Richard Cornelisse

Posts Tagged ‘fraud’

Study to quantify and analyse the VAT Gap in the EU-27 Member States 2012

In Audit Defense, EU development, Indirect Tax Strategic Plan on 25/10/2014 at 7:48 am

This report provides estimates of the VAT Gap for 26 EU Member States for 2012, as well as revised estimates for the period 2009-2011. It is a follow-up to the report “Study to quantify and analyse the VAT Gap in the EU-27 Member States”, published in September 2013. This update incorporates the NACE Rev. 2 classification of economic activities into the calculation of the theoretical liability.

The year 2012 saw overall unfavourable economic developments, as the GDP of the European Union shrank by 0.4 percent. These developments contributed to a slowdown of nominal final consumption and of other economic activities that form the basis of the Value Added Tax.

A few countries applied changes to standard or reduced rates, but on the whole the structure of VAT rates was relatively stable compared to the numerous changes in the wake of the onset of the Great Recession in 2008-2009.

For the EU-26 as a whole, VAT revenues grew by slightly over 2 percent, from Euro 904 billion in 2011 to Euro 922 billion in 2012; and the theoretical VAT liability (VTTL) also grew by a similar percentage. The overall VAT Gap, as estimated according to the refined methodology, for the EU-26 saw a slight increase in absolute numbers (of about Euro 6 billion) between 2011 and 2012, to reach Euro 177 billion, but remained essentially stable as a percentage of the overall VTTL, at 16 percent. The estimates for 2009-2011 have been revised because of the switch to NACE-2 classification and refinements in the methodology, and are slightly lower compared to those discussed in the 2013 VAT Gap report.

In 2012, Member States’ estimated VAT Gaps ranged from the low of 5 percent in the Netherlands and Finland, to the high of 44 percent in Romania. The median absolute change in the VAT Gap of the individual Member States from 2011 to 2012 was 1.1 percent, with a number of countries registering considerably higher changes. Overall, 11 Member States decreased their VAT Gap, with the largest improvements noted in Greece, despite the depth of its recession, and Bulgaria. However, 15 Member States saw an increase in the VAT Gap, ranging from virtually nil (e.g., Slovenia) to a substantial deterioration (e.g., Slovakia, Poland).

This report also provides estimates of the Policy Gap for the EU-26. This is an indicator of the additional VAT revenue that a Member State could theoretically collect if it applied uniform taxation to all consumption. Estimates of the Policy Gap confirm the finding that in most countries the loss of revenue compared to an “ideal” system with no reduced rates and no exemptions, is due to a greater extent to policy decisions than to non-compliance and weak enforcement.

2012 Update Report to the Study to quantify and analyse the VAT Gap in the EU-27 Member States

2012 Update Report to the Study to quantify and analyse the VAT Gap in the EU-27 Member States

OECD’s guidelines on value-added tax find widespread support

In General, Macroeconomic effects of VAT, Tax News on 06/05/2014 at 8:41 am

AN IMPORTANT development in the VAT world occurred recently in the Japanese capital Tokyo, when 86 countries endorsed a new set of international guidelines, devised by the Organisation for Economic Co-operation and Development (OECD) committee on fiscal affairs, aimed at mitigating the risks of double taxation or unintended double non-taxation.

About 160 countries have adopted value added tax (VAT) systems over the years, and at the same time international trade in goods and services has expanded rapidly. This means greater interaction between VAT systems, and increased risks.

OECD deputy secretary-general Rintaro Tamaki said at the meeting of the OECD Global Forum on VAT in Tokyo that jurisdictions often used different VAT rules to determine which jurisdiction had the right to tax a cross-border transaction, or they interpreted similar rules differently. These differences had caused “severe obstacles” for international trade and investment and hinders economic growth, he said.

“Policy action to address this issue was urgently needed, and the OECD has therefore made it a key priority to develop consensus around internationally agreed principles for a coherent application of VAT to international trade.”

South Africa is one of the 86 countries that endorsed the guidelines.

Tax authorities and the business community realised as far back as the late 1990s that VAT rules required greater coherence to avoid burdens on global trade. The OECD’s work started in 1998 with the Ottawa Conference on electronic commerce.

The 2014 OECD international VAT guidelines state that not only electronic commerce poses challenges, but that VAT could distort cross-border trade in services and intangible assets more generally, as they cannot be monitored at border posts in the same way as goods.

The OECD guidelines focus on the neutrality of VAT and the definition of the place of taxation for cross-border trade in services and intangibles between businesses. They accept the widespread consensus that the destination principle is the international norm: revenue accrues to the country of import where final consumption occurs.

