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 on budget.
Overview
In response to increased scrutiny from senior management, tax administration and other regulators, many businesses are now 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 to identify the key processes of their organization, measure their effectiveness and efficiency, and initiate improvement of the worst performing processes."
For leading companies, a tax strategy is a dynamic framework that is shaped by internal and external drivers. An indirect tax strategy should cover all business locations and should be aligned to the overall business strategy.
The benefits of a documented strategic plan
Potential benefits of a documented indirect tax strategy include:
- Obtaining clarity around the business' indirect tax risk appetite, which should facilitate the identification of planning opportunities appropriate to the business' wider commercial objectives
- Providing the business with a consistent and efficient review and evaluation process over tax-related matters
- Raising the profile of indirect tax with key business and finance stakeholders
- Monitoring and strengthening governance procedures in decentralized and overseas jurisdictions
- Identifying improvements in indirect tax-related systems, processes and controls
- Identifying areas where additional indirect tax resources or funding may be required
The indirect tax preparation and roll out process may involve:
- Initial scoping to confirm the relevant stakeholders and to clarify the objectives of the project. At this stage the Board’s expectations on indirect tax performance and indirect tax risk appetite should be considered
- Workshop 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
- Indirect tax strategy document to be drafted, reviewed, agreed with key stakeholders and approved by the Board
- Roll-out of the strategy to 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 the business
- 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. To move the (indirect) tax strategy from paper into practice the roll-out may also include organizational changes, and improvements to processes and systems
- Ongoing review and update of indirect tax strategy and documentation, and ongoing indirect tax strategy effectiveness reviews
Scope of work
The strategy and the group’s overall approach to indirect tax compliance, risk management and indirect tax planning should be clearly documented, signed-off my senior management and regularly reviewed to ensure that consistent minimum standards are defined and imple-mented.
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 overall indirect tax strategy of the group to ensure there is 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 indirect tax risk management framework of the group covering processes both within and outside the tax function. This includes the development and maintenance of 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 its frequency from the operating teams to senior management e.g. indirect tax to Head of Tax, the CFO and 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 has authority to negotiate with the tax authorities in relation to 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 that are 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 to be provided by indirect tax to the finance and business teams and other stakeholders (e.g. procurement, IT, logistics, internal audit, HR, legal).
External tax advisors
Provide guidelines on the use of external advisors (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 advisors 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 properly 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 prior to execution of 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 the business’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 indirect tax 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.
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 requirements of the group related to indirect tax compliance and financial reporting (i.e. data gathering and review, and preparation and review of indirect tax returns and provisions) across all jurisdictions.
It may also be appropriate to document specific responsibilities, controls and systems in relation to each process.
Internal auditing of indirect tax
Describe the internal audit program, including any processes, policies and tools used, for indirect tax focusing on the testing of effectiveness of internal controls for key risk areas.
Finance and business systems and data
Describe the finance and business systems used and the requirement for indirect tax training and input in relation to 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 used by the indirect tax function including how they control the integrity of data used for indirect tax filings.
Workflow information and management
Document in detail the indirect tax operating processes and procedures including workflow and information management, resourcing and technology requirements.
Reporting and workpapers
Define the detailed preparation and retention guidelines for both paper and electronic documents. It may be appropriate to include guidelines on mandatory archiving.
Tax function framework document
A tax strategy document is complemented by a tax function framework document describing the roles and responsibilities of the tax function and a tax policies document describing the policies developed and used by the tax function.