Richard Cornelisse

VAT/GST Control framework: becoming a business control tool

In Business Strategy, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls on 22/10/2014 at 4:01 pm

Written by Ferry Geertman and Sasha Savic

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.

9_benefits_of_testing_the_VAT_Control_Framework

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.

35_Potential_benefits_of_a_documented_indirect_tax_strategy

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.

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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.

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Review by exception of invoices AP is also common and generally materiality is used to filter out the volume

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Best SAP add on solution for VAT for a reason

In Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, SAP add on, SAP add on for VAT, SAP for VAT, SAP implementation, SAP review, SAP SLO renaming tax codes, System Landscape Optimization, VAT automation, VAT for SAP, VAT planning on 25/09/2014 at 12:34 pm

“It really takes a maximum of only 4 extra SAP tables to get our SAP add-on solution(s) up and running.  Other Add-on providers are trying to replicate our work.  A replication might be in practice cheaper than the original, however if quality service is the main driver where it relates to the company’s heart of its organization (its ERP system) and meeting a company’s strict IT policy is essential than such a bargain with the only effort of trying to replicate other people’s work without understanding the entire concept can backfire. Our add-on is in production for many years at listed multi billion Euro companies and client references are available. It is all about achieving client satisfaction for also the long run.”

In analogy with a car, we have tuned up standard SAP (i.e. given it extra brain power) to realize that extra indirect tax performance. The result is that the VAT treatment of all incoming and outgoing invoices is automatically determined for also the most complex transactions. In fact you have a SAP built in designated driver that makes that happen.

Even important is that you keep on driving safely. It therefore includes all the necessary safety features such as an integrated Tax Control Framework that stops the car or shows a RED light in an emergency table when danger is ahead.

Do you prefer a SUV instead of a supercar? That is possible as our features can be deselected and still added at a later stage. We are aware that not everybody needs a supercar immediately.

During Big4 software vendor selections Taxmarc™ has been selected various times as the ‘best’ SAP Add-on solution. Our Add-on is in production for many years at listed multi billion Euro companies.

A selection of our premium features:

  • Automated VAT determination of Inter-company and 3rd Party drop shipment chain transactions with 4 parties in the chain
  • Time stamped tax code design (never run out of tax codes)
  • Integrated Taxmarc™ decision tree in SAP as part of the Tax Control Framework with more automated real-time controls on transactions for VAT compliancy
  • In chain transactions with non EU countries the correct VAT treatment depends on which party is acting as importer or exporter of records. Additional data are used to either default the party acting as importer or exporter of records or define this at sales order level
  • Add-on checks the validity of VAT registration numbers against the European VIES database.
  • Data Analytics on the relevant VAT data for all sales transactions which provides a ‘Continuous Controls Monitoring tool
  • VAT management cockpit to monitor and maintain the VAT in a user friendly and cost efficient way.
  • VAT technical configurations and set-up options are grouped together in the standard SAP IMG

“The Add-on solution is also operational for non EU countries such as China, Chile, Israel, Japan, Malaysia, Mexico, Norway, Russia, Singapore, South Korea, Switzerland, Taiwan and the US?”

Besides above features our premium includes as well all our features of our standard package:

Standard package of Taxmarc™ tabel

Overview core features and its added value

  • Solution type: SAP Add-on solution
  • Technology used: SAP ABAP

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Taxmarc™ SAP solution2

Phenix Consulting: new solutions to optimize SAP

In Benchmark, business intelligence, Business Strategy, cash management, financial audit, Indirect Tax Strategic Plan, internal audit, liquidity management, Phenix Consulting, Processes and Controls, SAP add on, SAP add on for VAT, SAP for VAT, SAP implementation, SAP review, System Landscape Optimization, Technology, VAT for SAP on 24/09/2014 at 8:08 am

1. Phenix Consulting

Phenix Consulting is a company led by 6 partners and a team of around 30 employees who have strong international business and working experience in SAP environments.

Our main business focus is to optimize SAP from a tax, financial and control perspective. 

We are located in Amsterdam, Berlin, Cologne.

Products: Tax – standard audit file for tax purposes (SAF-T)

Based on the OECD requirements we developed an ERP system independent external solution that can combine data from different sources (i.e. SAP, Oracle and Sabrix).

Our solution provides a lean and flexible solution which extracts relevant data from any system automatically and transforms it into the country specific required XML format.

The output will be a correct SAFT-XML file.

Products: Tax – e-Bilanz-cockpit for Germany

Phenix Consulting e-Bilanz Cockpit is an easy-to-use solution for German e-tax balance requirements. It is fully integrated into SAP, easily accessible and generic interface risks are avoided. One central screen with all functions at your fingertips.

The cockpit’s ten steps process provides a simple guideline to create and submit mandatory filings. The cockpit is user-friendly due to well-designed features, such as the drag & drop functionality for mapping the company’s chart of accounts to the required fiscal taxonomy.

The cockpit has an interface to non-SAP systems to enable upload of financial data from subsidiaries not running on SAP.

All the group’s tax balances can be created in and filed from one central SAP system via an audit-proof process. Any tax adjustments made in the cockpit does not influence SAP data and these adjustment could be tracked via a separate document journal.

Similar to SAP all entries and changes are recorded (full audit trail), ensuring that the cockpit meets high standards of IT and process security.

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Services: SAP implementation and optimization

All of our consultants have a proven track record in implementing and optimizing SAP ERP at a broad variety of customers and industries.