The guidelines encourage similar levels of taxation where businesses in similar situations carry out similar transactions, that VAT rules be framed in such a way that they are not the primary influence on business decisions, and where specific administrative requirements for foreign businesses are considered necessary, they should not impose a disproportionate or inappropriate compliance burden on the businesses.

Tax authorities are encouraged to apply tax laws fairly, reliably and transparently; to encourage compliance by ensuring the costs of complying are kept to a minimum ; and to deliver quality information.

PwC VAT leader Charles de Wet, who attended the Tokyo meeting, says SA is already adhering to the guidelines to a large extent.

The problem is that not all its trading partners in Africa are doing the same.

Several African countries also attended the Tokyo conference, including Kenya, Zambia, Ghana and Mozambique. It is not clear whether all of them endorsed the guidelines.

Mr de Wet says all the positive elements expected in the design of a good VAT system have been encapsulated in the guidelines.

“VAT is supposed to work through the production cycle and it should be borne by the end consumer of the product or service and not by business.” VAT is a major source of revenue for governments, which take a knock from under-taxation, but double taxation hurts trade.

“The boxes that need to be ticked include whether the system offers neutrality, certainty and efficiency,” says Mr de Wet.

“It is an important development in the VAT world, and it is important for traders and tax authorities to take note of where VAT is being positioned in the tax value chain,” says Mr de Wet.

South African Revenue Service spokesman Adrian Lackay says the guidelines offer revenue authorities greater certainty on how VAT should be imposed on cross-border services. Ignoring them could lead to “either double taxation or double nontaxation”. He says South African legislation will have to be amended in the near future to comply fully with the OECD guidelines, as domestic legislation is not yet aligned with them in certain instances.

These amendments will be done under the guidance of the National Treasury.

“Fraudulent VAT activities and refund claims, in particular, pose significant risks to the fiscus. These risks have to be managed continuously to protect the fiscus against abuse and fraud,” says Mr Lackay.

VAT collections in South Africa amounted to 26.4% of the government’s main sources of tax revenue in the 2012-13 fiscal year, compared with 24.7% in 2008-09. Total collections increased from R191bn in 2009-10 to R240bn in 2012-13.

From: OECD’s guidelines on value-added tax find widespread support | Business | BDlive by Amanda Visser

Validation process of VAT numbers in SAP

In Audit Defense, Indirect Tax Automation, Processes and Controls, SAP add on, SAP add on for VAT, SAP for VAT, SAP SLO renaming tax codes, System Landscape Optimization, Technology, VAT automation on 01/04/2014 at 6:12 pm

Taxmarc™ SAP solution2
An important control measure in terms of material indirect tax is checking whether the 0% rate is correctly being applied.

A prerequisite for the application of the 0% rate for cross-border transactions within the European Union is a valid VAT number of the client. The valid VAT number must also be mentioned on the invoice.

Adequate monitoring of this is crucial to eliminating risks as much as possible.

Validation process of VAT numbers in SAP

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 is incorrect or invalid. The KEY Group checked the VAT numbers through a data analysis for a client:


The number of erroneous VAT numbers is close to 25%. From a VAT perspective this implies material risks that exceed every risk tolerance (0 percent, client acceptance with regard to preventing VAT fraud).

Taxmarc™’s solution for validation of VAT numbers

Taxmarc™ can automatically check the VAT numbers when a VAT number is added to the customer master data. A real time link to VIES is made to validate the entered VAT number. The client can choose 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: check with the customer and/or correct. VAT numbers can expire or change due to changes in the legal structure of customers.

It is therefore important to periodically check the validity of the VAT numbers. In Taxmarc™ it is also possible to periodically carry out these controls as detective controls within the Tax Control Framework.

This can be done in a fully automated process.

Taxmarc™: Intrastat Module in SAP

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 31/03/2014 at 9:41 am

Taxmarc™ SAP solution2

Taxmarc™ Tax Engine fully automates not only the VAT handling of incoming and outgoing invoices but checks real time each individual with its integrated Tax Control Framework and any errors are blocked or allocated to an emergency table.

Launch of Taxmarc™ Intrastat Module for SAP

Today, we launch our Taxmarc™ Intrastat Module: a fully automated SAP solution with integrated controls that uses standard SAP without external interface. The biggest issue with SAP Intrastat reporting is related to the completeness and correctness of the relevant Intrastat transactions. 

In standard SAP Intrastat there are transaction selected that should not have been selected (correctness) and there are transaction not selected that should have been selected (completeness). Manual corrections are time consuming and sometimes not possible.

See also below an extraction of a SAP note:

Cause and prerequisites: certain constellations of trangular deals cannot be modelled in the standard system.

