Transactions in today’s business world
Different approach to business indirect tax advice Even as the world is shrinking, businesses and their growth strategies are becoming more complicated. A schematic drawing of the functions of a typical multinational today might look like a Rube Goldberg contraption—a complex of moving parts that must connect one to another for tax, regulatory, and reporting purposes.
And unlike the more contained structure for handling income-based taxes, responsibilities and key drivers for indirect taxes may be spread throughout the enterprise, residing not just in the tax department but in any of such diverse departments as finance, information technology, supply chain management and logistics, human resources, and beyond.
Added is the growing trend toward shared service centers (SSCs) that are responsible for operational processes including accounts payable and accounts receivable as well as other outsourced functions for tax, finance, and treasury. Tax determination and reporting for the entire operation may be governed by one or more enterprise resource planning systems, which in turn may be integrated to varying degrees, with or without the benefit of sophisticated technology tools.
All these factors make for a changing and increasingly sophisticated business environment that requires a different approach to business indirect tax advice.
The tax function should be able to understanding business activities/objectives including R&D and get aligned with other functions like legal, HR and IT. The tax objective is to mitigate risk and identifying opportunities to support company's supply chain.
Surveys are alarming
Managing risk is about making decisions at all levels of an organization, to limit the effect and likelihood of threats happening and to increase the effect and likelihood of opportunities Benchmarking exercises against trends in the indirect tax market can be done via global surveys that capture info on tax function, attitudes and priorities. These surveys are useful as they give insight into what others are facing or have faced and how you could improve yourself.
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.’
The global bench mark study on VAT / GST of KPMG among multinationals (clients and relations), inter alia, shows that most companies haven’t yet developed an effective VAT/GST approach.
‘The chance that the Tax Authorities will issue additional assessments and penalties in the near future because errors in indirect tax are detected, increases by the day.’
Tax Authorities, due to technological innovations, have become increasingly better in executing their tax audit. The probability that the Tax Authorities will issue additional assessments and penalties in the near future because errors in indirect tax are detected, increases by the day.’
Benchmarking yourself against your peers
Lack of central ownershipThe surveys of the Big4 are clear: 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.
Ownership is often lacking around indirect taxes as no one is actually responsible for the entire end-to-end process causing operational gaps most visible when (cross border) changes occur.
However, CFOs / Head of Tax apparently still focus more on direct tax than indirect tax. At multinational companies we’re easily talking about amounts of over 5 billion euros of indirect tax flowing through the books. Yet 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.
Because of the structure of determination and control within organizations, indirect tax is dealt with completely differently than direct tax.
The Head of Tax is responsible for all taxes in the company, but it appears that the main focus is on direct tax. The Indirect Tax Function often reports to the Head of Tax, who, in turn, reports to the CFO. This is one of the reasons that hardly any KPIs are determined for VAT/GST and the CFO almost exclusively attends to direct tax regarding tax risks.
The most important reason is that the CFO has a lot on his plate. Indirect tax has still no priority. Due to economical circumstances, choices have to be made regarding budgets for internal control. And because indirect tax has traditionally received little attention, it will surely not get more in times of crisis.
That is a bit strange since I assume that the results of the benchmark studies are not only shared with clients, but especially within the organization itself, including colleagues in the audit department.
In terms of quality and providing integrated service, it can be expected that a position be taken each year concerning materiality and thus the necessity for further examination during the annual audit. It is therefore essential that financial auditors also read the surveys, acknowledge the risks and discuss them with the CFO.
The best outcome would be if the indirect tax would be controlled by default in audit or if a stand point would be taken not to do that.
Understaffed and no budget The deployment of expensive fiscal knowledge therefore usually remains limited to control of direct tax. 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.
Shift from direct tax to indirect tax
VAT accounts for more than 20% of total tax revenue CFOs / Head of Tax apparently still focus more on direct tax than indirect tax. This is interesting as from a tax revenue perspective the current trend is a shift from direct tax to indirect tax by decreasing direct tax rates and increasing VAT/GST rates.
Global indirect taxes can amount to as much as 75% of the overall corporate tax burden, with VAT and sales/use tax outlays nearly 40% of total business tax expenditures — almost twice as much as corporate income tax.
More than 160 countries have a VAT regime. In the EU, between 2008 and 2013, the average EU standard rate increased from around 19.5% to more than 21%. The EU average VAT rate is now approximately 21.5%. VAT accounts for more than 20% of total tax revenue (OECD).
