Richard Cornelisse

Posts Tagged ‘richard cornelisse’

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

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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

Soft skills are the key differentiator

In Audit Defense, Business Strategy, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls on 18/07/2014 at 12:00 pm

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For a long time, the indirect tax profession has been an individual sport. Due to changes in the tax market and in client needs, the tax profession has evolved into more of a team sport. What has changed over the years?

The changing world from an adviser’s perspective

What is different nowadays?

When I started around 20 years ago, indirect tax specialists were scarce, there were hardly any in-house indirect tax functions and content, which nowadays is freely available on the Internet, could still be sold.

“In the land of the blind the one-eyed man is king”

An adviser could work more reactively. A comparison can be made with a doctor who has patients in the waiting room, can diagnose the patients, can find the problem and can then prescribe some pills to remedy the situation.

We had full access to all kinds of VAT planning schemes, and the tax profession—both the buyer as the seller—was much more product-focused. As advisers, we were targeting new patients.

Many consultancy firms companies sold VAT 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.

When I started, the (starting) salaries were much lower, and that meant lower charge-out rates. Increased salary is one of the reasons why tax professionals now must grow up more quickly. A higher salary means a higher charge-out rate, and from the client’s perspective, a higher bill means higher expectations.

We must deliver higher quality and higher practicality; this is just a fact of life.

The changing world from the client perspective

In addition to the introduction of anti-abuse law, clients themselves (and their needs) have also changed.

To continue our analogy of the doctor, the patients have become doctors themselves by setting up their own in-house indirect tax functions.

Thanks to tax industry networks and social media, tax knowledge is shared and communicated within the industry. The result is that the service and the ability of an external adviser have had to evolve as well.

Changing client needs have also resulted from factors, including:

  • globalization
  • the use of tax technology
  • scandals such as the global credit crisis and Enron
  • increased tax authority scrutiny, etc.

Discussions regarding accountability put both the external adviser and the in-house indirect tax function in a more proactive mode.

One man’s weakness, is another man’s strength

Because of these changes, technical tax expertise has become more a basic skill from the adviser’s perspective. The soft skills of the adviser are—and will become—the key differentiator.

Due to all of the technological developments, this is already part of our present and future.

Technical tax advice must be implemented in systems, processes and controls. Instructions must be given to people who are outside of the tax function. Alignment with the business is essential for the tax function to plan in a timely manner and to avoid future firefighting.

In order to challenge and support a client in his mission, an adviser should possess—in addition to excellent technical skills—a clear understanding of communication and collaboration, project management, change management, information technology, negotiation and leadership. All of these skills are needed in order to be successful.

The indirect tax profession has been an individual sport for a very long time. The profession is still about the individual’s technical tax strength and personal practical experience, and the future generation of advisors are often trained by that individual. It is my opinion that the indirect tax professional of the future will need to take a different approach.

Why?

It is simply no longer possible to excel at everything regarding global indirect tax management. Thus, some people can excel in certain areas of indirect tax, and the overall outcome of the team’s effort will make the real difference from a quality standard perspective.

In other words: “One man’s weakness, is another man strength, so let’s team up”

By Richard Cornelisse

Change company’s indirect tax culture for the better

In Business Strategy, Indirect Tax Strategic Plan, Processes and Controls on 16/07/2014 at 12:00 pm

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Customer satisfaction is achieved by managing the expectations and relationships of internal customers, tax authorities, external auditors and other stakeholders.

1174766_40509785To evaluate your role in customer service, you should define first your customer, both external and internal.

Who depends on the indirect tax service?

Everybody who receives a service or a product is a customer. This includes end users, other departments, subcontractors, and regulators.

Assume therefore that a Tax Function of a company works under the same market principles as external tax advisers and that the in-house customers are senior management, finance, procurement, IT, logistics, internal audit, HR, legal, etc.

