In the articles “VAT Control Framework“, “Auditing your VAT Control Framework” and “Function Effectiveness Toolkit“, an introduction and methods were provided how to set up a control framework and an indirect tax function with the right focus on managing those risks that exceed the company’s risk tolerance.
The ever changing landscape for large corporate taxpayers has pushed the expectations for managing indirect tax obligations to a new level. The research indicates that tax authorities around the globe are becoming ever more vigilant and are looking to reign-in more tax remittances on behalf of often highly indebted governments.
The days of just submitting the VAT or excise return and shelving your files till the next month are well and truly over. The tax authorities have become more aggressive and inquisitive frequently demanding more from taxpayers – examples include scrutinizing the tax numbers, conducting ratio analysis, and performing contemporaneous risk reviews, prior or following the submission of the tax return.
For the Head of Tax and CFO it is about facing new challenges – the increased activity across indirect taxes generally means more time spent on audit issues, away from strategy and tax planning, ultimately can demand more resources and increase of external advisory costs.
The solution is the ‘VAT Control Framework‘ which is increasingly becoming a key defense tool for large corporates enabling them to engage with the tax authorities on the front foot. Coming on the back of the SOX requirements, today’s VAT/GST Control Framework has evolved significantly providing numerous benefits to Tax and Finance functions with very moderate upkeep.
This might be music-to-the-ears for the cost conscious multinational corporate functions looking for real value-add. We examine in more detail the key success factors for getting the VAT/GST Control Framework right.
- Demonstrating increased control of tax risks to the audit committee is a key challenge which can be addressed with careful planning and tailoring response to individual circumstances. In practice it is mitigated by targeting control gaps with both detective and preventive controls formalized in monthly/quarterly sign-off document. From a CFO or Head of Control stand point it provides high-degree of assurance around tax and more broadly GL numbers, and facilitates knowledge transfer to the internal audit team.
- Accuracy of tax data is critical to reduce the likelihood of tax errors and misstatement. Effective Indirect Tax Control Framework will ensure Head of Tax and CFO sign-off of the tax remittances with an added level of certainty having had the assurance that key checks have been performed prior to submission of the tax return. The Framework also ensures there are clearly defined responsibilities between Tax and Finance functions thus avoiding interpretation issues.
- The key benefits arising for the Tax and Finance functions include reduction in tax authority risk ratings and consistent assessment of tax risk across multiple jurisdictions where the corporate operates. Ultimately it significantly raises the profile and the efficiency of the Tax (and Finance) functions with internal and external stakeholders alike.
As written above in the article VAT Control Framework we provided narrative examples that relate to management of indirect tax risk areas that matter. Below a further explanation is provided with some flow charts that include roles and responsibilities between the various departments involved.
Cautionary Note: these flow charts are an example only and need to be tailored to a company’s specific circumstances.
The segregation of duties (SOD) can often occur between the core Tax function who approves any tax impacting coding changes and the team performing the compliance activity.
Master Data controls are key and fully warrant SOX controls as they impact the tax decision tree. The solution here is to ensure formal SOX control is in place for the Indirect Tax Manager to have input in designing & periodically reviewing the appropriate flow charts used of MDM.
Review by exception of invoices AP is also common and generally materiality is used to filter out the volume