Richard Cornelisse

VAT determination of incoming invoices

In Indirect Tax Strategic Plan on 16/12/2014 at 7:42 am

The purchase order (PO) and the vendor invoice are the VAT relevant data sources used to determine the VAT treatment of incoming invoices. However, the vendor invoice data is in general not available in SAP.

However, in order to automate the VAT determination, it is essential that external information is added in an easy and intelligent way. In practice, many of the incoming invoices are still processed manually.

AP clerks, who are not VAT experts, have to select the correct tax codes and thus determine the VAT treatment and reporting. In order to manage this process, detective controls should be executed to check whether this is done correctly.

This is labor-intensive and poses a major area for VAT errors, such as failing to deduct the correct input VAT in the VAT return. It will therefore be an area of investigation during a tax audit.

When an incorrect VAT result is caused by the incorrect data in the PO, the remediation takes place via updating the PO with correct data and re-processing the related transactions (goods receipt, etc). Such a process causes workforce inefficiencies due to the hidden factory.

Definition of ‘hidden factory’ or ‘hidden operation’ : the rework and cover-ups, the hours and days of wasted time in a company of people who constantly correct mistakes (unnecessary rework). The objective is to make the hidden factory visible (measure/calculate ROI) and as a result, return precious time and money to the business.

The AP clerk often fully relies on the purchase order and is unaware that this purchase order might no longer reflect the actual situation. For example, if the vendor decided to execute the transaction differently from what had been initially agreed upon – the vendor decides to deliver from another country as locally the goods were not in stock. This causes a gap between data in SAP and the formal invoice (i.e. incorrect use of goods supplier partner function). That gap has to be closed.

Additional complexity arises when the purchase orders relate to services and not to materials or when the VAT is not fully deductible.

Return on Investment

The objective could be to maximize the automated tax code determination of incoming invoice processing. In addition, it implements a Tax Control Framework for purchases with automated VAT controls. It will thereby optimize workforce efficiency and VAT processes via automation and reduce the hidden factory at the same time.

Efficient and effective deployment of employees makes manual operations in the financial department, Accounts Payable (AP), or the Shared Service Center largely redundant from a VAT perspective.

Increases workforce efficiency, avoids rework, decreases risk exposures but as well increases visibility and awareness by which the tax function is able to set the right priorities.

Fiscal trainings, extensive VAT AP manuals, and web-based instructions through complex decision trees are no longer necessary, since all regulations are incorporated in SAP and not solely in people. This also makes employee turnover have less impact.

Via VAT determination of incoming invoices.

Mandatory electronic audit file for tax purposes a worldwide trend

In Indirect Tax Strategic Plan on 13/12/2014 at 1:35 pm

The SAF-T standard, originally created by the OECD, is intended to give tax authorities easy access to the relevant data in an easily readable format. This leads to much more efficient and effective tax inspections.The legal requirements of the file are in line with the obligation of using certified billing and logistic software that prevent changes on documents already issued.

Besides Portugal similar obligations exist already in Austria, Canada France, (voluntary basis), Luxembourg and Singapore. In Belgium, Croatia, Finland, Germany, Lithuania, Malta, Spain, Slovak Republic, Slovenia, and UK discussions on SAF-T are already taking place.

Countries like Sweden and Netherlands have their own e-audit file standard. Somehow related to SAF-T is the new mandatory electronic Tax Balance sheet requirement in Germany. From January 1, 2014 it is mandatory to send Tax Balances electronically.

The more efficient use of technology lowers costs of collection and compliance. More and more tax administrations around the world are implementing electronic auditing of a business’s financial records and systems.

Countries are adopting tools that can interrogate such records on the basis that they must support the standard audit file for tax (SAF-T) methodology. Singapore is encouraging businesses to adopt the SAF-T standards.

Portugal requires large companies to use SAF-T, and Brazil, notably, can require a business to hand over all its electronic financial records for scrutiny. From: 6 May 2014 EY: Five indirect tax trends: increasing cooperation

Read more: Mandatory electronic audit files a worldwide trend.

Are non-routine and other significant business transactions propely executed?

In Indirect Tax Strategic Plan on 13/12/2014 at 1:30 pm

If the reason of a business model change is to optimize companys effective tax rate (tax opportunities), minimizing cash tax effect or cost reduction or realize efficiency overall such standardizing business processes, it is important that with regard to managing such change the indirect tax functions is timely involved (design phase) and also ascertains that proper implementation and executing of indirect tax planning has been taken place. That means that indirect tax issues should be addressed up front during the design phase.

Any change has impact on current processes and controls and its effectiveness. Business model change such as centralized operating model result often in an increased number of transactions and indirect tax obligations across many geographies.

Operational changes have a tax consequence due to the change in transactional flows and the change in a company’s assets, functions and risks profile. Important is to ensure that the new operating model is not only implemented correctly from a tax perspective, but also ensures that business processes are tax aligned realizing support of the business in the areas of compliance, finance & accounting, legal IT systems, indirect tax and regulatory matters. That means teaming is a necessity with with various work streams.

In many Asian countries the Commissionaire concept is not known. In several Asian and Latin- American countries centralized ownership of raw materials, work in progress and finished inventory is not possible. In most countries outside Europe having to register for VAT/GST/Consumption Tax will often results in a full taxable presence, including a liability for Corporate Income Tax.

One of the key processes relate to ERP system. A wrong perception in the design phase can lead to substantial tax and commercial risks. It could also impact the company’s reputation as also customers, suppliers, external auditor, senior management, tax authorities could become stakeholders when it goes wrong.

A condition for success of any ERP solution is involvement by the indirect tax department in design phase, teaming with other workstreams.

The change of a business model can create not only VAT risks, but as well commercial risks such as logistics problems in getting goods into a country and delays and hold off of shipments resulting in disruption of daily business. Some root causes: the company forgot to register for VAT or procurement forgot to agree with supplier who was importing the goods.

Read more: Are non-routine and other significant business transactions propely executed?

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