Richard Cornelisse

Author Archive

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™

Virtual personal assistant answers tax questions

In Audit Defense, Business Strategy, Indirect Tax Strategic Plan on 28/07/2014 at 12:00 pm

KEY Group new logo long

Non-traditional competitors are entering the tax service provider market and capturing market share. Will technological innovation get an extra boost? What can we expect next? Will a virtual personal assistant answer all your tax questions immediately?

Market Strategy

If competitor benchmarking reveals that the traditional way of working is still successful and has growth potential, do you really need to change?

One answer might be that the scope of the benchmark exercise was too narrow, especially in cases where non-traditional competitors are targeting your market.

Is the impact of non-traditional competitors a realistic scenario?

The easiest way – without any further analysis – is simply to deny or ignore their existence. The obvious arguments include our strong brand name, our strong reputation and the strong position our company has achieved in the market traditionally. Companies have responded like this and subsequently gotten burned. Ignoring innovation, being too self-confident or underestimating technology developers is not a smart move.

What happens when you don’t ignore?

In the worst-case scenario, you can accept your position, reinvent yourself, set new strategic objectives and mobilize your company’s resources to realize new sources of income. The wrenching effect of the change is less extreme, of course, if the company adapts its strategy and is capable of spotting new opportunities and (re)positioning itself.

Internet, Search Engines And Social Media

Both Apple and Virgin entered new markets, captured market share and in some cases even market leadership.

Apple’s iTunes store is a good example. This store sells online music, applications (games and other third-party software) and books. With Apple TV you can purchase or rent movies and television series.

Simply download, watch, listen and/or read on all your Apple devices.

Who stood to lose their longtime control over the market?

The list is long but examples include: the (mobile) phone industry, music industry, gaming industry, printing industry, publishing, postal services, video rental industry, companies manufacturing DVDs/CDs, commercial radio and TV broadcasting, etc.

In the Netherlands, the Free Record Shop is closing its megastore and many other stores have probably already done so or will follow. When somebody wins, somebody else must lose.

People can connect with each other all over the world and talk face-to-face (including video conferencing). This is all ‘free of charge’ if you have access to wifi (e.g. via FaceTime / Skype). This was traditionally the home market of telephone companies. Social media have made the world much smaller: you can establish global reach without any investment. With the infrastructure provided free of charge, you can connect with people, build and maintain networks, set up groups, communicate and share information. Many service providers had invested considerable amounts of money in similar sophisticated infrastructures over the years.

Companies such as Google, LinkedIn and Facebook are hardly charities. They use these services to achieve their own objectives: getting more users, increasing their advertisement income and gathering data for market analysis. Recently I noticed a Big4 organization that followed the same strategy. You could download an iPad app for free and get the latest edition of a digital book containing the local tax regulation as a bonus. In the past, that book was sold at market value. When somebody wins, somebody else must lose.

Many companies in the service provider industry sell content-based knowhow. In the past, that system was closed. Only a few organizations had access to specific content – often gathered via their worldwide network of people. At that time and under those circumstances, the content still represented significant added value for the client and therefore market value.

The system evolved from closed to open due to internet innovations such as search engines, and more people started to contribute and share content. Information can be posted, forwarded, shared and communicated. This is all free of charge: all kinds of content can be searched, found quickly and is available 24/7 as long as you have internet access.

Let’s do an exercise. Look back 5-10 years ago and think about the basic content that clients were willing to pay for and that content providers are now providing free of charge. Use Google’s search engine and enter that same question. What do you see? Google probably already has the answer to your question.

The consequence is that prices are going down and that the life cycle for this kind of paid product is at an end. Everybody can search and find it himself. The current impact of Google and Wikipedia is already huge since, from a pricing perspective, much content has become less valuable or even worthless.

Will search engine functionality develop further? Will more content be available on the Internet?

Without doubt, the answer to both questions is a resounding yes.

Is ‘Google’ The Adviser Of The Future?

I am following the developments of Apple’s Siri of and of Google in general with great interest. Siri is the speech recognition engine that Apple uses as a virtual personal assistant for their devices.

The software truly understands your questions, searches the web and provides you with answers immediately. Google’s has conceded that Siri could pose a “competitive threat” to the company’s core search business.

