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 neutraility has to be earned It is a risky business to monitor only the balance between output VAT and input VAT. Neutrality can only be achieved – better is the word ‘earned’ – if certain formal and material requirements are met.
It starts with the people in the organization becoming aware of the amounts that are at stake and the risks of something going wrong. Big4 surveys show unanimously that we’re easily talking about amounts of 5 billion euros concerning indirect tax. Benchmark studies repeatedly create the same picture: too little control, too few KPIs and when a mistake is made in the control, it usually concerns large amounts of money.
A mistake of one percent can make the difference between profit and loss for a multinational company. Explain that to your shareholders.’
Technological innovations and tax audits Tax authorities, due to technological innovations, have become increasingly better in executing their tax audit. The probability that the Tax Authorities will issue additional assessments and penalties in the near future because errors in indirect tax are detected, increases by the day.
In earlier paragraphs I mentioned that indirect tax often has low priority and that the focus of senior management is primarily on direct tax effectiveness. As a starting point to change this mindset the VAT throughput – amount of VAT under management – could be made visible. The VAT throughput could calculate via the company’s annual report based on the following data:
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Speak the language of CFO The estimated amount of VAT/GST under management could be calculated as a total amount with potential impact in total profits but also the impact on earnings per share.
It will be the ‘language’ that the CFO understands. ‘Just consider: a mistake of one percent can make the difference between profit and loss for a multinational company. Explain that to shareholders.’
Gain 'Internal audit' support to establish actual change
One of the objectives of Internal Audit is via a risk based methodology to provide comprehensive assurance to the Board and senior management that companies’ material risks areas are managed efficiently and effectively.
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Quantification of risks and root cause analysis
Measure performance As a follow-up of the VAT throughput exercise, statistical sampling could be used to measure the company’s ‚as is’ performance. Sampling has the added benefit that the exact amount of any tax assessment by the tax authorities is calculated.
The result could be used to get indirect taxes higher on the priority list, since managing of material risks that are quantified falls within the KPIs of the CFO.
For a root cause analysis the following questions should be asked in order seek to understand what caused the outcome:
- How did the results happen?
- Why did they happen?
- What specifically caused them to happen?
Zero measurement A root cause analysis is normally started via data collection and data analysis or ERP review and a clear understanding of the current processes (section zero measurement). Understanding the root cause is the first step to controlling outcomes.
From a saving perspective, you want to know how to make them happen again, from a risk perspective you surely want to know how to prevent them the next time.
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.