Richard Cornelisse

Is there a time limit on being bulletproof?

In Business Strategy, Indirect Tax Strategic Plan on 31/07/2014 at 12:00 pm

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On June 2014, the European Commission said it had opened three in-depth investigations into tax decisions affecting Apple, Starbucks and Fiat Finance and Trade in Ireland, the Netherlands and Luxembourg respectively.

An U.S. Senate investigation has revealed that Apple, that, “under the agreement Apple has with Ireland”, Apple paid a maximum tax rate of 2 percent or less. Apple’s annual reports show that over the past three years, Apple paid taxes worth 2 percent of its $74 billion in overseas income. Reuters 21 May 2013.

It raises the question whether besides evaluating tax risks (level of tolerance) also reputational risks of the company – as part of proper tax risk management – should be considered mandatory when such schemes are recommended.

Tax consultancy firms branded such effective tax planning service offerings not so long ago as ‘Tax Effective Supply Chain Management’. That kind of wording is hardly used anymore for obvious reasons.

  • Is the public opinion important for tax planning and the company’s business objectives?
  • Has that changed due to economic climate and EU / US investigations?
  • What drives public opinion?
  • What is the impact on the reputation of the tax professional if planning is implemented and becomes unforeseen public knowledge?
  • How important is the reputation of the tax professional to establish company’s tax objectives such as tax controversy when ‘enhanced relationships’ with tax authorities might be a global trend?

The changing world from an indirect tax adviser perspective

A tax professional should contribute and give guidance to achieve that taxpayers do not pay more tax than necessary. Every opportunity has to be considered. At least that was the job description and actually how you could differentiate yourself among competition to make that happen for example via realizing beneficial tax rulings.

“Look, for example, at the UK. There have been some abusive avoidance schemes in the UK over the years. Most advisers have left these behind them, but as a result, the tax authority has increasingly been addressing boards about controls and processes, asking: “Is this the kind of thing that you want your business to be seen to be doing?” They’re trying to change behavior at a board level by changing board attitudes.” Chris Needham, GE’s Global VAT and GST Director from EY Tmagazine Issue 8

In the indirect tax field, especially value added tax, this kind of aggressive tax structures were for a long time often approved by case law. That has changed when the European Court of Justice ruled a couple of years ago that the tax advantage had to be revoked or denied.

The indirect tax profession had to change as well and reposition itself to ‘manage the numbers of indirect tax’ – focus more on risk management – and because of new trends relationships with tax authorities became more important to realize the taxpayer’s tax objectives.

See also OECD’s promotion of ‘enhanced relationship’ (OECD Report: Study Into The Role of Tax Intermediaries).The new trend is or will be to have an open dialogue between revenue bodies, taxpayers and tax intermediaries based on mutual trust.

Is what Apple did wrong?

How Apple Sidesteps Billions in Global Taxes by Charles Duhigg and David Kocieniewski

“Apple’s headquarters are in Cupertino, Calif. By putting an office in Reno, just 200 miles away, to collect and invest the company’s profits, Apple sidesteps state income taxes on some of those gains. California’s corporate tax rate is 8.84 percent. Nevada’s? Zero. Setting up an office in Reno is just one of many legal methods Apple uses to reduce its worldwide tax bill by billions of dollars each year.

As it has in Nevada, Apple has created subsidiaries in low-tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands — some little more than a letterbox or an anonymous office — that help cut the taxes it pays around the world.

Almost every major corporation tries to minimize its taxes, of course. For Apple, the savings are especially alluring because the company’s profits are so high. Wall Street analysts predict Apple could earn up to $45.6 billion in its current fiscal year — which would be a record for any American business. Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist, Martin A. Sullivan.”

From an indirect tax perspective as resident of Europe if you buy services from Apple via the iTunes store no local VAT is due unless you are a resident of Luxembourg. The supply is subject to Luxembourg VAT. In Hungary the standard VAT rate is 27%. The standard VAT rate in Luxembourg is still 15%.