If that is the case, is it not realistic to assume that Google and/or other companies are going to invest a considerable amount of money in developing similar functionalities? Such competition between these powerhouses will boost technology improvement.

Will such technology in the end truly understand all your tax technical questions? Is a virtual personal tax assistant going to respond immediately? Is this science fiction or our near future?

I am aware that some people will argue that certain knowhow depends on individual skill sets and expertise. For the moment, they are right, but they might be proven wrong in the future.

Can this also be automated? What successful examples relate to strategic insight and decision-making?

  • Chess is a strategic game and relates on fact-based information (pieces on the chess board: relevant facts) and a number of possibilities (moves: calculation of the impact of various options combined with overall strategic insight).

If a chess-playing computer, Deep Blue, can beat world champion Gary Kasparov in a six-game match by two to one with three draws against, shouldn’t the automation of an adviser’s strategic decision-making also be possible?

  • Deep Blue’s successor – Watson – has beaten Jeopardy champions at their own game. What was needed to make that happen: “natural language processing, searching immense data sets and creating relationships among disparate sources of information to finally culminate in an answer.”

The good news is that the profession of tax service providing is a people business. We like to be connected to people. The success of social media like Facebook, LinkedIn, Myspace and all the dating sites has confirmed this as well.

Maybe the statement about automating the tax adviser is a bit too provocative, but I still believe a lot more can be automated than we can currently comprehend. Having an open mind is the message I want to get across.

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

Is it wise to have Stevie in the driver’s seat?

In Business Strategy, Indirect Tax Strategic Plan on 23/07/2014 at 12:00 pm

KEY Group new logo long

A Ferrari is a beautiful, very fast and a state of the art car, but we should not put Stevie Wonder in the driver seat. He is an excellent song writer and performer but he never ever will be the next Michael Schumacher. It will be risky business if he controls the throttle.

Although the above example might be considered somewhat ridiculous, strangely enough, the scenario occurs often in our daily practice. The current downturn might even make this situation worse.

Why?

The reason is budget-based incentive targets. Everybody today feels the pressure, and the focus is on making a personal budget first.

We might know the best driver and understand that he is the best option, but that does not mean that we would actually want Michael in the driver’s seat. It does not matter that Michael works for the same company or that his driving would be in the best interest of the client.

Stevie wants to make his own comfort zone first; it is in his personal interest.

  • Should we be surprised?
  • Is this not part of our human nature?
  • Is that not the reason why we should have the right company culture?

Budget To Actual Exercises

Before I continue, I should mention that I consider budget exercises to be a necessity, particularly for large organizations that need to manage the performance of many people. The budget process provides top management with a certain level of control. Actual to budget exercises are—and will remain—an important part of people’s performance targets.

It is more about being aware of the pitfalls and their impact on budgeting. Once the budget is set, manipulating the internal environment to make a budget—at any cost—could result in disconnect and internal competition. In my opinion, such behavior is in conflict with the company’s business strategy, which should include growth, increased market share and increased market leadership.

A potential reason for this conflict could be that personal performance—meeting budget-based incentive targets—is considered to be a higher priority than the company’s own business objectives. If this is something structural, it becomes the company’s “informal” culture and will result in:

  1. Power struggle over clients (protectionism, claiming clients and winnings)
  2. Individual’s own “people first” attitude (without a team approach)
  3. Service offerings being proposed that are actually outside their own area of expertise (no standard quality, increased liability, pricing variation, etc.)
  4. Lack of a willingness to share relevant client-related information (protectionism)

Budget-based compensation targets themselves might also create an incentive to underperform, even during times of growth. Substantially exceeding the budget could give rise to discussions about how much the budget has been sandbagged last year, with the result being higher targets next year. To avoid this possibility, positive results might be carried forward into the next year.

Jack Welch’s View

Jack Welch has his own view regarding budgeting. He considers budgeting to be number crunching and time that is wasted and which could be used in a more productive way. It is all about internal politics, and time could be used better by focusing on the external environment, i.e., the customer.

What is the amount of time spent on budgeting?

The Beyond Budgeting Round Table, an industry research organization, estimates that an average corporation spends four months and 20-30% of the senior executives’ and financial managers’ time on their budget.

