Richard Cornelisse

Taxmarc™: gain real hindsight, insight and foresight 

In Audit Defense, Benchmark, Business Strategy, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, SAP add on, SAP add on for VAT, SAP for VAT, System Landscape Optimization, VAT automation on 25/07/2014 at 1:52 pm

Taxmarc™ SAP solution2

Only Taxmarc™ has the SAP expertise and analytics skills turning real-time accessible information into useful and actionable insights.

Why?

Via Taxmarc™ Tax Engine all VAT relevant transactional data of legal entities operating on the same SAP platform could immediately be made visible and accessible as this information is separately stored in one database in SAP.

That means real-time insight – without facing run-time issues – of the company’s blue print without the need of performing a manual transaction mapping exercise first.

The advantage is no more ‘guessing’ as detailed information is accessible. That means a clear understanding of key risk factors in real numbers as the full potential of data is used for your organization.

The unlimited slice and dice options could help:

  1. benchmarking between entities or VAT registrations;
  2. detect patterns, risks and opportunities
  3. detective controls opportunities;
  4. planning opportunities;
  5. financial analysis;
  6. supply chain analysis;
  7. customer analysis;
  8. working capital improvement;
  9. etc.

Auto generated reports based on the right data sets would be available in any format (e.g. cross-border transactions, inter-company, per country, per plant, per BU).

The Taxmarc™ set up is client flexible and can be tailored to the tax or other departments specific needs and wishes including the amount of transactional detail to be shown.

Detective control for both indirect tax and beyond

Taxmarc™provides a ‘Continuous Controls Monitoring’ tool also for stakeholders beyond indirect tax as ‘guessing the numbers’ is something of the past.

It enables that company’s resources and external advisors do not spend time on further reducing risks that are already at an acceptable level.

Without spending extra money a manager is more in control and can act proactively as transactions can be reviewed and quantified real-time. From an indirect tax perspective:

‘whether the correct VAT determination has been applied.’

Error detection and quantification goes beyond indirect tax as it is also essential for transfer pricing, internal audit, finance, business, legal, etc:

An example: ‘export controls’ could impact the company’s reputation when e.g. certain listed goods are delivered at certain destinations. Taxmarc™ functionality can be used to set up an early warning systems or even block transactions automatically from happening

Impact analysis and forecasting

This Taxmarc™ functionality provides immediate access to all relevant transactional data and optimizes planning and forecasting in general:

available ‘what if’ option to investigate how does this decision affect our aim

Foresee future risks long before they manifest themselves

Data analyics

Link your business strategy to advance analytical possibilities to improve decision making capabilities. A business change can be simulated via ‘what if’ with real-time data and its impact can be quantified.

  • Beyond indirect tax this should improve processes for management of e.g. transfer pricing, for logistics and warehouse locations management, cash-flow planning, etc.
  • Many stakeholders can benefit from this functionality, it is accessible real time and it should improve both internal and external effective communication because you can talk numbers.
  • It will support buy-in from other departments and ease the writing of problem statements and business cases with the aim to realize sponsorship for change and better management of the Executives own KPIs as real numbers have actually been used.

Taxmarc™ Functionality

Within Taxmarc™ Tax Engine this Data Analysis tool is integrated in SAP self without interface and queries, BW or an ABAP can be run. With this, problems regarding performance, format of reports and interpretation of data definitely belong to the past

Without the purchase of the Taxmarc™ Tax Engine this is done via a self-written SAP program (ABAP), so the data can be extracted from SAP in a uniform way

Other Data analytic Providers in the market

Other data analytics providers need to gather also all relevant transactional data from various SAP tables and databases first to have the same visibility of the company’s blue print and to be able to link transactions between entities such as inter-company chain transactions with drop shipments (ABC transactions).

A big part of that work is often a manual exercise that could cause an increased risk of ‘false positive’ outcomes during analysis. Such semi-automated exercises would normally take a considerable amount of money, time and effort to generate all relevant transactional data.

Something to consider when a business case has to be written and what the real saving is when this is all done in an automated fashion and also immediately becomes available without run-time issues.

A good way to estimate the potential value of a solution is to imagine how much you could actually save if the real problem was completely eliminated.