Netherlands: Tax revenue in 2015
Indirect tax revenue in NL was in 2015 EUR 74,9bn compared to Corporate Income Tax EUR 21,3bn. Wage tax and income tax was EUR 133,7bn.
Plug into new trends
Combat fraud a top priority
There is also large-scale VAT fraud within the European Community
200 billion euros lost A recent European Union study (2013) says the bloc's 28 member nations may be losing almost 200 billion euros ($267 billion) annually in value-added tax revenues due to tax evasion and a lack of enforcement. EU Tax Commissioner Algirdas Semeta said the amount of revenues slipping through the governments' nets is "unacceptable, particularly given the impact such sums could have in bolstering public finances."
The study for the European Commission, the bloc's executive arm, found member states lost an estimated 193 billion euros ($258 billion) in VAT revenues in 2011, or 1.5 percent of the EU's economic output.
Based on VAT collection figures from 2013, published 4 September 2015, the overall difference between the expected VAT revenue and the amount actually collected (the so-called "VAT Gap") did not improve on 2012. While 15 Member States saw an improvement in their figures, 11 Member States saw deterioration.
The total amount of VAT lost across the EU is estimated at €168 billion, according to the report. This equates to 15.2% of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies and miscalculation in 26 Member States.
Actively combating VAT fraud is a priority for the European commission and local governments. New measures are being taken such as the introduction of individual liability for not remitting VAT if the buyer knew or should have known that he was buying from a fraud. To prevent such a condition of liability, the ability to demonstrate that sufficient control measures have been taken is essential.
Roadmap of effective processes and controls to avoid liabilities with VAT fraud
Data analytics will allow tax authorities to
in an efficient and effective way identify compliance breaches
no more guessing the numbers
Effectively testing of VAT/GST control framework
Investments and exchange of information In the Netherlands, the tax authority often uses statistical sampling as a control method during a VAT audit. The severity of the additional tax bill is determined based on the number of errors found. Foreign tax authorities cooperate intensively in the Fiscalis program. The Fiscalis program will be continued under the name of Fiscus and has a budget of 770 million for the period between 2014 - 2020!
Knowledge in the area of risk management is shared actively between tax administration.
Data analysis is known to be used for rapid insight into exactly where the risks lie and what the quantitative impact is of these risks. In this way, the tax authority can perform its audit of the books in a more directed manner.
Compared with sampling, data analysis has the benefit of no longer missing a significant treatment error.
Data analysis is already used in a number of countries. It is expected to become the standard audit method in the near future.
See chapter: 'Tax Authorities Peeking At Your Data'
Tax authorities and e-audits are becoming the norm
Risk management and governance Tax authorities collect and analyze already indirect tax data (e.g. SAF-T for VAT). The focus is not only about timely and accurate VAT reporting but as well whether on high risk areas an effective tax control framework is in place. Tax risk management methods are assessed. The slide deck starts with a trend overview of the author and subsequently relevant tax survey findings were gathered that relate to these trends spotted. The complete overview is relevant from a priotization and tax strategy perspective.
E-audits starts at slide 15 of the PowerPoint.
Recruitment of IT skill set The Dutch tax authorities announced on May 19, 2015 that 5,000 of its 30,000 employees will lose their current job, while at the same time 1,500 specialized data analysts will be hired as tax returns will be automatically assessed via data analysis. This is not exceptional as in various European countries taxpayers are already obliged to submit electronic audit files to the tax authorities.
The world how we know it is changing
A pending reorganization at the Dutch tax authority Belastingdienst will likely result in the elimination of 4,000 to 5,000 jobs. The staff cuts are due to improvements to computer systems that reduced the need for many spot checks done by workers, reports broadcaster NOS.
Improvements to information technology infrastructure will lead to better data analysis, and thus more accurate tax assessments, sources told NOS. This should not only reduce the amount of tax evasion, but also increase the amount of tax revenue received by anywhere from hundreds of millions to billions of euros every year.
This trend will continue due to the availability of data analysis software and the increased focus on VAT compliance by tax administrations. It is also expected that tax authorities will request more and more data from the taxpayers.
Both data analysis and sampling can be used by multinationals as a pre-audit to test the functioning of the tax control framework. There is, namely, an expectation that tax authorities will start testing the tax control framework for its adequate functioning in the future.
In the Netherlands (Horizontal Monitoring) and UK (Senior Accounting Officer sign-off) are examples of such initiatives (see for detail appendix of this chapter).
See chapter: a roadmap to a sound Audit Defense strategy
Written by Richard Cornelisse
Richard advises multinational businesses in improving the efficiency and effectiveness of their Indirect Tax Function and Tax Control Framework.
