The tax function should be able to understand 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 identify opportunities to support a company's supply chain.
'As Is' situation to benchmark at
Does it fit or not?
A common factor among organizations with an increased risk profile is often the absence of a clear strategy to manage both the technical and operational risk issues associated with indirect taxes. Most major multinationals include one or more VAT specialists within the tax function.
However, the way in which organizations seek to utilize this specialism tends to mirror the traditional consulting model: the specialist adviser holds a central position within the tax function, responding to individual queries raised by logistics managers, accounting staff and local business units.
The role is often a reactive one, relying on the ability of colleagues with an operational or local market focus to identify potential areas of indirect tax risk and refer them to the tax department for specialist review.
As a consequence, central visibility of the VAT compliance issues affecting local country operations tends to be patchy at best, with little or no continuity in the management of local VAT risk across the enterprise.
A further limitation on the effectiveness of the in-house VAT adviser is that he or she tends to focus on technical questions of strict VAT liability, rather than on the operational issues affecting the integrity of transactional reporting. An increasing number of in-house VAT managers, however, are facing the challenge of creating an indirect tax strategy that is more closely aligned with the business objectives of operational integrity.
Within most organizations, there is no single person or department responsible for the end-to-end VAT accounting process. The finance department often owns overall responsibility for the sales and purchase processes, but the application architecture underpinning those processes is configured and maintained by the IT department.
The control environment surrounding manual intervention in the accounts payable and receivable processes remains the responsibility of the finance department. VAT-critical processes such as PO creation, invoice verification and AP tax code selection are subject to limited or inappropriate controls, while the attention of the internal VAT function remains focused on the provision of ad hoc advisory support to local business units.
Despite the potential impact of VAT errors on the audited accounts, the financial reporting responsibility of the in-house VAT specialist tends to be limited to VAT returns and associated filings (e.g. EC Sales List, Annual Sales Listings, Intrastat).
Looking back, 'What has changed over the years?'
For a long time, the indirect tax profession has been an individual sport. Due to changes in the tax market and in client needs, the tax profession has evolved into more of a team sport.
The changing world from an adviser's perspective
What is different nowadays? When I started around 20 years ago, indirect tax specialists were scarce, there were hardly any in-house indirect tax functions and content, which nowadays is freely available on the Internet, could still be sold.
"In the land of the blind the one-eyed man is king"
An adviser could work more reactively. A comparison can be made with a doctor who has patients in the waiting room, can diagnose the patients, can find the problem and can then prescribe some pills to remedy the situation. We had full access to all kinds of VAT planning schemes, and the tax profession—both the buyer as the seller—was much more product-focused.
As advisers, we were targeting new patients. Many consultancy firms companies sold VAT content-based knowhow. In the past, that system was closed. Only a few organizations had access to specific content - often gathered via their worldwide network of people. At that time and under those circumstances, the content still represented significant added value for the client and therefore market value.
The system evolved from closed to open due to internet innovations such as search engines, and more people started to contribute and share content. Information can be posted, forwarded, shared and communicated. This is all free of charge: all kinds of content can be searched, found quickly and is available 24/7 as long as you have internet access.
Let’s do an exercise. Look back 5–10 years ago and think about the basic content that clients were willing to pay for and that content providers are now providing free of charge. Use Google’s search engine and enter that same question.
What do you see?
Google probably already has the answer to your question.
The consequence is that prices are going down and that the life cycle for this kind of paid product is at an end. Everybody can search and find it himself. The current impact of Google and Wikipedia is already huge since, from a pricing perspective, much content has become less valuable or even worthless.
When I started, the (starting) salaries were much lower, and that meant lower charge-out rates. Increased salary is one of the reasons why tax professionals now must grow up more quickly. A higher salary means a higher charge-out rate, and from the client’s perspective, a higher bill means higher expectations.
We must deliver higher quality and higher practicality; that is just a fact of life.