“Making a budget is an exercise in minimization. You’re always getting the lowest out of people, because everyone is negotiating to get the lowest number” (…) ”The budgeting process at most companies has to be the most ineffective practice in management. It sucks the energy, time, fun and big dreams out of an organization. It hides opportunity and stunts growth. In fact when companies win, in most cases it is despite their budgets, not because of them” Jack Welch

I like and admire Jack Welch for making these kinds of statements.

“Screw business as usual”, Richard Branson (would say)

Budgeting A Waste Of Time

Jack Welch’s complaint was that he was being sandbagged in the planning process itself. A waste of productive time begins when setting the budget. It is all about managing an internal conflict. The aim of the leadership is to set the budget as high as possible, whereas the manager has the opposite strategy—“negotiation to the lowest”. This conflict is the side effect of budget-based incentive targets.

Such an approach—“passionately defending modest projections of mediocre performance”—is in conflict with business objectives, in which the company’s mission statement is to increase its market share and/or maintain or achieve market leadership. Is that not strange?

Jack Welch’s dream was not a better way to negotiate budgets, but rather an end to the negotiations. However, how likely is it that managers themselves will propose aggressive goals? And if not, does the company’s culture have to change?

Assume that the company’s business plan was to grow by 15% overall and that one of the business units exceeds this target and realizes 25% growth. The budget is already made.

  • What does this say about the responsible manager?
  • Did he do a good job?
  • Should he earn a large bonus?

The answer would depend on several factors.

If you focus internally, only an affirmative “yes” is the obvious answer.

However, this could simply be considered underperforming when the growth is the result of an unexpected increase of market demand (by external factors).The same is applicable if the competition also has much higher growth figures.

In an ideal world, everybody knows how their competition is performing, how the teams are set up and what the client portfolio is. Their own strengths and weaknesses are continuously being analyzed and measured. A gap analysis is made with the competition, and the gaps found can be prioritized and validated by top management.

The impact of these gaps on the company’s overall business objectives is discussed. For the various solutions, cost-benefit analyses are made such that a constructive discussion with top management can be held regarding what is needed to close these gaps.

In the worst-case scenario, the gap(s) will not be closed, but at least you will have achieved mutual awareness and—hopefully—responsibility.

The strength of this approach is that you look forward and focus on what can still be managed. Budget to actual is a “looking back” exercise. Perhaps combining the best of both worlds is the winning combination. Indeed, life is often about finding a good compromise.

By Richard Cornelisse

Equip SAP with automated VAT Controls

In Audit Defense, EU development, 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 on 22/07/2014 at 12:00 pm

cropped-taxmarce284a2-sap-solution2.jpg

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.

  • 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 or external software needed and low maintenance).
  • 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.

Integrated VAT Control Framework

Because the decision tree of Taxmarc™ is integrated in SAP as part of the Tax Control Framework, SAP is equipped with automated controls:

  • Real time evaluation of the consistency of the combination of the VAT data Taxmarc™ identifies real-time when certain transactions are not possible, for instance because a local VAT registration is missing
  • In the event of inconsistencies transactions are automatically blocked. The correct combination – incoterms, tax compliancy, customer/company VAT registration, export control – has to be entered via the Edit function in order for the transaction to proceed. If a transaction is classified as fiscally impossible, the internal tax function must take action, whereupon configuration occurs, such as the entry of a new VAT number
  • It is possible to allow transactions to proceed during these actions, if that is necessary from the company’s business perspective
  • Taxmarc™ keeps a logbook – Risk Register – of all identified inconsistencies. The internal tax function always has insight into the areas for attention through this logbook. This also allows companies to set the right priorities when measures are taken
  • The results are processes in VAT reports without manual interventions. The use of Excel sheets to submit tax return is in the past, as are the risks caused by manual interventions and VAT processes

Compare VAT performance of Standard SAP with Taxmarc™ packages.015

 

About Taxmarc™

  1. The maximum VAT performance of SAP
  2. Where Taxmarc™ differentiates
  3. Taxmarc™ Features
  4. Taxmarc™ Tax Control Framework
  5. VIES ID check integrated in SAP
  6. Taxmarc™: Intrastat Module in SAP
  7. The best SAP Add-on solution for VAT
  8. Tax Codes with validity dates
  9. SLO renaming tax code exercise