Richard Cornelisse
Director Strategy & Sales Taxmarc™

Compare VAT performance of Standard SAP with Taxmarc™ packages.006

60% of companies say VAT/GST have a negative impact on their business

In Audit Defense, Benchmark, EU development, Indirect Tax Automation, Indirect Tax Strategic Plan, Tax News, Technology, VAT automation, VAT planning on 24/07/2014 at 6:28 pm

The importance of indirect tax has increased over the last couple of years. While the rates for direct tax, corporate income tax, are decreasing, the rates for indirect tax keep rising.

Time for Richard Cornelisse, editor of Global Indirect Tax Management, to act on that: ‘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.’

The global bench mark study on VAT / GST 2013 of KPMG among multinationals (clients and relations), inter alia, shows that most companies haven’t yet developed an effective VAT/GST approach.

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.’

Isn’t it strange that the indirect tax still isn’t high on the agenda of the Head of Tax and the CFO?

Cornelisse: ‘It is indeed. Not only are the amounts in the indirect tax cycle continuingly rising internationally, these surveys also reveal that the Tax Authorities, due to technological innovations, have become better at executing their tax audit.

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.’

Still, companies hardly seem to react.

Cornelisse: ‘On the one hand it’s understandable. 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 CFO has a lot on his plate and lines of reporting often fail to sufficiently pass on the risks of indirect tax and the necessity of managing this adequately.’

‘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.’

Breaking the silo structure

But doesn’t the CFO’s financial auditor point out the large risks associated with insufficient control of indirect tax?

Cornelisse: ‘That is indeed 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 remarkable, however, that regarding indirect tax, the tax advisory departments of the Big4 mention the increasing risks of additional assessments, penalties and loss of reputation because risks are rising and KPIs and controls of indirect tax are lacking, but that this knowledge is hardly ever taken into account during the financial statement audit.

The CFO assumes that the knowledge acquired within the walls of the large accountancy and tax consultancy firms is shared, but the tax advisors appear to be prone to focus solely on serving their own circle of clients and to a far lesser extent on strengthening other services within the organization itself. Focus on one’s own expertise is good on the one hand, but it can also lead to reduced transfer of information.’

Isn’t this where the financial auditor comes in?

Cornelisse: ‘It’s understandable from the financial auditor’s perspective that the accounting firms don’t always deploy the knowledge available in their own tax advisory department when performing the financial statement audit.

The tax advisors primarily address their own clients, for which personal KPIs such as sales turnover must be achieved, and therefore have an individual higher rate structure. The financial auditors apply sharp rates in their market competition, and expensive internal staff hours spent on control of indirect tax are limited as much as possible. It costs a lot of money to hire internal knowledge and that money isn’t always available in economically difficult times.

They have, however, a responsibility, especially when it comes to managing reputational damage.’

If the facts say that more control, more KPIs are required in monitoring the indirect taxes, then why doesn’t the CFO take that on?

Cornelisse: ‘The most important reason is that the CFO has a lot on his plate. Indirect tax has 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.

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.

Surveys are alarming

If the risks are truly this high, then shouldn’t it receive more attention from the CFO?

Cornelisse: ‘That’s exactly the reason I started the Global Indirect Tax Management initiative. It’s not that the problem is unknown among the multinationals, but they just don’t share information sufficiently.

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.

The 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.

Source: KPMG Indirect Tax Compliance Services – go beyond the data

  • Indirect tax is the third largest item of working capital
    1. Sales
    2. Cost of sales
    3. Indirect tax
  • 60% of companies say VAT/GST have a negative impact on their business
  • Only 1 in 8 businesses have a global head of VAT/GST that has visibility over VAT / GST returns prepared locally

One of the tools the Global Indirect Tax Management initiative offers, are aimed at achieving better awareness.

The fact that direct and indirect tax work in a different way must also be taken into account.

The Head of Tax should be more involved in the Indirect Tax Function. The Head of Tax mainly gets his information from corporate finance and not so much from other departments. And that is precisely where the indirect tax is managed and must be operated. It is therefore often not visible for the Head of Tax how important the controls on indirect tax are.

If the Head of Tax and the Indirect Tax Function would figure out how to cooperate more efficiently, they will also bring indirect tax more into the spotlight of the CFO.’

‘Just consider: a mistake of one percent can make the difference between profit and loss for a multinational company. Explain that to your shareholders.’