Intrastat reports are increasingly becoming a useful tool for the tax authorities to evaluate the risk of VAT frauds, a topic high on the priority list of European Commission and local governments.

Many countries, notably Germany and Belgium, look to reconcile companies’ VAT returns to their Intrastat filings to identify inconsistencies in their VAT compliance.

Mismatches between VAT returns and Intrastat reports have the current focus of tax authorities and could trigger an audit. In practice reconciliation efforts afterwards are time consuming and in practice often not possible due to lack of audit trail.

To design an optimum process it is mandatory to link SAP’s VAT return with Intrastat requirements and transport the results to SAP Intrastat templates. Taxmarc™ module has established this alignment. That is the strength of Taxmarc™ and what is lacking in standard SAP.

It is not only about ‘being compliant’ to EU rules and regulations, but workforce efficiency and reduction of future costs as well. For example hard savings could be realized as this module avoids manual intervention, but also future audit costs could be reduced substantially.

This Intrastat module has been implemented and tested by a listed Multinational and a client reference is thus available. So whilst fines for non-compliance of Intrastat are very low, companies should therefore ensure they are fully up-to-date on their reporting.

Intrastat background

Each Member State of the European Union compiles its own external trade figures, in other words statistics on its cross-border movements of goods. A distinction is made between trade of goods between EU Member States (Intrastat), on the one hand, and trade with countries that do not belong to the European Union, on the other, (Extrastat).

The transactions between EU Member States are called “intra-Community purchases and deliveries” as regards to the value added tax code, and are labelled “arrivals” and “dispatches” for statistical purposes. The names “imports” and “exports” remain used for movements with third party countries, as well as for describing external trade in general.

The entry into force, on 1 January 1993, of the Single European Market opened up internal borders and abolished customs formalities. However, statistical obligations remain in place.

Intrastat is the monthly filing regime for companies sending (dispatches) and receiving (arrivals) goods across EU member countries’ national borders. It enables countries to monitor intra-community supplies and general trade.

All those subject to VAT have to complete a declaration themselves, regarding their intra-Community trade, unless this does not exceed a threshold calculated on an annual basis. This is the Intrastat declaration. This declaration includes all data regarding goods arriving from other Member States and goods being sent to other Member States.

It is important to note that if a business fails to submit the Intrastat reports within the legal time period, administrative or legal sanctions may be imposed.

459296 sap note triangular deals and intrastat

Via Intrastat Module in SAP

By Richard Cornelisse

Director Strategy Taxmarc™




‘Why’, ‘What’, and ‘How’ of Managing an Effective Indirect Tax function

In Audit Defense, Benchmark, Business Strategy, EU development, General, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, Technology, Training, VAT planning on 04/03/2014 at 9:07 am

Table of Content

Yes, I address more than one person with this newsletter, but here’s the absolute magic trick (the secret behind the curtain):

  • People who don’t belong here unsubscribe and find where they belong.
  • People who do belong here lurk for a VERY long time usually before they dare to hit reply and see if I’ll write back (I almost always do, and usually ridiculously fast).
  • People who do belong here learn really quickly that I don’t want your money as much as I want your time and attention and connection.
  • People who do belong here learn really quickly that if they do spend money with me, I work very hard to deliver value. [Chris Brogan]

Philosophy behind the GITM initiative – Richard H. Cornelisse

The objective of the GITM initiative is to set out and discuss the ‘Why’, ‘What’, and ‘How’ of managing an effective indirect tax function.

Impact of the increase of VAT rates globally: the greater the amount of tax in the system, the greater the tax risk. VAT errors could – as it is a transactional tax – negatively impact profit margin and shareholder’s value.

Besides the ‘Why’ it is important to know what needs to be managed within an organization. To support change of roles and responsibilities – e.g. governance and mandate – involvement of senior management is essential.

Change management is an important topic in various sections. How to realize sponsorship and make a difference? An overview of approaches, methodologies and best practice tools are included.

Richard H. Cornelisse


A roadmap to indirect tax function effectiveness

Planning of non-routine transactions

Building Blocks of an Indirect Tax Strategic Plan

Indirect Tax Risk Management

Building Blocks of a VAT Control Framework

Data and Technology



Indirect Tax Technical


Tax Fraud: Commission looks at how VAT collection and administrative cooperation can be improved

In Audit Defense, EU development, Processes and Controls on 13/02/2014 at 6:05 pm

Tax Fraud: Commission looks at how VAT collection and administrative cooperation can be improved

Today the Commission adopted two reports which shed more light on problems linked to fighting Value Added Tax (VAT) fraud within the EU, and which identify possible remedies.

