Not only Finance, but also Tax, needs access to data that shows how transactions are processed and how IT systems are set up. Data integrity is an operational risk factor when transactions are booked in any given country and are not properly evaluated for tax purposes.
It could also be that the financial data in the system does not reflect the business model design or that change is not properly managed. Besides that, in the current 'as is' it is often a challenge to get access to the relevant tax data that must be reported to regulators, investors and tax authorities in every business unit and country in which a company operates.
Effectiveness and efficiency of operations, the reliability of tax reporting, and compliance with applicable laws and regulations
For a tax function to produce timely deliverables and satisfy the requirements of the board and other stakeholders, the effectiveness of the tax department’s 'governance', 'operation' and 'infrastructure' are essential enablers.
This article sets out the business challenges and areas of improvement for these enablers.
Governance - challenges and improvements
The tax function will face challenges when no formal documented strategy, objectives or planning exists to direct the tax function or tax department or when senior management does not have written and agreed-upon objectives and risk tolerance levels in formulating tax planning and strategies.
Without a proper tax policy, it depends on your personal influence within your organization to kick-start a change. Often that results in a fragmented approach, as not all stakeholders will be convinced. The outcome is that this will negatively impact defining standardized and global controls.
This will improve if the tax department’s strategy, objectives and risk tolerance are understood by everybody in the tax department and throughout the organization and signed off by senior management.
The indirect tax department objectives and strategies should also be aligned with the company's business objectives and overall tax strategy as a whole. When the tax department does not have direct relationships with key stakeholders, including the CFO, audit committee, internal audit and tax authorities, efforts should be made on creating and maintaining productive and proactive tax stakeholder relationships.
When a tax risk policy, including definition of risk tolerance levels associated with tax planning, does not exist, this should be set up as this will support effective management of tax risk when allocating resources. Important is as well that the organizational structure meets the tax department requirements. That means that it should be mutually aligned and periodically updated between the indirect tax department and the corporate finance function, procurement, legal, IT, business and other stakeholders and is designed to support stakeholder needs.
A split should exist of roles, functions and responsibilities between the tax department and the business are well documented in manuals, procedures and working instructions. This documentation should be available on-line for all stakeholders to optimize that the tax department professionals are involved in time to support multidisciplinary teams in projects and programs, and that the added value of the tax department is also clear for the business.
The tax department should be up-to-date with the latest developments in the organization to be able to perform its advisory role to the business. This means there should be a well-equipped learning & development environment to keep tax staff up to date with the latest developments.
External representation and lobbying to influence policies on various levels of government (local, national and European scale) has to be considered as it builds and maintains relations with government and other industry stakeholders and will support indirect tax planning.
Operational Challenges and Improvements
In many organizations, we often observe a lack of clearly defined performance targets or monitoring systems, which leads to unresolved issues due to a lack of accountability. From a best practice standpoint, it is essential to establish performance targets and implement technology-enabled key performance indicators (KPIs) that facilitate ongoing monitoring—both formal and informal. These targets should also reflect the interactions between the tax department, business units, and other stakeholders.
Additionally, we frequently find that clear procedures for critical VAT processes are lacking, and consistent evaluation criteria for VAT planning are absent. As a result, essential VAT data needed for compliance, financial reporting, and other tax activities is not easily generated throughout the year. This critical information should be consistently available to provide objective evidence and support for business and tax-related decisions.
A systematic approach to tax planning is necessary, including established evaluation criteria for utilizing external advisors. For instance, when corporate entities seek advice from outside experts, a policy should stipulate that all written advice be provided in English and that the tax department be informed before consulting external advisors, particularly for material tax issues.
Effective tax risk management should continually inform operational decisions and strategic direction. To achieve this, a uniform tax risk process must be implemented to facilitate structured and consistent evaluations. Tax risk management must encompass potential events that could adversely affect the organization’s objectives, including missed opportunities for savings.
Resources and budget allocations should align with the results of tax risk assessments, prioritizing time and effort on high-risk areas. The indirect tax department should seek opportunities to optimize tax planning across various jurisdictions, business units, and tax categories.
In the case of non-routine significant business transactions—such as mergers and acquisitions—all indirect tax liabilities must be identified before the transaction's implementation. This process should consider all regulatory, legal, and record retention requirements, and include a thorough assessment of relevant indirect tax risks in consultation with the indirect tax department.
The indirect tax department's risk management strategy should differentiate between strategic, operational, and financial compliance risks, along with detailed action plans for managing these risks. Furthermore, the tax department must adopt a robust internal control framework that is fully integrated across all global tax functions, with reporting on internal controls included as part of its performance indicators.
Infrastructure Challenges and Improvements
It is crucial for both hard copy and electronic corporate documents, tax files, and tax records to be well-organized, retained, and easily accessible—preferably not stored on employees’ personal hard drives. In addition to being readily accessible, these documents should be backed up in accordance with the company’s IT policy. Documentation of tax audit adjustments—including settlements—should be properly archived for future reference.
When there is no documentation for critical tax processes, or when tax authorities or corporate record retention requirements have not been addressed, it is vital to establish a structured process for documentation. This process should be regularly reviewed and updated to reflect changes in the operating environment.
The effectiveness of the tax department can be significantly enhanced by utilizing adequate supporting technology and tools that minimize the need for extensive manual input. An integrated approach to technology ensures that tax data is collected only once and reused across various applications. The indirect tax department should engage with key stakeholders consistently to exchange knowledge, and these interactions should be supported by technology.
ERP systems and other relevant platforms must be properly configured for VAT to facilitate compliance, financial reporting, and planning. Additionally, there should be dedicated IT support for tax-related functions. The tax department must have access to critical systems and applications with the correct VAT configurations implemented and maintained moving forward.
Embracing New Technologies and Advancing Capabilities
A substantial improvement can be achieved by replacing spreadsheets with advanced technological tools and systems that enhance effectiveness and mitigate risks. It is essential to establish systems and processes that maintain critical data needed for tax-related and strategic decision-making regularly, considering reporting, compliance, auditing, and planning requirements.
