A relevant indirect tax strategy—correctly implemented—will allow the new business to function effectively from go-live, from both a tax and commercial perspective, so that it can move inventory, generate sales and invoices, face fewer disputes with non-paying customers, remain tax compliant, and integrate the business on time and budget.
With indirect taxes intertwining through the day-to-day operations of a company—raising sales invoices, moving inventory, paying suppliers, collecting cash—indirect tax risk can have a distinct and domino-like effect on the commerciality of an organization. The impact can increase exponentially in the event of, for example, a merger or acquisition. But do these taxes and tax planning opportunities get the attention they need, especially in light of increasingly complicated and globalized business models?
Transactions in today’s business world
Even as the world is shrinking, businesses and their growth strategies are becoming more complicated.
A schematic drawing of the functions of a typical multinational today might look like a Rube Goldberg contraption—a complex of moving parts that must connect one to another for tax, regulatory, and reporting purposes.
Unlike the more contained structure for handling income-based taxes, responsibilities and key drivers for indirect taxes may be spread throughout the enterprise, residing not just in the tax department but in any of such diverse departments as finance, information technology, supply chain management, and logistics, human resources, and beyond.
Added is the growing trend toward shared service centers (SSCs) responsible for operational processes, including accounts payable and accounts receivable, as well as other outsourced tax, finance, and treasury functions. Tax determination and reporting for the entire operation may be governed by one or more enterprise resource planning systems, which may be integrated to varying degrees, with or without the benefit of sophisticated technology tools.
All these factors make for a changing and increasingly sophisticated business environment that requires a different approach to business indirect tax advice.
'As Is' situation to benchmark at
Does it fit or not?
A common factor among organizations with an increased risk profile is often the absence of a clear strategy to manage both the technical and operational risk issues associated with indirect taxes. Most significant multinationals include one or more VAT specialists within the tax function.
However, the way in which organizations seek to utilize this specialism tends to mirror the traditional consulting model: the specialist adviser holds a central position within the tax function, responding to individual queries raised by logistics managers, accounting staff, and local business units.
The role is often reactive, relying on the ability of colleagues with an operational or local market focus to identify potential areas of indirect tax risk and refer them to the tax department for specialist review.
Consequently, central visibility of the VAT compliance issues affecting local country operations tends to be patchy at best, with little or no continuity in managing local VAT risk across the enterprise.
There is no ‘one-size-fits-all’ approach to designing and implementing an operational indirect tax strategy. However, the goal should be to create an indirect tax function that is fit for purpose and fully aligned with the business's operational priorities and risk appetite.
Through the design and implementation of adequate controls, the objective of the internal indirect tax function should be to assume overall strategic responsibility for the operational integrity of VAT-critical systems and processes.
Unless there are measures to capture and control the end-to-end VAT accounting process, the result will be an incomplete risk management strategy that is essentially unreliable. By contrast, an improved tax risk management model should involve periodic testing of controls to guarantee the effectiveness of VAT-critical processes.
By redefining the indirect tax strategy, giving it an operational and technical focus, and aligning the strategy to the key business objectives of transactional integrity and financial reporting accuracy, the in-house VAT function can make a valuable contribution to the organization.
From a Big 4 survey, it follows that only 25 percent of companies say their company has specific indirect tax metrics. Most of these measures relate to basic compliance, rather than activities that could improve the bottom line and drive cash flow improvement. From that outcome, I conclude that a strategic indirect tax plan with SMART individual objectives set has not been developed or properly rolled out.
Surveys are alarming
Managing risk is about making decisions at all levels of an organization to limit the effect and likelihood of threats happening and to increase the effect and likelihood of opportunities.
Benchmarking exercises against trends in the indirect tax market can be done via global surveys that capture info on tax function, attitudes, and priorities. These surveys are helpful as they provide insight into what others have faced and how you could improve yourself.
According to big4 surveys, the related control mechanisms are still inadequate. Not only can an error in the accounts lead to major additional tax assessments and substantial penalties, but with amounts like these, it can also be devastating for the reputation of a listed company.’
Survey tax findings
The slide deck starts with a trend overview of the author, and subsequently, relevant tax survey findings were gathered that relate to these trends spotted. The complete overview is appropriate from a prioritization and tax strategy perspective.
Overview
In response to increased scrutiny from senior management, tax administration, and other regulators, many businesses are formally documenting their indirect tax strategy and implementing formal processes to evaluate and approve planning ideas.
"A strategy may be defined as a plan or method for obtaining some goal or result. The responsibility of management is to identify their organization's key processes, measure their effectiveness and efficiency, and initiate improvement of the worst performing processes."
For leading companies, a tax strategy is a dynamic framework shaped by internal and external drivers. An indirect tax strategy should cover all business locations and align with the overall business strategy.