The first report looks at VAT collection and control procedures across the Member States, within the context of EU own resources. It concludes that Member States need to modernise their VAT administrations in order to reduce the VAT Gap, which was around €193 billion in 2011. (see IP/13/844) Recommendations are addressed to individual Member States on where they could make improvements in their procedures.

The second report looks at how effectively administrative cooperation and other available tools are being used in order to combat VAT Fraud in the EU. It finds that more effort is needed to enhance cross border cooperation, and recommends solutions such as joint audits, administrative cooperation with third countries, more resources for enquiries and controls and automatic exchange of information amongst all Member States on VAT. Both reports are part of the broad Commission Action Plan to fight against tax fraud and evasion (see IP/12/1325), and can be found online on the European Commission’s Taxation and Customs Union website .

  1. Report I from the Commission to the Council and the European Parliament on the application of Council Regulation (EU) no 904/2010 concerning administrative cooperation and combating fraud in the field of value added tax
  2. Report II from the Commission to the Council and the European Parliament. Seventh report under Article 12 of Regulation (EEC, Euratom) n° 1553/89 on VAT collection and control procedures.


EU to establish a cooperation framework with non EU countries to fight VAT fraud

In EU development on 08/02/2014 at 9:09 am

Tackling tax fraud: Commission proposes stronger cooperation with non-EU countries on VAT
As part of the fight against tax fraud, the Commission has today asked for a mandate to negotiate VAT administrative cooperation agreements in with Russia and Norway.

An estimated €193 billion in VAT revenues (1.5% of GDP) was lost due to non-compliance or non-collection in 2011. While this loss is attributed to a mix of different factors, VAT fraud is certainly an important contributor.

Cooperation agreements with the EU’s neighbours and trading partners would improve Member States’ chances of identifying and clamping down on VAT fraud, and would stem the financial losses this causes. (See EC Press 6/2/2014). Business News Correspondent – 07.02.2014

As part of the intensified battle against tax fraud, the Commission today launched the process to start negotiations with Russia and Norway on administrative cooperation agreements in the area of Value Added Tax (VAT). The broad goal of these agreements would be to establish a framework of mutual assistance in combatting cross-border VAT fraud and in helping each country recover the VAT it is due. VAT fraud involving third-country operators is particularly a risk in the telecoms and e-services sectors. Given the growth of these sectors, more effective tools to fight such fraud are essential to protect public budgets. Cooperation agreements with the EU’s neighbours and trading partners would improve Member States’ chances of identifying and clamping down on VAT fraud, and would stem the financial losses this causes. The Commission is therefore asking Member States for a mandate to start such negotiations with Russia and Norway, while continuing exploratory talks with a number of other important international partners.

Algirdas Šemeta, Commissioner for Taxation, said: “The supply chain has evolved dramatically since VAT was first implemented in the EU. Globalisation and e-commerce open up new windows of opportunity, but also create new risks. Fraudsters play on cross-border differences and information gaps between countries. The EU needs to work hand-in-hand with its international partners if it is to successfully combat VAT fraud. That is what the Commission is proposing today, with a request for negotiating mandates to formalise this cooperation.”

The cooperation agreement would be based on the Regulation on administrative cooperation in the field of VAT, which currently sets the framework for intra-EU collaboration in this area. Among the ways in which Member States cooperate against VAT fraud are by allowing each other access to their data bases, and exchanging information (either automatically or on request) on taxpayers’ activities. Eurofisc is also a very effective network for Member States to exchange information and intelligence on VAT fraud.

The use of such instruments could be extended to third countries through cooperation agreements against VAT fraud. The EU intends to negotiate such agreements with neighbouring countries, its main commercial partners and countries to be considered leaders in the field of electronically supplied services. For now, exploratory talks have been initiated with Norway, Russia, Canada, Turkey and China. Both Norway and Russia have already indicated that they are now ready to start official negotiations.

via EU to establish a cooperation framework with non EU countries to fight VAT fraud.

Fighting Tax Evasion and Avoidance: A year of progress

In EU development on 17/12/2013 at 9:47 am

Why has the Commission made fighting tax fraud and evasion a priority?

Every year, billions of euros of public money are lost in the EU due to tax evasion and tax avoidance. As a result, Member States suffer a serious loss of revenue, as well as a dent to the efficiency their tax systems. Businesses find themselves at a competitive disadvantage compared to their counterparts that engage in aggressive tax planning and tax avoidance schemes. And honest citizens carry a heavier burden, in terms of tax hikes and spending cuts, to compensate for the unpaid taxes of evaders. Fighting tax evasion is therefore essential for fairer and more efficient taxation.