That means a maximum VAT saving of 12% per transaction to purchase the services from Luxembourg in stead of a local (e.g. Hungarian) entity.

About change and competencies

Based on the above, effective tax advice by a tax professional should nowadays not only address the ways of how not paying more tax than necessary and evaluate associated tax risks of implementing such tax planning schemes (rate level of tolerance on a risk scale), but should also take in consideration the impact of such planning on the reputation of the company if it becomes public knowledge and that means anticipate actions of the authorities to truly qualify as a trusted business tax advisor.

What is the impact if the tax planning becomes public knowledge?
What are the consequences if a newspaper or politician picks it up to make statements about lack of ‘tax morale’ and the company is used as case study?
Think about the taxpayer’s customers, suppliers, employees, external auditors, financial institutions, the taxpayer’s credit rating.

“On his 2008 Presidential campaign trail, Barack Obama made his hostility toward “offshore” jurisdictions very clear: “There’s a building in the Cayman Islands that houses supposedly 12,000 U.S.-based corporations. That’s either the biggest building in the world or the biggest tax scam in the world, and we know which one it is.”

What determines our reputation?

Is that also the real market danger for Apple:

  • The mindset of the public opinion?
  • What is the impact on Apple’s reputation with respect to this kind of stories?

Apple customers and suppliers face increase of taxes and you hear that Apple does not pay taxes (highly profitable). Would that customer have an opinion about tax morale in general and benchmark that with Apple’s tax strategy?

  • What is the public opinion about the company’s code of conduct?
  • Has that opinion changed and what was the cause effect?
  • Does that impact Apple’s future tax strategy?

About change of tax strategy, If you focus only on evaluating tax risk (level of tolerance) probably not. However, is such a tax risk analysis nowadays sufficient?

In Apple’s defense lots of multinationals are doing the same and change of the tax system – as those structures are often legally allowed – is the only way to close such gaps. I refer to Obama’s quote:

“There’s a building in the Cayman Islands that houses supposedly 12,000 U.S.-based corporations.”

Apple’s public image is made of teflon

The N.Y. Times’ tax-avoidance story didn’t stick to Apple By Philip Elmer-DeWitt

“When the New York Times claimed incorrectly last year that General Electric (GE) paid zero federal taxes in 2010 on worldwide profits of $14.2 billion, the company’s reputation took a steep and prolonged hit, as measured by YouGov’s BrandIndex Reputation score.
Not so Apple (AAPL).

When the same paper ran a front-page story last week detailing — again incorrectly, according to Forbes — the lengths to which Apple has gone to avoid paying taxes, the company’s consumer reputation barely budged. In fact, based on responses to the question “Would you be proud or embarrassed to work for this brand?” Apple’s reputation score actually went up modestly a few days after the Times story broke, according to a YouGov report issued Tuesday.

The market research firm concluded that Apple’s public reputation is “virtually Teflon” – at least in terms of tax avoidance.”

However, is there a time limit on being bulletproof?

What are your guidelines on acceptable tax planning, including impact on the business, the potential change to the company’s tax risk profile and key reputational issues.

By Richard Cornelisse

Solve the actual problem not a SAP VAT symptom

In Audit Defense, Benchmark, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, SAP add on, SAP add on for VAT, SAP for VAT, SAP SLO renaming tax codes, System Landscape Optimization, VAT automation, VAT planning on 30/07/2014 at 4:06 pm

cropped-taxmarce284a2-sap-solution2.jpgIf full ‘VAT automation of AP and AR and being in control’ is the aim of your organization, it is important to understand what exactly makes standard SAP not function optimal from an Indirect Tax perspective. Only then it is possible to validate whether company’s objectives can be achieved with upgrading standard SAP functionality and/or implementing a tax engine.

In so many instances the current problem turns out to be nothing more than a symptom of something far bigger. With an easy fix we will probably not solve the real problem at all.