The Evolving Landscape from the Client Perspective
Alongside the introduction of anti-abuse laws, clients' needs and expectations have significantly evolved. Continuing with our analogy, today's clients have transformed into their own "doctors," establishing in-house indirect tax functions to manage their tax obligations more effectively.
With the rise of tax industry networks and social media, tax knowledge is now disseminated and shared more widely than ever. As a result, both the services offered and the capabilities of external advisers must adapt to meet these new demands. Client needs have evolved due to several factors, including:
- Globalization: Businesses are now competing on a global scale, necessitating more sophisticated tax strategies.
- Advancements in Tax Technology: The integration of technology into tax functions allows for more efficient processes and data management.
- High-Profile Scandals: Incidents like the global credit crisis and the Enron debacle have heightened awareness and demand for accountability in financial practices.
- Increased Scrutiny from Tax Authorities: Regulatory requirements, such as the standard audit file for tax purposes, have intensified demands for transparency and compliance.
- Rapidly Changing Global Tax Landscape: Evolving legislation and regulations, including initiatives like Country-by-Country Reporting, the OECD's Base Erosion and Profit Shifting (BEPS) project, and new reporting standards, are reshaping tax norms and performance metrics.
- Automatic Exchange of Information in Tax Matters: This initiative has increased the flow of tax-related information among jurisdictions, raising compliance standards.
These shifts have prompted discussions about accountability, pushing both external advisers and in-house indirect tax functions to adopt a more proactive approach in their operations and strategies.
Improve the following text: Add new talent, skills and competencies
Because of these changes, technical tax expertise has become more a basic skill from the adviser’s perspective. Data analytics, IT and accounting capabilities as well the soft skills of the adviser are—and will become—the key differentiator. Due to all the technological developments, this is already part of our present and future.
Technical tax advice must be implemented in systems, processes and controls. Instructions must be given to people who are outside the tax function. Data has to be analyzed in an efficient and effective manner not only to measure the past but as well to predict the future. Alignment with the business is essential for the tax function to plan in a timely manner and to avoid future firefighting.
To challenge and support a client in his mission, an adviser should possess—in addition to excellent technical skills—a clear understanding of communication and collaboration, analytical/critical thinking, project management, change management, information technology, negotiation and leadership. All of these skills are needed to be successful.
The indirect tax profession has been an individual sport for a very long time. The profession is still about the individual’s technical tax strength and personal practical experience, and the future generation of advisers are often trained by that individual.
Get the right people in the right roles
It is my opinion that the indirect tax professional of the future will need to take a different approach.
Why?
It is simply no longer possible to excel at everything regarding global indirect tax management. Thus, some people can excel in certain areas of indirect tax, and the overall outcome of the team’s effort will make the real difference from a quality standard perspective.
In other words: "One man's weakness, is another man's strength, so let's team up" - Richard Cornelisse
Get resources, systems, and skill sets in place to pursue priorities set
Benchmarking for Improvement
Benchmarking offers objective evidence that can demonstrate whether you have achieved your goal of establishing a 'mature' tax function. It also highlights areas that require attention to facilitate this evolution, providing compelling arguments to support change and secure buy-in from stakeholders.
Addressing the Gap Between Current Capabilities and Future Needs
The indirect tax function often recognizes that it is understaffed and constrained by a limited budget, hindering its ability to execute tasks optimally. However, it frequently struggles to communicate this issue effectively and get it prioritized on the CFO's agenda. Consequently, the deployment of specialized fiscal knowledge tends to be limited primarily to direct tax oversight.
To succeed, the indirect tax department must have the appropriate number of personnel equipped with the necessary skills and capabilities.
Surveys indicate that indirect tax teams are often inadequately sized in comparison to their direct tax counterparts, which not only have more staff but are often positioned more effectively within the organization. By fostering improved collaboration between the Head of Tax and the indirect tax function, it is possible to elevate the visibility of indirect tax within the CFO's purview.
To accomplish the objectives outlined in this section, it is essential to assess additional factors that will determine whether the set goals can be realistically achieved.