He started his career as a manager at Arthur Andersen and then became an EY partner where he led the indirect tax performance team for Netherlands and Belgium. Currently, he is a managing director of SAP Tax Consultancy Firm.
Richard has over 20 years of experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service center migration, and post-merger integration work.
Senior Accounting Officer Guidance UK
"Where possible, HMRC relies on large companies’ own governance, systems and processes to manage risks to tax compliance. As part of the Business Risk Review a CRM evaluates how the group’s approach to these factors mitigates the inherent risks to tax compliance within the group.
The Senior Accounting Officer (SAO) provisions fully fit with this approach. The provisions make the SAO of a qualifying company responsible for ensuring that the company establishes and maintains appropriate tax accounting arrangements that allow the tax liabilities of the company to be calculated accurately in all material respects."
Automatic exchanges of information and joint tax audits
The OECD also promotes such enhanced relationships between tax authorities, taxpayer and advisers, where ex post facto audits may be limited by instituting both a proactive and a cooperative relationship with the tax service.
The aforementioned developments are extra reasons to give the right priority to indirect tax management and to formulating annual indirect tax objectives as part of the company's tax strategy. It is essential here that the tax function also be empowered to actually achieve these objectives.
The European Commission’s Tax Transparency Package proposes to introduce quarterly, automatic exchange of information between EU Member States regarding their cross-border tax rulings such as Advance Pricing Arrangements (APAs).
Dutch and German governments sign Memorandum of Understanding on spontaneous exchange of information with respect to tax rulings
General description of the measure
The measure will introduce a legislative requirement for all large businesses to publish an annual tax strategy, in so far as it relates to UK activities, approved by the Business’s Executive Board.
The strategy will cover 4 areas:
- the approach of the UK group to risk management and governance arrangements in relation to UK taxation
- the attitude of the group towards tax planning (so far as affecting UK taxation)
- the level of risk in relation to UK taxation that the group is prepared to accept
- the approach of the group towards its dealings with HM Revenue and Customs (HMRC)
Non-publication of an identifiable tax strategy or incomplete content based on the 4 areas outlined above could lead to a financial penalty. This penalty will be subject to the usual HMRC appeals process.
Who is likely to be affected
Around 2,000 largest businesses in the UK.
The publication of tax strategies will ensure greater transparency around a business’s approach to tax to HMRC, shareholders and consumers. And board level oversight of those strategies will embed tax strategy in existing corporate governance processes. Taken together this should drive behaviour change around tax planning and therefore enhance tax compliance.
Legislation will be introduced in the Finance Bill 2016 to require qualifying large businesses or qualifying groups to publish a tax strategy, in relation to UK taxation, on the internet.
The legislation sets out the content required for inclusion in the tax strategy.
The strategy will need to remain accessible until the next update to the strategy, typically on an annual basis. A penalty may be chargeable either for the non-publication of a tax strategy or if the information contained within the published strategy does not meet the requirements of the legislation.
Monitoring and evaluation
This measure will form part of HMRCs business risk review processes and implementation and impact will be measured within the internal governance and risk management processes within Large Business Directorate.
- Tax administration: large businesses transparency strategy
- Draft clause 65
- Draft explanatory notes clause 65
OECD's action plan on base erosion and profit shifting (BEPS)
"Tax Executives Institute, Inc. (TEI) commends the OECD for its thorough overview of the components of a potential mandatory disclosure regime and its comprehensive discussion of various options that countries may adopt to implement disclosure rules into their domestic law.
TEI appreciates tax authorities’ need to obtain a better view into the aggressive tax planning engaged in by some businesses and we do not oppose a mandatory disclosure regime in principle. Indeed, an objective, clear, uniform, and easy-to-apply mandatory disclosure rule could help level the playing field between multi-national enterprise (MNE) competitors that might have differing appetites for tax risk.
While the flexible approach in the Discussion Draft gives countries the ability to tailor a disclosure regime to their particular domestic tax policy concerns, varied approaches to mandatory disclosure across jurisdictions present several concerns for MNEs."
BEPS - Country by Country report also implemented in the Netherlands. On the 15th of September 2015 the Dutch legislator announced new Dutch reporting standards for the Dutch Corporate Income Tax Act. The annual TP documentation package should consist of a master file and a local country file. The reporting standard is intended for intercompany transactions with more than €50 million annual revenues.
Further Country by Country reporting requirements are also included with an treshold of €750 million. A penalty is included as well. The report will be mandatory per Januari 2016 due to obligations with OESO /G20.