In order to fix a problem, we have to first understand the root cause thoroughly. We have to accept the possibility that the problem involves far more than what is immediately apparent and will require more work than is estimated at the beginning.

Real problem

The standard SAP logic and functionality for VAT determination does not work for complex dynamic business models (e.g. Principal-Toller-Agent model) with for example multiple VAT registrations, pick up transactions, drop shipments and chain transactions between legal entities (ABC / ABCD scenarios).

  • The reason is that both standard SAP as bold-on tax engines focus exclusively on transactions within a single company; it only evaluates the underlying individual transactions and fails to link the current transactions to the VAT results of previous transactions.
  • As a consequence, companies with VAT registrations in different countries cannot automatically comply with all VAT obligations.
  • Tax logic should in those circumstance be based on the complete end-2-end scenario and the country specific legal requirements.
  • In case the transaction involves multiple companies on the same SAP platform the VAT Determination must be done across the different SAP company codes, at SAP client level.
  • Additional functionality need to be added to standard SAP to give it its Birds Eye overview.
  • That is the real problem that Taxmarc™ is solving in order to remediate all the symptoms in a structured way.

Because all VAT relevant data of all legal entities are gathered and used in the decision tree of Taxmarc™, SAP can now be equipped with automated VAT controls via evaluation of the consistency of the combination of VAT data and identifying real-time when certain transactions are not possible, for instance because a local VAT registration is missing.

Taxmarc™ does not patch up a symptom but solves the real problem. We should not limit our options to what we believe today’s solutions could provide more quickly or more cheaply.

Turn-key solutions fix only a symptom

There are in the market other SAP add-on solutions offered as a turn-key solution to overcome the pitfalls and shortcomings within SAP’s VAT determination and reporting logic. After signing a SOW such turn-key solutions are implemented via simply handing over an USB stick to the company’s IT department with the request to load the software into SAP.

That would mean that the product is designed as a Plug And Play solution and has been developed as an One Size Fits All which probably qualifies more as a patch up solution as it is focused only on remediating some symptoms but does not meet the ‘being in control’ aim set. That is not the Taxmarc™ approach.

Such way of operating would be in conflict with reality, not in line with our philosophy and never be qualifying as best practice. Every multinational company has not only their own deviations from a supply chain perspective (e.g. 4 parties in the chain) but would have a different SAP set up with various ‘homegrown’ practical work-around’s as well. There are not only generic VAT rules and risks but also specific (industry) VAT rules and risks.

We have tuned up standard SAP (i.e. given it extra brain power) to realize extra indirect tax performance.

The result is that the VAT treatment of all incoming and outgoing invoices is automatically determined on real time data for also the most complex transactions and it includes features to optimize workforce efficiency (i.e. Taxmarc™ time stamped tax codes).

Continuous Controls Monitoring and Planning

With Taxmarc™ Data Analytics all relevant VAT data are immediately available without any run-time issues as the VAT data are separately stored in the SAP database. It provides a Continuous Controls Monitoring tool for all stakeholders, also beyond indirect tax (e.g. export control, transfer pricing), and realizes real time access to the company’s blue print without any need of manual transaction mapping.

This contributes added value to company’s business objectives. The impact of business changes can be determined via simulation with the use of real time data (e.g. cash flow planning) and facilitates in better management of the executives own KPIs.

Apple and orange comparison

Taxmarc™ Tax Engine is our premium package. In order to facilitate the client needs or simply to avoid apple and orange comparison with our competitors of turn-key solutions, we have launched Taxmarc™ Basic (standard package) and Taxmarc™ Add-on (start up package).

The difference is that the features of these packages are built on the ‘proven Taxmarc™ platform and adding additional features or even upgrade to the full Taxmarc™ Tax Engine is possible at a later stage.

Last but not least

A company’s indirect tax objectives go beyond Europe and standardized global processes and controls are important from an indirect tax management perspective.

