The intersection of VAT and shared service centers - Underrating VAT — some cautionary notes

Page 5 of 5:  Underrating VAT — some cautionary notes

Page 5 of 5

Underrating VAT — some cautionary notes

Global indirect taxes can amount to as much as 75% of the overall corporate tax burden, with VAT and sales/use tax outlays nearly 40% of total business tax expenditures — almost twice as much as corporate income tax. And the more taxing jurisdictions around the world focus on taking in VAT revenues, the more prevalent will be VAT audits.

For a company that underrates the impact of VAT and fails to factor in its implications throughout the SSC design, the financial consequences can be huge:

An oil and gas company had to pay $2 million in VAT instead of getting the refund they expected in the same amount.
A mining company was assessed $500 million in taxes and penalties because they lacked the proper documentation.
A consumer products company missed out on a $20 million VAT refund.
A Fortune 100 company saw its officials put in jail because of personal liability.

Granted, not all these outcomes arose from the shared service model, but they were a direct result of failing to properly handle VAT. When SSCs are vested with the responsibility for VAT, the potential for risk at this level follows.

Managing by design — last words and leading practices

The levers for performance improvement that must be addressed to comply with VAT also help to fully optimize shared services and enhance the sustainable value they deliver.

So with proper planning for an SSC that manages VAT appropriately and proactively, the pain of noncompliance can be replaced with the gain of a leading practice shared service model. And that means managing by design — looking at any process or transaction from end to end and factoring in all the requirements and controls essential to designing and optimizing a compliant VAT process.

It also means addressing the roles and responsibilities connected not only with the processes being moved to the SSC but also with those that are being left behind, fully and accurately capturing local and tribal knowledge about how things actually get done.

Companies that efficiently and effectively integrate VAT into their shared service model will have these leading practices in common:

They know that VAT is far more than a simple “wash” as a consumption tax but needs to be proactively managed throughout the buy and sell end-to-end processes.

They look at the upstream and downstream processes connected with any transaction that carries VAT and have a transparent end-to-end perspective into the controls and metrics for each.
They leverage the capabilities of their ERP systems to automate VAT processing wherever possible, and design their solutions so the decision is made at the right time by the right resource.
They know that an SSC is not the end result of a one-time initiative. Rather, it’s a vehicle for continuous improvement, with the built-in ability to flex with the changes in company, industry, marketplace, business and the global regulatory environment.
They know that VAT is not an add-on to the SSC model, it’s a critical requirement that if proactively managed brings an additional slate of benefits to the SSC.