Richard Cornelisse

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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?

M&A: invoicing in the Interim

In Indirect Tax Strategic Plan on 08/12/2014 at 7:31 pm

When the new business model cannot be implemented into the purchaser’s own ERP system within a given time frame, the typical solution is to temporarily outsource the process to the seller through a temporary service agreement. But such workarounds, however practical, can lead to new risks.

In an asset deal, for example, an ongoing relationship with the seller as part of the transition agreement could be seen as outsourcing VAT accounts payable/accounts receivable processes. That in turn could trigger VAT compliance issues, difficulties in accessing data, questions around the quality of VAT controls, and blind reliance on an ERP set up with an outcome that could not be verified.

There are possible people issues as well. Although the vendor’s (seller’s) staff and systems are used to bridge the gap until the necessary resources, knowledge, systems, registrations, and authorizations are in place, the people doing the work have no real vested interest in the new model. In fact, they may even be losing their jobs because of the merger or acquisition.

Invoicing in the Interim

In worst case scenarios, staff members may not feel responsible for the work they are doing. We have seen results that, if not costly and catastrophic, certainly undermine the functionality and credibility of the enterprise.

One of the most common side effects of an integration that cannot be fully realized surfaces in the realm of invoicing. For example, large numbers of payable invoices are not correctly coded so VAT is not deductible. Or when the legacy system is only half integrated into the new model, incorrect sales invoices are issued, causing problems for customers, incorrect reporting of tax figures, and missed compliance obligations.

Knowing who is legally obliged and practically able to issue invoices is critical in interim or transitional situations. Is the previous owner legally allowed to issue invoices? Whose VAT compliance issues are these and how can the new owner obtain and share information? Can the new company continue billing its customers? Implementing a transitional arrangement—especially if it is unplanned—can be expensive, causing delays to the overall integration and setting practical, commercial risks into motion.

via M&A Integration And Indirect Tax.

Pitfalls of actual to budget exercises

In Indirect Tax Strategic Plan on 08/12/2014 at 7:23 pm

Is it wise to have Stevie Wonder in the drivers seat?

“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” Richard Cornelisse

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.

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:

  • power struggle over clients (protectionism, claiming clients and winnings)
  • individual’s own “people first” attitude (without a team approach)
  • service offerings being proposed that are actually outside their own area of expertise (no standard quality, increased liability, pricing variation, etc.)
  • lack of a willingness to share relevant client-related information (protectionism)

via Pitfalls of actual to budget exercises especially in the downturn.

Is Google the adviser of the future

In Indirect Tax Strategic Plan on 08/12/2014 at 7:20 pm

Non-traditional competitors are entering the service provider market and capturing market share.

Who are they? Can content service providers ignore these trends? Will technological innovation get an extra boost from this economic climate? What can we expect next? Is ‘Google’ the adviser of the future?

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.

via Is Google the adviser of the future.

Phenix Consulting: SAF-T service offering

In Phenix Consulting on 28/11/2014 at 9:58 pm

Across the globe many multinational companies are facing challenges in complying with the mandatory SAF-T filing requirements.

SAF-T is the OECD’s Standard Audit File for Tax Purposes that is being adopted as common practice for tax administrations and will be the basis for IT-based audit tools to help to combat fraud and tax evasion.

Schermafbeelding 2014-11-09 om 12.01.42

View SAF-T Service offering

Phenix Consulting: SAF-T demo

In Phenix Consulting on 28/11/2014 at 6:58 pm

Phenix Consulting, a joint venture between LiNKiT Consulting and the KEY Group, specializes in the delivery of a range of SAP consultancy and implementation services from a tax, financial and control perspective. Phenix Consulting continually strives to develop innovative SAP products and broaden our product lines.

An examples of our innovative products is the SAF-T Cockpit.

Phenix Consulting: tax, financials and controls for SAP

In Audit Defense, Processes and Controls, SAFT, VAT for SAP on 27/11/2014 at 7:43 pm

The KEY Group and LiNKiT Consulting incorporated a joint venture company Phenix Consulting.

The combined knowhow of these 2 companies are used to develop and implement SAP software products and provide tailor-made SAP consultancy services.

Where the KEY Group focuses on those areas where Business Control, Information Technology and Tax come together, LiNKiT Consulting is specialized in Finance and Controlling providing expertise in Business Consulting, SAP-implementation and Product Development.

 

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Phenix Booklet

Learning Lab: ‘cross border movements in SAP’

In Business Strategy, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, SAP add on, SAP add on for VAT, SAP for VAT, SAP implementation, SAP review, Technology, US VAT introduction, VAT automation, VAT for SAP on 24/11/2014 at 8:08 pm

We hosted the Learning Lab of the sharedserviceslink Conference – VAT compliance through SAP Control – in London November 19-21, 2014 on the topic ‘cross border movements in SAP’.  The objective was to facilitate and share knowledge on SAP and VAT. The learning lab slides have been transformed into a video as well.

Learning Lab Contents

Learning Lab in PowerPoint

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