Although the VAT rules are most complicated in the EU the SAP VAT solution should not be limited to only EU countries. Taxmarc™ is already running outside the EU in the following countries: China, Chile, Israel, Japan, Malaysia, Mexico, Norway, Russia, Singapore, South Korea, Switzerland, Taiwan and the US. All new VAT or GST countries can easily be added.

The US is an example that Taxmarc™ can handle other than VAT or GST countries.

Our company statement is ‘promise only what you can deliver and deliver everything you promise’. All our solutions are ‘implemented’, ‘tested’ and ‘in production’ at various listed multinationals.

About Taxmarc™

The maximum VAT performance of SAP
Where Taxmarc™ differentiates
Taxmarc™ Features
Taxmarc™ Tax Control Framework
Real time access to your company’s blue print
VIES ID check integrated in SAP
The best SAP Add-on solution for VAT
Tax Codes with validity dates
SLO renaming tax code exercise
Taxmarc™: Intrastat Module in SAP

Compare VAT performance of Standard SAP with Taxmarc™ packages.004Compare VAT performance of Standard SAP with Taxmarc™ packages.005Compare VAT performance of Standard SAP with Taxmarc™ packages.006Richard Cornelisse
Director Strategy & Sales Taxmarc™

Our premium SAP add-on package for VAT

In Audit Defense, Business Strategy, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, SAP add on, SAP add on for VAT, SAP for VAT, SAP SLO renaming tax codes, System Landscape Optimization, VAT automation, VAT planning on 29/07/2014 at 10:34 pm

Taxmarc™ SAP solution2

No interface, no external software and low maintenance

It really takes a maximum of only 4 extra SAP tables to get our SAP add-on solution(s) up and running

Our premium package

Taxmarc™ Tax Engine is the name of our premium package and enables – without interface or external software – a fully automated VAT determination of all sales and purchase transactions in SAP. This package incorporates VAT relevant data of all transactions, including chain transactions between legal entities in order to ensure this correct VAT determination and can be implemented in all recent versions of SAP (R/3 or ECC).

The advantages

  • Fully automated VAT determination of outgoing invoices (AR) on the basis of 30 parameters instead of the 4-8 parameters in standard SAP;
  • Automated VAT determination of incoming invoices (AP) based on purchase orders and actual vendor invoices;
  • Fully automated VAT determination of chain transactions in SAP with the assurance that the VAT code on sales transactions always correspond to the VAT code on purchase transaction;
  • Integrated Tax Control Framework which ensures that transactions that fail to comply with fiscal requirements are automatically blocked. Blocked transactions can be released but are always logged for review;
  • Time-stamped tax code structure: no new tax codes are required when VAT/GST rates are changed;
  • Taxmarc™ prevents that time-consuming manual processes outside of the system are necessary;
  • Taxmarc is fully table-driven and there is no “hard-coding” of tax rules, which results in easy maintenance;
  • Integrated VAT number validation in SAP;
  • All relevant VAT data separately stored in database in SAP (immediate available without any run-time issues);
  • Continuous Controls Monitoring for all stakeholders (data analytics);
  • Real time access to the company’s blue print;
  • Determine impact of business change via simulation with real time data.

When is Standard SAP sufficient?

Standard SAP itself is only processing a transaction within one specific company code and the consequence is that standard SAP VAT determination logic and functionality for VAT determination should therefore only work for:

  • AB scenarios
  • Cross border inter-company
  • AB scenarios: electronic invoices via EDI/iDoc
  • Local ABC scenarios (e.g all legs in France)
  • ABC scenario with a static business model (for instance leg B-C triggers always the same VAT treatment)

Any standard SAP gaps could be resolved with limited adjustments the overall VAT determination improved via standard design of VAT condition tables, access sequences, tax codes, tax sensitive master data, configuration of customer VAT registration number.

When is Standard SAP insufficient?

