The intersection of VAT and shared service centers

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Lack of the right resources due to changeTake for example a Shared Service Center. In the past local country teams were handling VAT matters and its department who had been there for a long period of time, had access to talented staff, and were well trained and also employee turnover was low.

Under a Finance transformation all of their responsibilities are often moved to a far away location and new process owners who do not know the company's historical background and employee turn over is high. The local staff are often made redundant.

Can you see the risk?

The world has changed and so has the way the world does business — some say irrevocably, whether for better or for worse. An arguable upside of the global credit crisis is that it has provided many companies with an added impetus to look for ways to improve processes, manage costs, increase functionality and customer satisfaction, eliminate redundancies and extract additional value.

One approach that is growing in popularity is the migration to a shared service center (SSC) model. About 27% of the respondents to a recent Ernst & Young survey of global executives indicated that they plan to increase their use of shared service centers over the next year for functions ranging from property management to customer service, from IT software and network management to HR and accounting.

As varied as the drivers for and uses of the SSC model may be, there is one common denominator that is too often missing from the strategic or planning elements of the shared service discussion — indirect tax. And although these tax considerations may not be among the issues that drive a shared service decision, tax can certainly give rise to some significant and costly challenges. That is particularly true of value added tax (VAT), which hits a number of disparate points within the enterprise as diverse as finance, procurement, IT or HR. 

For multinational companies (MNC), these touch points can arise in a wide range of countries and taxing jurisdictions as well. As MNCs move more and more to the shared service model to meet their varied objectives, the responsibility for indirect taxes migrates with them, especially in the case of VAT and goods and service tax (GST). Also, complexity in managing these taxes increases exponentially when cross-border activities are involved, especially in today’s VAT environment, where all too often controls are external, processes are manual and procedures are not documented.

Historically, the activities around transactions giving rise to indirect taxes have been handled by in- country entities that are more familiar with local regulations and compliance requirements and accustomed to the rules and obligations for invoicing, liability, rates, accounting and reporting specific to each of the myriad jurisdictions.

• But what happens when VAT and GST functions are transferred to an offshore SSC in some faraway location?
• How complex will the operational requirements be when one SSC is dealing with countless transactions that originate in multiple countries and languages and fall under the auspices of a variety of cultures and authorities?

Getting ahead of possible problems at the planning stage before they arise in practice is one critical way to make sure that the company reaps the benefits intended from an SSC migration. VAT needs to move to the top of the priority list whether a new SSC is being designed or an existing one evaluated.