Richard Cornelisse

Study to quantify and analyse the VAT Gap in the EU-27 Member States 2012

In Audit Defense, EU development, Indirect Tax Strategic Plan on 25/10/2014 at 7:48 am

This report provides estimates of the VAT Gap for 26 EU Member States for 2012, as well as revised estimates for the period 2009-2011. It is a follow-up to the report “Study to quantify and analyse the VAT Gap in the EU-27 Member States”, published in September 2013. This update incorporates the NACE Rev. 2 classification of economic activities into the calculation of the theoretical liability.

The year 2012 saw overall unfavourable economic developments, as the GDP of the European Union shrank by 0.4 percent. These developments contributed to a slowdown of nominal final consumption and of other economic activities that form the basis of the Value Added Tax.

A few countries applied changes to standard or reduced rates, but on the whole the structure of VAT rates was relatively stable compared to the numerous changes in the wake of the onset of the Great Recession in 2008-2009.

For the EU-26 as a whole, VAT revenues grew by slightly over 2 percent, from Euro 904 billion in 2011 to Euro 922 billion in 2012; and the theoretical VAT liability (VTTL) also grew by a similar percentage. The overall VAT Gap, as estimated according to the refined methodology, for the EU-26 saw a slight increase in absolute numbers (of about Euro 6 billion) between 2011 and 2012, to reach Euro 177 billion, but remained essentially stable as a percentage of the overall VTTL, at 16 percent. The estimates for 2009-2011 have been revised because of the switch to NACE-2 classification and refinements in the methodology, and are slightly lower compared to those discussed in the 2013 VAT Gap report.

In 2012, Member States’ estimated VAT Gaps ranged from the low of 5 percent in the Netherlands and Finland, to the high of 44 percent in Romania. The median absolute change in the VAT Gap of the individual Member States from 2011 to 2012 was 1.1 percent, with a number of countries registering considerably higher changes. Overall, 11 Member States decreased their VAT Gap, with the largest improvements noted in Greece, despite the depth of its recession, and Bulgaria. However, 15 Member States saw an increase in the VAT Gap, ranging from virtually nil (e.g., Slovenia) to a substantial deterioration (e.g., Slovakia, Poland).

This report also provides estimates of the Policy Gap for the EU-26. This is an indicator of the additional VAT revenue that a Member State could theoretically collect if it applied uniform taxation to all consumption. Estimates of the Policy Gap confirm the finding that in most countries the loss of revenue compared to an “ideal” system with no reduced rates and no exemptions, is due to a greater extent to policy decisions than to non-compliance and weak enforcement.

2012 Update Report to the Study to quantify and analyse the VAT Gap in the EU-27 Member States

2012 Update Report to the Study to quantify and analyse the VAT Gap in the EU-27 Member States

Getting the most out of standard SAP

In Indirect Tax Strategic Plan on 25/10/2014 at 7:10 am

Taxmarc™ provides a SAP VAT  add-on solution that ensures that for every transaction the correct VAT treatment can be determined, adds VAT logic to SAP when standard SAP is not sufficient and is fully integrated in SAP and focused to meet all needs of the (indirect) tax function.

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.

1 Phenix Consulting - Blog Vat control

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.

2 Phenix Consulting - Blog Vat control

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

3 Phenix Consulting - Blog Vat control

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