Our service offering ranges from the functional improvement of existing SAP installations to full life-cycle implementation projects. Beside our business- and IT-expertise we also provide project management and development services.

Our distinguishing capabilities

  • We understand that no SAP implementation is alike – we recommend and implement the functionalities that best fit to your size, complexity and industry
  • We help you get the maximum out of SAP: we bring in best practice approaches and combine them with your individual requirements
  • For international rollouts we are best familiar with the local requirements even of highly specific countries such as Brazil, Russia or China
  • Our team of experienced consultants takes ownership and responsibility and pushes your project to success
  • We rely on a proven set of structured methods and tools that we can bring into the project

Other services in this line: Workflow optimization, Business Intelligence, Development Support

Services: Finance – cash management & liquidity management

Cash and liquidity management is becoming more and more crucial to each organization. Despite, many companies do not take full advantage of the system’s capabilities and run their processes and reporting on a semi-automated, or even spreadsheet based approach.

SAP offers an entire toolkit of functions related to cash-management topics that are branded as ‘financial supply chain management’:

  • Liquidity reporting and planning (cash position, liquidity forecast, liquidity planner, BO BPC)
  • Optimization of available cash (inhouse-cash)
  • Facilitation and automization of cash related transactions (electronic bank statement, bank communications Management)

To cover more specific requirements like loans management or hedge accounting SAP’s treasury and risk management solution (SAP TRM) is available.

Most of these functions can be implemented independently from each other. This brings a huge flexibility in terms what brings most benefits to an organization within reasonable time and budget.

Our recommended approach is to start with functional small packages (e.g. cash position, bank statement) and – once proven successful – implement subsequent add-ons.

Our distinguishing capabilities

  • We are not functionality-driven but instead develop and implement a sound roadmap towards an integrated cash- and liquidity management
  • We offer add-on products (e.g. EBS-Cockpit) to further drive efficiency in your cash processes
  • We are also best familiar with SAP’s treasury solutions

Other services in this line: Consolidation optimization, Intercompany optimization

Services: Tax – SAP implementation for VAT / GST

For nearly every company, the accuracy and efficiency of local-country VAT compliance is nearly completely dependent on the functionality of the underlying ERP system.

Operational malfunctions in a system that is used to manage VAT compliance can lead to substantial financial risks.

There are countless examples of the mismatching of VAT treatment of purchases and sales in chain transactions, double payments of VAT and “forgotten” manual adjustments to the VAT filing, all attributable to shortcomings in SAP’s automated VAT solution.

SAP VAT logic

The SAP VAT determination logic was developed a long time ago (1980’s) and except for the “plants abroad” logic SAP’s VAT determination logic has not changed.

This in contrast with the VAT rules and business models. A brief overview of some of these changes:

  • the EU VAT laws have been more harmonized (EU VAT directive)
  • substantial increase of cross border transactions
  • businesses are registered for VAT in multiple countries
  • businesses are operating more often under complicated principal structures
  • increased number of (integrated) inter-company and supply chain transactions

As a result, there has been a huge increase in the complexity for the SAP system to meet all VAT requirements, which leads to necessary modifications to the standard SAP VAT for many multinational businesses.

Modifications of already very complicated SAP systems create a risk for maintenance and half-hearted solutions. At the same time, tax authorities across the world both sharpen their focus on non-compliant taxpayers and increase their focus on reviewing ERP systems as a source of VAT compliance risks.

Businesses have to ensure that the VAT determination logic in the SAP systems is correct, easy to implement and remains VAT compliant.

Our distinguishing capabilities

Phenix Consulting possesses practical experience and understands SAP’s possibilities, but also its limitations and thus the capability to free up resources, reduce manual activities and manage risks.

With respect to the possibilities, we can express the wishes to the external SAP consultant in his own language and we can demonstrate how these can actually be achieved in SAP. In practice, we note that certain functionality intended for the support of indirect tax objectives does not get used – due either to reluctance (not within budget) or to a lack of knowledge in this area.

From an indirect tax standpoint, the realization that you are part of a larger team in which each of the participants have other priorities is key. This means that effective communication and agreements are essential.

Instructions must be understandable and so short and compact that they can also be used as a reference framework and material for the tests. In practice, Excel is often used to record all transactions and to indicate what the VAT treatment, etc. We developed our own normative decision trees for effective communication resulting in effective workforce and less risks.

Other services in this line: SAP review,Tax Performance Consultancy

Services: Risk and Control – GRC, security and authorization management

Management of information security becomes more and more critical because of increasing regulatory requirements. A key to ensure adequate information security is the design, implementation and ongoing operation of the authorization concept in SAP.

Management and continuous monitoring of authorizations can be carried out in SAP directly or tool-based.

Our distinguishing capabilities

  • We approach information security in a combined approach bringing together our long-year audit experience and our technical excellence in setting up authorizations in SAP
  • We provide our own tools to quickly assess the quality of security and authorizations in your SAP system
  • Because we know the market well we can assist our client finding the right approach and tools to ensure sustainable compliance

Other services in this line: Internal Audit Optimization, Financial Audit Optimization

Contacts

Netherlands

Richard Cornelisse
Managing Director, Phenix Consulting
E-mail: richard.cornelisse@phenix-consulting.nl
http://www.phenix-consulting.nl

Germany

Guido Czampiel
Managing Director, Phenix Consulting
E-mail: guido.czampiel@phenix-consulting.nl
http://www.phenix-consulting.nl

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