The cross-border nature of tax evasion and avoidance, along with Member States’ concerns to maintain competitiveness, make it very difficult for purely national measures to have the full desired effect. Tax evasion is a multi-facetted problem requiring a multi-pronged approach, at national, EU and international level.

EU Member States need to cooperate closely if they are to increase the fairness of their tax systems, secure much needed tax revenues and help to improve the proper functioning of the Single Market. In addition, the “strength in numbers” of the EU acting as a united block helps give more weight in achieving faster and more ambitious progress at international level in the area of tax good governance.

What progress has been made in fighting tax evasion and avoidance at EU level over the past year?

In December 2012, the Commission presented an Action Plan to better tackle tax evasion and corporate tax avoidance (IP/12/1325). This Action Plan kick-started what has become a highly intensive EU campaign to better fight these problems. It was endorsed at the European Council in May, where EU leaders called for effective steps to be taken to combat tax evasion and avoidance.

In the 12 months since the Action Plan was presented, there has been remarkable progress in this area at EU level, and a number of important new initiatives have been put forward by the Commission. Among the actions taken in 2013 were:

  1. Expanding the automatic exchange of information widely within the EU

In June, the Commission proposed extending the automatic exchange of information between EU tax administrations, to cover all forms of financial income and account balances (IP/13/530). This paves the way for the EU to have the most comprehensive system of automatic information exchange in the world. It will also ensure that the EU will well-placed to implement the new global standard (see below) quickly and with minimum disruption to businesses. The proposal could be agreed by Member States in the first half of 2014.

  1. Tightening EU corporate tax rules against aggressive tax planning

In November, the Commission proposed measures to close loopholes in the Parent-Subsidiary Directive and address national mismatches. This will shut off opportunities for a particular type of corporate tax avoidance (IP/13/1149). The proposal should be discussed and possibly agreed by EU Finance Ministers under the Greek Presidency.

  1. Negotiating with neighbouring countries for greater transparency

The Commission was given a mandate to negotiate stronger tax agreements with Switzerland, Andorra, Monaco, San Marino and Liechtenstein (MEMO/12/353) in May. Commissioner Šemeta immediately visited all 5 countries, to give political drive to the talks and underline that the EU was looking for swift and ambitious negotiations. Formal negotiations have begun with the 4 smaller countries and will start with Switzerland as soon as it has its own negotiating mandate (expected before the end of the year).

  1. Establishing a Platform on Tax Good Governance

The Commission established a Platform on Tax Good Governance to discuss the best ways to fight tax evasion and avoidance and monitor progress in this area at both EU and national level (IP/13/351). The Platform has already started work on how best to implement the Commission’s Recommendations on Aggressive Tax Planning and on how to deal with tax havens. Its work programme also includes several other areas of focus, including an EU Taxpayer’s Code, ways to increase transparency of multinationals and looking at the effects of EU tax policy on developing countries.

  1. Launching the debate on Digital Taxation

The Commission established a High Level Expert Group on Taxation of the Digital Economy, chaired by former Portuguese Finance Minister Vitor Gaspar. It will meet for the first time on 12 December (IP/13/983). Corporate tax avoidance is an especially pressing problem in the digital sector. The group will look at the particular challenges in digital taxation and propose solutions in the first half of 2014 to ensure that the digital sector pays its fair share of taxes, while not creating tax obstacles to this pro-growth sector.

  1. Agreeing new instruments to better fight VAT fraud

In June, Member States unanimously agreed on a set of measures to better combat VAT fraud. The Quick Reaction Mechanism and reverse charge mechanism will allow Member States to react more quickly and efficiently to large-scale VAT fraud, thereby reducing substantial losses for public finances. These new instruments will be ready for use from 2014 (IP/12/868).

  1. Proposing new standard VAT form to improve tax compliance

In October, the Commission proposed a simplified, standard VAT form for use by businesses throughout Europe. In addition to easing life for businesses, this standard form will help to improve tax compliance by simplifying the procedure for businesses to declare the VAT they owe (IP/13/988). And greater compliance means greater revenues for national budgets.

  1. Publishing a new report on VAT Gap in EU

The Commission published a study on the VAT Gap in the EU, which amounted to €193 billion in 2011. Prior to this study, the most recent estimates for the VAT Gap dated back to 2006. The new figures help to better understand the recent trends in the EU, to better shape and target policy measures to improve VAT compliance (MEMO/13/800).

  1. Preventing harmful tax competition

The Commission has continued to scrutinise and control state aid granted through tax measures to companies. It has also supported the work of the Code of Conduct Group against harmful tax competition, contributing detailed analyses of many national tax regimes for consideration by the Code Group.

