The critical conditions for success
The importance of indirect tax has increased over the last couple of years. While the rates for direct tax, corporate income tax, are decreasing, the rates for indirect tax keep rising. At multinational companies we’re easily talking about amounts of over 5 billion euros of indirect tax flowing through the books.
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, with amounts like these, it can be devastating for the reputation of a listed company. We are talking about extremely large amounts of money that lack appropriate control, but because KPIs have never been developed for this particular purpose, the risks remain outside the CFO’s field of view.
The Indirect Tax Function is aware of the fact that it is understaffed and that budget is too limited to optimally execute its tasks, but they often don’t know how to change this and get it on the agenda of the CFO.
It’s essential that change comes from the organization itself. An advisor can repeat this over and over, but if it isn’t carried out within the organization, by the people who actually have to work with it, nothing will change. And that deadlock must be broken.
What should be done to actually break it?
Adequate control mechanisms
A VAT Control Framework - when addressing proper risk management - should be in line with Business Control Framework and a company's overall Tax Control Framework.
From a governance perspective the indirect tax department has to be positioned and should be given the tools - e.g., budget and resources - to realise its strategic objectives as highlighted below in a table.
That the indirect tax objectives should create, protect and optimize value in the range of company ’s business objectives is an obvious one.
Some other objectives that could be considered:
- The tax function should ascertain proper implementation and determine the impact of changes in businesses, laws and regulations on implemented tax planning.
- VAT should be considered in every aspect of the process, from concept through completion and beyond.
- Technology-related tax risk: understand and address the potential harms and benefits of (new) technology.
- Commit to pay tax in accordance with all relevant laws and regulations in the territories of operation.
- The objective of the indirect tax department is to minimize unnecessary cash out flow of output VAT and the complete deduction and reclaim of input VAT where possible.
- When executing this objective the cash flow position must be taken into account and no additional risk on VAT audits must be created that exceeds company’s risk appetite.
- Sustain a good and honest working relationships with the tax authorities seems a logical one.