A tax policy should define the company's overall tax strategy and tax objectives and establish a framework to promote best practices and governance procedures. The policy should outline the roles and responsibilities of the tax function, other corporate departments, and corporate entities.
The tax policy written should be rolled out to entire tax and the wider business to ensure a shared understanding of company's VAT risk appetite and acceptable VAT planning. The roll-out may include workshops and conference calls with tax, finance, legal, the business, etc.
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.
The tax policy is the highest in tax hierarchy - signed off by senior management - and sets the internal tax rules and tax behaviour: the do's-and-don'ts of employees with respect to tax.
Building blocks of a tax policy
The following taxes fall normally under the scope of such a tax policy - all taxes the Head of Tax is end responsible for:
- Corporate income tax
- Wage taxes, payroll, and social security
- Withholding taxes
- Capital taxes (including stamp duties and transfer taxes);
- Local taxes (e.g local business tax, packaging tax, sur tax, gift tax)
- Indirect tax and customs duties
Some key building blocks of a tax policy:
- Tax function objectives
- Risk profile and VAT risk tolerance parameters
- Approach to tax risk
- Relationship with tax authorities
- Scope of taxes covered
- Entities in scope
- Roles and responsibilities
- Tax resources (internal / external)
- The tax strategy detailed per role and / or applicable tax
- Situations when mandatory upfront involvement should take place
It should include detailed guidelines around the type of VAT planning and whether this is allowed according the company’s tax policy. These guidelines should be approved by senior management and may include issues such as the likelihood of tax administration to challenge and litigate the potential change to the group’s VAT risk profile and key reputational risk issues.
This may also cover documented planning evaluation and acceptance criteria, planning implementation review processes and an ongoing planning review and monitoring processes.
Mandatory involvement upfront
From a Tax Control Framework perspective, for setting up risk based controls, the more unusual the transactions, the greater the tax risks.
The tax policy should contain as well a description of situations when it will be mandatory to involve indirect tax department upfront (e.g., stakeholders such as Legal, IT, HR, Internal Audit, Procurement, Business, Finance).
The following transactions will always exceed a company's VAT risk appetite:
- Significant business transactions
Non routine transactions:
- Share issues or sales
- Acquisition or disposal of any business or part of a business
- Acquisition or disposal of real estate
- Financial transformation
- Part of the business is outsourced (e.g. a Shared Service Centre or accounts payable/receivable to a third party service provider)
- Other financial transactions
Recommended is to describe in detail the requirements for other process owner/stakeholders to seek VAT input early in the process. It should cover non-routine or significant business transactions and the requirement for review & approval by indirect tax department prior to execution of the transactions. The indirect tax department should always be a mandatory work-streams in for example technology and finance projects.
Operational changes have a tax consequence due to the change in transactional flows and the change in a company’s assets, functions and risks profile. Important is to ensure that the new operating model is not only implemented correctly from a direct tax perspective, but also ensures that business processes are overall tax aligned realising support of the business in the areas of compliance, finance & accounting, legal, IT systems, VAT and regulatory matters.
To move the tax policy from paper into practice the roll-out may also include organisational changes, and improvements to processes and systems.