BEPS 2015 Final Reports
What is new? New transfer pricing documentation requirements; demands to publicly account for their tax and business activities on a country-by-country basis; and consultancy proposal in the UK to disclose more information about their overall tax strategy.
Businesses have to disclose not only tax and financial data but also overall approaches to tax strategy, tax planning and tax risk, the relationship the company wishes to have with the taxing authority, and whether the company has an effective tax rate (ETR) target (and if so, what it is, and what measures the business is taking to reach or sustain this target ETR).
The European Parliament proposed on July 2015 changes to the EU accounting directive and transparency directive. Large groups and public interest entities have to include country-by-country information in financial statements, including turnover, number of employees, value of assets, sales and purchases, profit or loss before tax, and tax on profit or loss.
Data analytics will allow tax authorities to in an efficient and effective way identify compliance breaches (no more guessing the numbers).
See chapter: OECD's standard audit file for tax purposes
It will be challenging for the in-house tax function to keep up date on new local requirements (announced) and how to adapt systems, processes and controls to meet legal requirements and analyze the required data prior to submission on tax risks. Systems readiness will be a challenge as many companies have still multiple ERP systems or manipulate data outside the system (Excel).
Tax Compliance Consultation – UK
On 22 july 2015 the Revenue & Customs in the UK have published two linked consultation documents that relate to compliance and anti-avoidance. Both are directed at behaviours and behavioural change for large corporates in particular.
The document entitled Improving Large Business Compliance contains 3 main proposals:
- A legislative requirement for large businesses to publish their tax strategy
- A voluntary ‘Code of Practice on Taxation for Large Business’
- A ‘Special Measures’ regime to apply to businesses continually undertaking aggressive tax planning or persistently refusing to engage with HMRC in an open and collaborative manner.
See chapter: 'Improving Large Business Compliance'
OECD VAT/GST Guidelines 2015
The OECD has published its international VAT/GST Guidelines, which are expected to be approved in 2016. Jurisdictions are encouraged to use existing bilateral, regional or multilateral arrangements on mutual co-operation to practically comply with the Guidelines.
The Australian Tax Office (ATO) Practice Statement
Australia's proactive efforts to change the international tax arena. This practice statement is a draft for consultation purposes only.
When the final practice statement issues, it will have the following preamble: This practice statement is an internal ATO document, and is an instruction to ATO staff.
Taxpayers can rely on this practice statement to provide them with protection from interest and penalties in the following way.
If a statement turns out to be incorrect and taxpayers underpay their tax as a result, they will not have to pay a penalty. Nor will they have to pay interest on the underpayment provided they reasonably relied on this practice statement in good faith.
However, even if they don't have to pay a penalty or interest, taxpayers will have to pay the correct amount of tax provided the time limits under the law allow it.
This practice statement is designed to assist Tax officers who are contemplating the application of Part IVA or other GAARs to an arrangement, including in a private ruling, Public Ruling (including a Product Ruling or a Class Ruling) or other document setting out the ATO view.
OECD Tax Administration 2015
Tax Administration 2015, produced under the auspices of the Forum on Tax Administration, is a unique and comprehensive survey of tax administration systems, practices and performance across 56 advanced and emerging economies (including all OECD, EU, and G20 members).
Its starting point is the premise that revenue bodies can be better informed and work more effectively together given a broad understanding of the administrative context in which each operates. However, its information content is also likely to be of interest to many external parties (e.g. academics, external audit agencies, regional tax bodies, and international bodies providing technical assistance).
The series identifies some of the fundamental elements of national tax system administration and uses data, analyses and country examples to identify key trends, comparative levels of performance, recent and planned developments, and good practices.
Relevant benchmark info
- Big4 surveys
- OECD overview
- Risk Management Guide For Tax Administrations
- OECD Report: Study Into The Role Of Tax Intermediaries
- Horizontal Monitoring
- OECD International VAT/GST Guidelines
- A 'European Taxpayer's Code' - European Commission
- Studies made for the European Commission: 2013
- EU standard VAT return
- B2C 2015 VAT changes
- European Commission – Press Release About Future Of VAT
- OECD – Consumption Tax Trends 2012
- OECD – Consumption Tax Trends 2010
- OECD – Consumption Tax Trends 2008
- OECD – Consumption Tax Trends 2004
- OECD – Consumption Tax Trends 2001
- OECD – Consumption Tax Trends 1999
- Technical consultation: country-by-country reporting - UK