  1. Introducing more corporate transparency

The new Accounting Directive introduces an obligation for large extractive and logging companies to report country-by-country the payments they make to governments, and also on a project-basis. Taxes levied are among the payments to be reported. The revised Capital Requirements Directives (CRDIV) improves transparency in the activities of banks and investment funds in different countries, particularly regarding profits, taxes and subsidies in different jurisdictions (MEMO/13/690). It is hoped that the implementation of the May European Council Conclusions will ensure that all large companies and groups make public how much they pay in tax and in which country, as banks now need to do. Finally, the Commission’s proposal to revise the anti-money laundering legislation includes a specific reference to tax crimes (IP/13/87).

The active work at EU-level was also mirrored in the active role that the EU played in pushing forward international discussions to improve tax good governance worldwide (see below).

Where is there room for greater action at this stage in the fight against tax evasion and avoidance in the EU?

First and foremost, agreement is needed on the Savings Tax Directive (MEMO/12/353) before the end of 2013, as called for by the European Council in May. This is crucial to close loopholes in the Savings Directive, and ensure that it can continue to work well. An EU-wide framework for automatic information exchange will also give banks more legal certainty and clarity about reporting obligations.

Progress on the Common Consolidated Corporate Tax Base (CCCTB) is also very important to better tackle corporate tax avoidance (IP/11/319). In addition to substantially reducing administrative burdens for businesses, the CCCTB has the potential to eliminate many opportunities for profiting by multinational companies. This is recognised in the OECD’s action plan against Base Erosion and Profit Shifting (BEPS), and agreement on the CCCTB would ensure that the EU is the standard setter in this area.

As stated in last year’s Action Plan, the Commission would encourage Member States to make better use of the Code of Conduct on Business Taxation. This can be a highly effective tool for identifying and eliminating harmful tax regimes within the EU. The Commission is currently considering ways of strengthening the Code, for example by extending its scope or amending the Code criteria.

In addition, Member States have been called upon to intensify efforts at national level to tackle tax evasion and avoidance. Country specific recommendations were given to 13 Member States to improve tax compliance at national level. And the 2013 Annual Growth Survey again called on all governments to step up their national campaigns against tax evasion, and strengthen their coordinated action to tackle aggressive tax planning and tax havens.

Meanwhile, the Commission is continuing work on the medium and long-term actions set out in the Action Plan against tax evasion last year. These include a Taxpayers’ Code, an EU Tax Identification Number and possibly common sanctions across the EU for tax offences.

What has been achieved at international level to improve the fight against evasion and avoidance, and what has been the EU’s contribution to this?

In September 2013, G20 leaders agreed on concrete measures to better tackle tax evasion and corporate tax avoidance worldwide. First, they confirmed a move to greater international tax transparency, by agreeing that automatic exchange of information should be the new global standard of cooperation between tax administrations. Second, they endorsed the OECD’s BEPS action plan to curb corporate tax avoidance worldwide. These measures confirm a major improvement in international taxation – one that will make it fairer, more effective and better equipped for the 21st century economy. With the political commitment made, the focus is now on implementing these changes.

With regard to the automatic exchange of information, the EU has drawn on its own experience and expertise in this area to actively contribute to the development of the new global standard. In particular, the Commission has tried to ensure that the global standard takes into account the existing EU automatic information exchange arrangements and is compatible with EU law (e.g. data protection), so as to avoid any unnecessary difficulties for businesses. The latest draft of the global standard appears to meet at least most EU needs, and the OECD intends to present the final version to the G20 Finance Ministers in February for agreement.

Meanwhile, the BEPS Action Plan complements the EU measures to tackle aggressive tax planning, while also addressing issues that can only be effectively dealt with at international level. The BEPS action plan sets out 15 specific actions to re-adjust international standards in taxation so that they are better shaped for the changing global economy. Over the next year, new rules and standards will be developed in areas such as permanent establishment, transfer pricing and digital taxation. The aim is to protect the fairness and integrity of tax systems, and better equip governments in their clamp down on corporate tax avoidance. The EU has already valuable experience in various areas covered by BEPS such as transfer pricing and tackling hybrid mismatches. And the work of the Commission’s expert group on digital taxation will provide input for the OECD digital taskforce. With this input and experience to offer, the EU can continue to play a central role in the work to implement BEPS, particularly if a strong, coordinated position is maintained amongst all Member States.






Why Manage Indirect Taxes?

In Audit Defense, Benchmark, EU development, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, Technology, VAT planning on 19/10/2013 at 7:00 pm

KEY Group new logo long

By Richard Cornelisse

KPMG quote

To self assess risks the following non-exhaustive overview might be useful as a guideline:

risks overview 1

risks overview2

risks overview3

The correctness of VAT reporting is checked only afterwards by the tax authorities. Non compliance could result in that over many years an assessment can be levied (depends on country’s assessment period: NL is five years) including interest and increased with penalties.