Carried by the organization itself

How can change be accomplished?

Cornelisse: ‘It’s essential that change comes from the organization itself. An advisor can repeat this over and over, but if it isn’t carried out within the organization, by the people who actually have to work with it, nothing will change.

It starts with the people in the organization becoming aware of the amounts that are at stake and the risks of something going wrong. Big4 surveys show unanimously that we’re easily talking about amounts of 5 billion euros concerning indirect tax. Benchmark studies repeatedly create the same picture: too little control, too few KPIs and when a mistake is made in the control, it usually concerns large amounts of money.

A mistake of one percent can make the difference between profit and loss for a multinational company. Explain that to your shareholders.’

The reason is that both from within the organization – that is, via the Indirect Tax Function, the Head of Tax and the internal audit – and from outside – that is, financial auditor – insufficient signals reach the CFO in order to raise priority of indirect tax.

Cornelisse: ‘That’s right. And that deadlock must be broken. The internal and external stakeholders are all chains in the process and if one isn’t cooperating, change is difficult to accomplish.

It is 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.

In case control is required, all methods and tools developed by one’s own Tax Advisory Department of the Big4 – (technology, methods and tools such as reconciliations and data analytics including auto generated reports based on the right data sets)  are to be deployed in order to ensure overall quality of service.

This influences the CFO externally, can bring about change top down and can lead to new instructions for internal audit and Head of Tax. Of course the indirect tax function itself has to improve its working relation with the head of tax.

As a result, the Indirect Tax Function can have the tools (mandate, resources, budget etc.) necessary to execute its tasks adequately.

Richard Cornelisse is editor of Global Indirect Tax Management.

VIES ID check integrated in SAP

In Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, SAP add on, SAP add on for VAT, SAP for VAT, System Landscape Optimization, VAT automation on 23/07/2014 at 11:28 pm

Taxmarc™ SAP solution2

VAT numbers can be invalid, be changed or withdrawn and it is therefore important to check the validity of the VAT numbers. This can be done in a fully automated process in SAP during set up of customer master data and periodically afterwards.

Taxmarc™ can automatically check the VAT numbers in SAP when these are added to the customer master data via bulk checking and rechecking. With Taxmarc™ it is possible to periodically perform this as both a preventive and detective control of the company’s Tax Control Framework. This can all be done in a fully automated fashion.

Via a real-time link to VIES the VAT numbers are validated on correctness.

Flexibility exist how to manage incorrectness. The client can choose for example to treat the result of the VIES validation as:

  • An “error”: it is not possible to enter invalid VAT numbers in the customer master data or
  • A “warning”: invalid VAT numbers can be entered but are reported separately and process is set up to check with the customer and/or correct

A “warning” might for certain countries be considered more practical as the updating of VIES database (in time) by certain authorities is sometimes delayed (e.g. by a couple of months) resulting in an error message and a ‘false positive’ outcome in the transition.

Case Study

In native SAP is it possible to check the syntax – the format of the VAT number, including the number of positions. However, it is not possible to check whether the VAT number is valid. To this end, the European Commission has provided an online database, VAT Information Exchange System (VIES) for the validation of VAT.

Standard SAP does not have an interface with the VIES database.

In practice, it appears that 5 to 25 percent of the VAT numbers are incorrect or invalid. We checked VAT numbers during a own data analysis exercise:

VIES

The number of erroneous VAT numbers was close to 25%.

From a VAT perspective this is a material tax risk area as the 0% VAT rate might incorrectly been applied and the risk amount involved would most likely exceed the company’s risk appetite especially when cross border transactions are part of normal course of business.

It will therefore be an area of investigation during a tax audit.

Such an outcome would be a strong argument for the tax authorities that the company’s client acceptance process has a major defect. It could result in (joint) liability in case of VAT fraud in the supply chain and impact the company’s reputation negatively when it becomes public knowledge. VAT fraud is a high priority of both EU Commission and local governments to combat.

About Taxmarc™

The maximum VAT performance of SAP
Where Taxmarc™ differentiates
Taxmarc™ Features
Taxmarc™ Tax Control Framework
Taxmarc™ Intrastat Module in SAP
The best SAP Add-on solution for VAT
Tax Codes with validity dates
SLO renaming tax code exercise

Compare VAT performance of Standard SAP with Taxmarc™ packages.007

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