However, standard SAP VAT determination logic and functionality for VAT determination does not work for complex dynamic business models (e.g. Principal-Toller-Agent model) with for example multiple VAT registrations, pick up and drop shipments, chain transactions between legal entities (ABC / ABCD scenarios).

Tax logic should in those circumstance be based and generated on a higher SAP’s hierarchy: at client level combined with implementing the basic tax rules into the logic. Client level includes all the company codes working on the same SAP platform.

Explanatory

For a correct VAT determination of a cross border chain transaction the VAT relevant data of company code A and B has to be linked real time as Standard SAP itself is only processing a transaction within one specific company code. That means that additional functionality need to be added to Standard SAP to give it its Birds Eye overview.

SAP and bold-on tax engines exclusively focus on transactions within a single company; it only assesses the underlying individual transactions and fails to link the current transactions to the VAT results of previous transactions. As a consequence, companies with VAT registrations in different countries cannot automatically comply with all VAT obligations.

To realize such Birds Eye view the tax logic should be based and generated on a higher SAP’s hierarchy: at client level combined with implementing the basic tax rules into the logic. Client level includes all the company codes working on the same SAP platform. Without that approach: the ‘Garbage In’ and ‘Garbage Out’ principle will apply.

  • Taxmarc™ draws upon 30 parameters at this level to be able to fully automate the VAT determination of all (chain) transactions in SAP on real time data. Via enhancement implementation extra Taxmarc™ functionality is added to standard SAP (no interface needed).
  • It really takes a maximum of only 4 extra SAP tables to get our SAP add-on solution(s) up and running.
  • 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.

Taxmarc™ Taxmarc™ 2 Taxmarc™ 3

Where Taxmarc™ differentiates

In daily tax life every company has not only their own deviations from a supply chain perspective (e.g. 4 parties in the chain) but could have a different SAP set up with various ‘homegrown’ practical work arounds and face besides generic also specific (industry) VAT risks.

  • After the SOW is signed our first effort would be that we sit down together with all in-house stakeholders (Indirect Tax, SD, MM, Finance, IT) to demonstrate in detail what we are going to change, explain why those changes are needed, what is accomplished with these changes and that these changes have a low impact on the current SAP set up.
  • Subsequently we perform own checks on the current system and discuss these VAT and set up findings to understand the root cause why certain developments or configurations have been made in the past or to get a clear understanding of the background of certain specific SAP scenarios.
  • We consider it important to spend time together with in-house stakeholders not only to get their immediate buy-in at the beginning of the project from a change management perspective, but as well to transfer knowledge back and forth by which also the solution will be tailor-made and future maintaining could be done in-house. The latter means process owners are appointed and we challenge decisions from a best practice perspective (what works for other multinationals).
  • Understanding your current set up is really essential for us as all our designed features have to work as promised and that means that for certain specific scenarios some extra development might be needed. That is included in our fixed fee as it is all about realizing the IT and indirect tax objectives as agreed.
  • We take a management role. We are the Subject Matter Experts and will take the lead in the project and install our solution ourselves. We do not shift responsibility as it is our core business and expertise. Simply ask our client references if this has been an appreciated and an effective approach.

Our company statement is ‘promise only what you can deliver and deliver everything you promise’. All our solutions are ‘implemented’, ‘tested’ and ‘in production’ at various listed multinationals.

The following diagrams consist of some core Taxmarc™ features.The percentages shown describe the performance of standard SAP only, Taxmarc™ Add-on and Taxmarc™ full features per category item. The maximum performance is set at 99.5% due to for example cost benefit considerations (e.g volume rebates).

*All scenarios are taken into account such as ABC scenario where party A and party B have multiple VAT registrations

Compare VAT performance of Standard SAP with Taxmarc™ packages.004Compare VAT performance of Standard SAP with Taxmarc™ packages.005Compare VAT performance of Standard SAP with Taxmarc™ packages.006Compare VAT performance of Standard SAP with Taxmarc™ packages.007

 

Richard Cornelisse
Director Strategy & Sales Taxmarc™

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