It is risky business to monitor only the balance between output VAT and input VAT.

Neutrality can only be achieved – better is the word earned – if certain formal and material requirements are met.

EY Quote

Optimizing VAT recovery, working capital efficiency

Overall business strategies focuss nowadays on:

  • Release cash
  • Reduce costs
  • Efficient refinancing and restructuring

cash flow

To self assess opportunities the following non-exhaustive overview might be useful as a guideline:

cash flow

Increased Audit Risk due to Fraud Priorities?

A recent European Union study (2013) says the bloc’s 28 member nations may be losing almost 200 billion euros ($267 billion) annually in value-added tax revenues due to tax evasion and a lack of enforcement.

EU Tax Commissioner Algirdas Semeta said  the amount of revenues slipping through the governments’ nets is “unacceptable, particularly given the impact such sums could have in bolstering public finances.”

The study for the European Commission, the bloc’s executive arm, found member states lost an estimated 193 billion euros ($258 billion) in VAT revenues in 2011, or 1.5 percent of the EU’s economic output. European Commission – Press Release – Fight against fraud: new study confirms billions lost in VAT Gap

Actively combating VAT fraud is a priority for the European commission and local governments. New measures are being taken such as the introduction of individual liability for not remitting VAT if the buyer knew or should have known that he was buying from a fraud. To prevent such a condition of liability, the ability to demonstrate that sufficient control measures have been taken is essential.

In the next paragraph an overview is given of the estimated VAT Gap per Member State.

Is it not realistic to state that the risk of a tax audit increases in countries that have lost substantial tax revenue because of VAT fraud. Something to consider from an audit defense strategy perspective and could be a reason to challenge the company’s current indirect tax priorities set.

One of the tasks of the indirect tax function is to timely identify changes in legislation and regulations potentially affecting the group and/or its business. There could be many other arguments why for example review of control measures to avoid such liability should be a top priority.

Top on my list is managing reputational risk.

Estimates of the VAT Gap per Member State

EU study VAT Gap due to Fraud

Related articles

How Internal Audit could contribute value in realizing indirect tax objectives?

In Audit Defense, Benchmark, Business Strategy, EU development, Indirect Tax Strategic Plan, Processes and Controls, Technology on 24/09/2013 at 8:46 pm

KEY Group new logo long

By Ferry GeertmanSven HesselbachGuido Czampiel

In the news we see more focus on tax risks in various areas such as offshore tax planning to reduce effective tax rate, tax evasion and (VAT) fraud.

A recent example is Tim Cook defending Apple tax policy in a Senate hearing where Congressional investigators released findings showing that Apple uses a “highly questionable” tax minimization strategy of impressive complexity. Several subsidiaries set up by the company, according to investigators, have few or no employees. Located in Ireland, these subsidiaries allowed the company to exist effectively “nowhere” in certain cases. [Senators accuse Apple of 'highly questionable' billion-dollar tax avoidance scheme]

In addition to evaluating tax risks (level of tolerance), companies should also determine and manage their reputational risks as part of tax risk management.

It is important, as governments and tax authorities consider the combat a high priority and has introduced anti-abuse legislation, have increased tax audits and uses tax litigation at its full potential with publishing the outcome when tax evasion is in play.

Nasir Khan had a successful accessories business, a jet-set lifestyle and reputation as a pillar of the community. But all that vanished in December when he was jailed for his part in a £250m VAT fraud. Jasper Jackson discovers how a 10-year investigation by HMRC led to his downfall. By Jasper Jackson – Mobile News March, 2012

Recommended reading material

These articles give an overview of the need of (indirect) tax risk management.

Our_Key_Focus-418px-1Our article is about how Internal Audit could perform a more pro-active advisory role with respect to risk management and more in specific to Indirect Tax risks. Many companies prioritize too low indirect taxation, such as VAT. The consequences of this neglect can sometimes be dramatic.

Erroneous VAT calculations can wipe out a company’s profit margin, or have consequences far beyond that. The problem can often be traced to operational weaknesses: less-than-adequate internal information systems that fail to properly process and display the VAT consequences of business transactions.

At a large multinational, a software error resulted in the company paying too much VAT over an 11-year period. In the case of another company, a software error resulted in the opposite situation: it had deducted € 40 million in excessive input VAT.

