The intersection of VAT and shared service centers - Identify, diagnose and design — steps for getting an SSC that works

Page 3 of 5: Identify, diagnose and design — steps for getting an SSC that works

Page 3 of 5

Identify, diagnose and design — steps for getting an SSC that works

VAT should be considered in every aspect of the migration process, from concept through completion and beyond. Although we’ve identified the three mega-steps as identify, diagnose and design, these are not necessarily discrete elements that take place only once.

These same steps can — and should — be applied from time to time to an existing SSC to make sure that it is optimized and functioning as efficiently as possible and that it remains consistent with enterprise objectives in the event of changes in the business profile.

Identify

VAT-critical functions are among the most common transaction-handling processes to migrate to an SSC. That typically includes such functions as accounts payable, general accounting, intercompany settlements, travel and expenses, tax filing, customer billing and order entry.

This is essentially the time for defining the scope of the SSC – documenting the current VAT processes for the various local business units and determining what countries the SSC will support and the processes for which it will be responsible. Underpinning these decisions should be a realistic perspective on the available technologies and talent pool, coupled with reporting and metrics for measuring performance.

Another important element built into making these choices is identifying their impact and any changes they could have on current processes. Centralizing functions into an environment like a SSC entails a shift of responsibilities, which then requires establishing and documenting new protocols and new lines of communication. This early stage is the time for surfacing potential problems and identifying the time frame and approach for addressing them (e.g., further integration of ERP systems, tax engines, procedural guidance and controls).

The complexity of change that comes with implementing an SSC and its various support systems gives rise to some critical considerations, so the company must fully understand the degree of change that’s about to occur and communicate and manage it across the enterprise.

Diagnose

The goal is to make sure that the outsourced VAT processes and functions are transferred and continue operating as effectively and efficiently as possible.

That means determining whether the current processes operate satisfactorily as is or need to be improved, factoring in any potential or existing differences and taking into account the complexity of the existing processes and the variations between these processes in each of the business units to be supported by the SSC.

One of the potential actions that may be taken is optimizing the VAT functionality of the ERP system. For example, some systems and tax engines include the option of using a condition table or decision tree to determine the appropriate VAT action without human involvement.

This virtual VAT manager establishes the VAT qualification for each transaction by allocating a tax code to yield a specific VAT result.

It is essential that any process functioning or being drawn up to function will reflect such changes as new customers, flow of goods, legislation, etc. and then is entered into the system accurately and in good time.

The system also must include adequate controls to ensure that transactions not within the scope of the condition table/decision tree cannot be completed without the involvement of an internal or external VAT expert.

If different applications are used, integrating multiple ERP systems into one ERP system could be an option, so this is the time to diagnose the current conditions in light of the actions to be taken, their timing and feasibility.

Keep in mind that ERP implementation immediately prior to the SSC’s go-live date is not realistic. Systems changes involve various stakeholders, are time consuming and realistically take months to complete, so they should be considered as a medium- to long-term objective.

As you begin to diagnose the current state and future objectives of your SSC plans, some of the questions that can help you determine the impact of VAT prior to migration.

Do we have sufficient insight into current VAT processes including all manual adjustments, workarounds and internal quality assurances processes?
Are the processes specific and well-documented and are they adequate to the new environment?
Do we understand the scope of personnel changes that may occur as we migrate to the SSC?
Have we captured all the relevant knowledge from personnel who may decide to leave the organization?
Are we retaining access to and information about existing manual processes and procedures and offline solutions?
To what extent do current processes depend on local VAT expertise and technology? How much will be lost in the event of a transfer to SSC?
To what extent are different processes required from one jurisdiction to another?
Who has final responsibility for the VAT compliance process at present and who will own it upon transfer to the SSC model?
Where are the essential process controls being carried out?
How does the SSC model deal with local VAT risks in terms of internal communication and coordination?

Design

There are no standard solutions, just the central requirement that any solution be VAT-compliant. What the future SSC/VAT interface will look like will depend largely upon the complexity of the transactions to be handled and the type of technology and talent available.

If the SSC design will be based upon the organization’s existing ERP system, it’s essential to know from the outset how well its structure and functionality will support the completion of the VAT processes.

It’s equally important to know the extent that technology will be used for electronic invoicing, tax engines, tax reports and other VAT-specific processes and to make sure that they are in keeping with any local VAT rules and guidelines.

Fundamental to the ultimate design is whether there is an integrated ERP system in place or the VAT compliance process is based on different applications.

If the infrastructure comprises a combination of applications, this increases the chances of manual adjustments having to be made for consolidation or other purposes, which in turn leads to greater VAT risk because of the higher margin of errors.

If employees with limited knowledge of VAT end up being responsible for manipulating and entering data, this begs the central question of whether the data can be considered sound.

Following are more questions that can help refine the design of the VAT/SSC intersection for short-, medium- and long-term functionality:

What kind of supervision is in place for SSC staff responsible for carrying out the relevant VAT processes?
Is hard copy documentation available on how staff members should carry out VAT processes?
Alternatively, is technology used to select tax codes and is assistance provided in the form of intranet/internet/tax engines?
What duties and responsibilities for VAT processes are assigned to the different members of the SSC? The business units? IT, tax, finance or other departments? Have these duties and responsibilities been clearly defined and documented?
Is everyone aware of the responsibilities in terms of monitoring, delegating duties and establishing efficient and effective communication lines between staff members with varying responsibilities?
What does the internal control structure pertaining to these processes look like?
Which controls have to or can be carried out at the SSC and which have to or can be carried out at local level?