

An indirect tax control framework minimises risks and reduces costs by improving operations. Take, for example, the VAT determination logic of VAT calculations and reports and driving back the required VAT operating capital. A company with a good framework is in an excellent position to enter into an advance agreement with the tax authorities.

The advantage of such an agreement is that companies gain faster insight into their tax positions and that more emphasis is placed on monitoring the actual VAT position, rather than on subsequent verification.

Richard Cornelisse is a partner at Ernst & Young Tax Advisers

Written by Richard Cornelisse
 Richard LinkedIn

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 a partner in EY where I led the indirect tax performance team for Netherlands and Belgium. Currently he is a senior managing director of Key Group.

Richard has over 20 years’ experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service centre migration, and post merger integration work. Richard is also somewhat of a mentor, giving back to the profession. If you are interested in conversation and discussion, please feel free to contact him.