Many organisations lack an ‘indirect tax control framework’ for defining a strategy, systems and control mechanisms to manage risks linked to reporting VAT. With an indirect tax control framework, companies determine the management level that is responsible for the entire VAT reporting process, from beginning to end. The risk that VAT errors will compromise companies’ financial positions and reputations is a growing one. With globalisation of business, the complexity of transactions in terms of VAT is increasing.

  • Is adequate management of material indirect tax risks actually tested in daily practice?
  • Should this be part of Internal Audit annual audit plan to investigate?

One of the objectives of Internal Audit is via a risk based methodology to provide comprehensive assurance to the Board and senior management that companies’ material risks areas are managed efficiently and effectively.

In order to meet this objective from an indirect tax perspective what does Internal Audit need to realize these aims?

Starting point would normally be the company’s Indirect Tax Control Framework. For a first impression Internal Audit could raise the following questions:

  • Is the indirect tax strategy defined and aligned with companies’ business objectives?
  • Are material indirect tax risk areas defined?
  • Are roles and responsibilities for managing these risks explicitly assigned?
  • Are the internal controls that mitigate these risks explicitly documented?
  • Are the responsibilities for executing and monitoring the internal controls assigned
  • Are there regular meetings to discuss status of risks and internal controls and define actions?
  • Has a strategy been defined for managing the relationship with tax authorities? Have the responsibilities been assigned for the different geographic regions?

The answers give insight of the existence of the right building blocks of an Indirect Tax Control Framework and give an auditor the possibility to draft his first conclusion on process and risk management around indirect tax.

When however the conclusion is that the right building blocks TCF are not present (question are answered negatively), Internal Audit probably could take the role as pro-active advisor with regard to the right set up of internal indirect tax processes.

To perform such a role Internal Audit need to have the following competencies:

  • sufficient knowledge available re indirect tax risks that exceed the company’s risk appetite;
  • clear understanding of a normative framework from indirect tax perspective how and what need to be managed re these risks.

These are the conditions under which Internal Audit could fulfill a proactive role relating indirect tax risk management. In practice, the best way to achieve this is often to limit the scope and request the top 3-5 indirect tax risks that exceed the company’s indirect tax appetite. Often these risks can be benchmarked with other multinationals:

  • Intercompany transactions
  • Cross-border transactions
  • Correct deduction of input VAT (VAT paid)

An example of a normative process re cross-border transactions within the EU:

Tax Control Framework - Role of Internal Audit v10 - September 2013

A normative framework faciltates Q&A during an Internal Audit exercise.

The actual situation (IST position) within the organization is then measured against this yardstick, generally resulting in a summary of the differences. Analysis of these gaps and the associated risks may lead to acceptance or to proposals for improvement. It is an efficient and effective approach that challenges the responsible process owners.

To what extend is internal audit able to fulfill an advisory role?

From Internal Audit by ASML – Accountant September 2013 by Lieuwe Koopmans some quotes (translated from Dutch to English by authors):

At ASML, one of the most important producers of semi-conductor systems, there is not only this ‘internal’ input but give internal auditors also actively their input on risks together with the business
My department Corporate Risk & Assurance can have an important advisory role on this topic. We can identify risks and indicate how to manage these. Also on a lower level in the organization, e.g at the implementation of a new IT-system, we can give our feedback and support.” (…) I believe that internal auditors can use their knowledge and skills besides audit, also can apply in the area of risk management. – Martin Reinecke

From an Indirect Tax Perspective,  such a proactive advisory role hardly takes place. Other examples of major indirect tax risk areas relate to change:

Another example is Supply Chain transformations such as setting up of a Principal model. Internal Audit should in our view be part of the project team and should be actively involved and monitor during the design phase whether risks in the transformation will be appropriately managed. With a supportive normative framework, Internal Audit is able to raise critical questions and facilitate that indirect tax risks are prior to go-live identified and managed.

Do you see this work in practice?

Ferry Geertman is COO of the KEY Group and was Director IT Audit and Data Analytics at Deloitte Netherlands. From his background in Applied Mathematics, Ferry has vast experience in data analysis, including the design and evaluation of statistical samples as part of internal and external control. Ferry has extensive experience in advising about and evaluating of (IT)- risk management and internal control for multinationals.

Sven Hesselbach is partner at compliance-net GmbH and was a partner in charge of the Enterprise Risk Services Line at Deloitte in Frankfurt. Sven specializes in Corporate governance and compliance, internal audit, internal controls testing and documentation and to a great extent the IT part of these topics. Sven assists medium-sized and large companies in achieving their compliance and governance objectives.

Guido Czampiel is a partner at LiNKiT Consulting. Guido has more than 12 years of consulting experience focusing on large transformation projects within finance and IT. Guido has helped clients of different size and branches in successfully managing changes within their organization, processes and their systems.

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