Benefits
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Potential benefits of a documented indirect tax strategy |
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Obtaining clarity around the business' indirect tax risk appetite should facilitate the identification of planning opportunities appropriate to the business' wider commercial objectives |
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Providing the business with a consistent and efficient review and evaluation process over tax-related matters |
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Raising the profile of indirect tax with key business and finance stakeholders |
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Monitoring and strengthening governance procedures in decentralized and overseas jurisdictions |
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Identifying improvements in indirect tax-related systems, processes, and controls |
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Identifying areas where additional indirect tax resources or funding may be required |
The indirect tax preparation and rollout process may involve
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Roadmap |
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Initial scoping to confirm the relevant stakeholders and clarify the project's objectives. At this stage, the Board’s expectations on indirect tax performance and indirect tax risk appetite should be considered. |
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The workshop will be attended by indirect tax and key business and finance stakeholders. Workshop discussions will include overall business strategy, indirect tax risk appetite, stakeholder requirements from Tax, indirect tax function objectives, and planning evaluation and review processes. |
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Indirect tax strategy document to be drafted, reviewed, agreed with key stakeholders, and approved by the Board |
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Roll-out of the strategy to the entire tax and the wider business to ensure a shared understanding of indirect tax risk appetite and acceptable planning. The roll-out may include workshops and conference calls with tax, finance, and business representatives. |
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At this stage, the most appropriate formats for the strategy document should also be considered. These may include a strategy document stored on the Intranet, an interactive decision tree to evaluate planning, hard copy tax guidance manuals, etc. The roll-out may consist of organizational changes and improvements to processes and systems to move the (indirect) tax strategy from paper into practice. |
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| Ongoing review and update of indirect tax strategy and documentation and ongoing indirect tax strategy effectiveness reviews. |
Introduction and overview
Scope
The strategy and the group’s overall approach to indirect tax compliance, risk management, and indirect tax planning should be documented, signed off by senior management, and regularly reviewed to ensure consistent minimum standards are defined and implemented.
The approach should also implement an effective communication plan as part of the change management process to ensure all impacted entities understand what is required of them and clarify their commitment to the strategy.
Group business strategy and indirect tax objectives
Document and challenge the group's overall indirect tax strategy to ensure a clear linkage to the business strategy and how the indirect tax strategy contributes value to the business’s overall objectives.
Risk management
Risk management - strategic objectives
Define the group's indirect tax risk management framework, covering processes both within and outside the tax function. This includes developing and maintaining a group indirect tax risk register and the review & oversight of processes of decentralized and overseas locations.
Define the group’s overall indirect tax risk tolerance parameters, which should be applied to all significant transactions.
Governance and performance
Strategy oversight and sponsorship
Define the principles and policies on which the group’s indirect tax processes are based. It should also include the process on how the strategy will be approved by the Board and communicated to the business.
Management reporting of indirect tax risk
Describe the reporting lines and their frequency from the operating teams to senior management, e.g., indirect tax to the Head of Tax, the CFO, and the Board/Audit Committee. Reporting should cover key indirect tax compliance and the reporting of issues globally, including significant transactions and tax administration audits.
Define the reporting processes from overseas and decentralized locations to the group indirect tax function relating to compliance, transactions, audits, and exposures.
Indirect tax objectives and key performance indicators
Define the KPIs for the indirect tax function to show indirect tax performance. Indirect tax function KPIs should include performance measures on people, efficiency, growth, and quality.
Relationship with tax administration
Describe the requirements for dealing with the external tax regime, including who can negotiate with the tax authorities concerning potential audits and penalties.
People and organization
Roles and responsibilities and reporting lines
Outline the indirect tax-related roles and responsibilities (including review and reporting lines) of the Group, including, but not limited to, the following stakeholders: the Board, Chief Financial Officer, Head of Tax, Business Units, Finance team, Tax Function, Local indirect tax teams, etc.
Resourcing
Define the skills and roles required to deal with indirect tax matters in each location. Document career development, role rotation, and succession planning processes.
Training
Describe the indirect tax training requirements for staff and the awareness training provided by indirect tax to the finance and business teams and other stakeholders (e.g., procurement, IT, logistics, internal audit, HR, legal).
External tax advisers
Provide guidelines on the use of external advisers (i.e., for industry insights, technical updates, and input and to cover skills and resource shortages) and the authority to approve the use of external advisers in various jurisdictions.
Alignment with business units
Describe the responsibilities, quality levels, controls, and reporting between indirect tax and the business units and ensure this is appropriately represented in Service-Level Agreements.
Process and controls
Indirect tax planning and significant business transactions
This should cover non-routine or significant transactions and the requirement for review & approval by the indirect tax function before executing the transactions. It may also be appropriate to include more detailed guidelines around the type of indirect tax planning and whether this is allowed according to the business’s tax policy.
These guidelines should be approved by senior management. They may include issues such as the likelihood of tax administration to challenge and litigate the potential change to the group’s indirect tax risk profile and key reputational risk issues.
This may also cover documented planning evaluation and acceptance criteria, implementation review processes, and ongoing planning review and monitoring processes. Describe the requirements for other stakeholders (e.g., finance, procurement, IT, logistics, internal audit, HR, legal) to seek Indirect Tax input early in the process.
Indirect tax compliance and financial reporting
Describe the group's requirements for indirect tax compliance and financial reporting (i.e., data gathering and review, as well as preparation and review of indirect tax returns and provisions) across all jurisdictions. Documenting specific responsibilities, controls, and systems concerning each process may also be appropriate.
Internal auditing of indirect tax
Describe the internal audit program, including any processes, policies, and tools used for indirect tax, focusing on testing the effectiveness of internal controls for key risk areas.
Technology and data
Finance and business systems and data
Describe the finance and business systems used and the requirement for indirect tax training and input about accounting and business systems (e.g., review of indirect tax set-up of accounting systems and indirect tax involvement in business system upgrades to ensure global consistency in their application).
Indirect tax systems
Describe the systems the indirect tax function uses, including how they control the integrity of data used for indirect tax filings.
Workflow information and management
Document the indirect tax operating processes and procedures in detail, including workflow and information management, resourcing, and technology requirements.
Reporting and work papers
Define the detailed preparation and retention guidelines for both paper and electronic documents. It may be appropriate to include guidelines on mandatory archiving.