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

No external software, no interfacing and low maintenance

In VAT planning, Business Strategy, Indirect Tax Strategic Plan, Processes and Controls, Technology, Indirect Tax Automation on 21/07/2014 at 12:00 pm

cropped-taxmarce284a2-sap-solution2.jpg

The standard VAT functionality of SAP is far from optimal. Partly due to this reason SAP offers a certain degree of flexibility within the system, which enables users to apply adjustments in order to customize SAP for their organization. Previously this was known as ‘user exit’ and nowadays as enhancement implementation.

It offers users the possibility to add functionality and that is exactly what is accomplished with the implementation of Taxmarc™ without an interface.

Taxmarc™ basically creates a bypass in SAP, thereby building on the standard functionality and infrastructure of SAP, and adding extra ‘brain capacity’ in SAP. As a result, companies are able to automatically and correctly determine the VAT treatment for all transactions without external interfaces.

In addition, Taxmarc™ provides a VAT/GST Tax Control Framework integrated in SAP. This framework ensures that incorrect and improbable results are immediately visible and can instantly be corrected, so time-consuming corrections afterwards, such as the correction of sales invoices, can be prevented.

Simply the best SAP Add-on solution to overcome pitfalls and shortcomings within SAP’s VAT determination and reporting logic.

  • 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 external software and no interfacing).
  • 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.

During Big4 software vendor selections Taxmarc™ has been selected various times as the ‘best’ SAP Add-on solution for automating the indirect tax determination for both incoming and outgoing invoices including its integrated tax control framework with automated VAT controls.

Not only have we been recommended but also tested intensively prior to production by the Big4. Recently the outcome of a very detailed report was again that after intensive testing the solution works according to its specifications and could go into production.

A good question to ask our client references. We stimulate such Q&A.

Feature overview of our various packages

All packages are SAP integrated with no external software and no interfacing.

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

Taxmarc™ Taxmarc™ 2 Taxmarc™ 3

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

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

Disclosure of tax avoidance schemes

In Audit Defense, EU development, Indirect Tax Strategic Plan, Processes and Controls, VAT planning on 20/07/2014 at 4:13 pm

What is tax avoidance?

“Tax avoidance is an attempt to exploit legislation to gain a tax advantage that was never intended. This often involves artificial transactions that serve little or no purpose other than to produce a tax advantage. But tax avoidance is not the same as tax planning, which involves applying tax legislation in the way it was intended – for example saving in an ISA (Individual Savings Account) where you don’t pay tax on the interest. You can find out the sorts of activity that HMRC may consider as avoidance from the leaflet ‘Tempted by tax avoidance’.”

HMRC – Disclosure of tax avoidance schemes

Detecting tax avoidance early is a key strand in HM Revenue & Customs’ (HMRC’s) anti-avoidance strategy. The Disclosure of Tax Avoidance Schemes (DOTAS) rules enable the government to react quickly to close loopholes by changing the law, sometimes within days of the disclosure being made.

The DOTAS rules mean that HMRC can immediately put resources in place to conduct intensive investigations into avoiders’ tax returns, and so far they have helped to protect billions of pounds of tax.

HMRC regularly reviews the DOTAS rules to make sure that they reflect changes in the market for tax avoidance schemes. Tax avoidance scheme promoters have to give HMRC early information about schemes which fit certain ‘hallmarks’.

The promoter also has to provide HMRC at quarterly intervals with details of any clients who have used their avoidance scheme.

In addition, anyone using a tax avoidance scheme that falls within the DOTAS rules has to tell HMRC about it, usually by including a Scheme Reference Number (SRN) on their tax return, or on a special form, if they don’t complete a return. This along with the information from the promoter allows HMRC to identify tax avoiders. Promoters and users who do not comply with the DOTAS rules face substantial penalties. HMRC never approves tax avoidance schemes.

The fact that a scheme has been disclosed and has been given a reference number simply means that a promoter has complied with their obligations under the DOTAS rules. Every six months HMRC publishes statistics showing the number of disclosures made under these rules. You can find other related information from the links below:

Is there a time limit on being bulletproof?:

“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.”

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