Quite simply, setting realistic objectives is the starting point for any successful change effort: is being fully VAT compliant a realistic goal?
Effectiveness is the degree to which an organization achieves the objectives. When is effectiveness achieved? For the tax function this is if all risks are managed and opportunities spotted and implemented.
Efficiency refers to the extent to which time, effort or cost is well used for achieving the objectives.
- As indirect tax resources are normally scarce it is important that the available time is used in the most efficient and effective way
- Beside the fact that managing all risks is cost inefficient, it will have negative impact on efficiency beyond indirect tax (e.g. time spent by finance department on VAT matters)
- It is about making the right choices
In order to allocate resources to risk and cost saving areas that matter, the level of risk appetite of the company has to be determined. This facilitates prioritization in the deployment of resources. Having defined acceptable levels of risk leads to resources not having to spend time on further reducing risks that are already at an acceptable level.
The resources and budget is aligned with the outcome of a risk assessment. Most of our time on high risk areas. The efficiency and effectiveness of the indirect tax function is periodically measured and compared with financial and operational KPIs. This is discussed in review meetings and corrective actions are identified.
Sometimes percentages are used to prove the apparent level of control. The most famous is the 80-20 rule. Another example is statements like 95% of our transactions are compliant.
These numbers can cause misperception of senior management when the overall feeling within the business is that the company is in control. For potential impact of such error rates, I refer to VAT throughput calculation.
An example: what does the following statement say about risk management: tackling master data can contribute to getting over 80% of your invoices VAT compliant. If 80% of these invoices qualify as a low risk and 20% exceed the risk appetite level of the company if it goes wrong, the solution supports efficient deployment of employees, but does not support the achievement of risk management objectives.
Note that currently I assumed that the 20% is a high risk.
In practice, of course this should be investigated first and measured to become useful from a management perspective.
- To self assess VAT risks and opportunities
- Setting the objectives of the indirect tax function
- Indirect Tax Strategy Framework