We have to ensure that the internal processes meet customer requirements on every level; and that to the extent an internal service provider is also a customer, their requirements have to be met as well.

It seems according to Big4 surveys that senior management consider indirect tax of lower priority than the indirect tax function generally does.

Is the root cause misinterpretation, not understanding and speaking the same language or is from a senior manager’s perspective indirect tax risks already at an acceptable level?

To achieve mutual understanding – it will be important to get agreement with senior management what the level of indirect tax risk appetite actually would be of the company in a worst-case scenario.

If you know the risk appetite, you have to identify the lowest performing indirect tax processes that have the most direct impact on the company’s business objectives.

  • Identify the key indirect tax processes, measure their effectiveness and efficiency, and initiate improvements of the worst performing processes
  • Identify a problem, measure its magnitude, determine why the problem exists, and generate a set of solutions to ensure that the problem goes away.

Short problem statements for the gaps found should be written. They should include an estimate of savings or the amount of hours currently lost due to rework. These statements can subsequently be prioritized and validated with senior management.

Various solutions are presented with cost-benefit analysis, so a constructive discussion with senior management can be held about what is needed to close these gaps (e.g. budget and/or resources needed or necessary for change of systems, processes and controls etc.).

In the worst case the gap(s) will not be closed, but at least you have achieved mutual awareness and hopefully responsibility. However, if the problem is material and addressed in the right way it will more than likely be dealt with accordingly, because it has now become a mutual responsibility as visibility exists why a higher level strategic business objectives are not being met and senior management should see the need to start fixing broken processes.

A good way to estimate the potential value of a project/solution is to imagine how much you could save if the problem was completely eliminated.

  • Hard Savings: reduce expenses and result in financial improvement
  • Soft Savings: financial benefits that may occur, but are not a direct result of the product, solution etc
  • Potential Saving: are hard savings but require some action or decision to be become realized (e.g. go ahead after feasibility study)

An example of a Taxmarc™ ‘Return on Investment‘ overview

return-on-investmentBy Richard Cornelisse

 

Indirect tax function effectiveness: a More Innovative Due Diligence

In Audit Defense, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls on 08/07/2014 at 12:00 pm

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The question is whether there is a method of determining the exact additional tax assessment in an efficient and effective way.

A due diligence investigation not only serves the purpose of mapping the material risks, but quantification of these risks is also essential.

A traditional due diligence investigation normally involves completion of standard questionnaires and retrieval of standard information, which is provided by the vendor via a specially designed data room. When possible incorrect VAT determination is detected, a rough estimation of the magnitude of the VAT risks is made on the basis of turnover and sales figures.

This is not ideal for both vendor and purchaser, as it concerns much guesswork and thus usually provides an insufficient framework in price negotiations.

In order to quickly gain insight into the level of tax risks i.e. calculation of the potential assessment, statistical sampling can be used.

By selecting a few elements euros, the reliability of the composition of tax items can be determined to a high degree of certainty, and on the basis of identified errors in the sample, the exact amount of additional tax assessment can be calculated.

The strength of this method lies in the fact that statistical sampling is the tax audit method used by the Dutch Tax Authorities. Calculation is done on the basis of the parameters that the Tax Authorities apply themselves in their tax audit. This method is explicitly approved by the highest Dutch court.

Statistical sampling requires a different approach and process of information retrieval compared to the traditional method. In practice, this means the following steps are to be taken:

  • Defining the scope see aforementioned main VAT risks;
  • Defining the required data from the systems;
  • Defining the sample size based on parameters of the Tax Authorities;
  • Obtaining the data file provided by the vendor on the basis of instructions;
  • Drawing the sample;
  • Obtaining the selected physical invoices, claims, documentary evidence or other documents provided by the vendor on the basis of instructions;
  • Fiscal assessment of the tax items;
  • Calculating the amount of potential additional tax assessment on the basis of detected errors.

Defining the scope and correctly designing and drawing the sample requires a multidisciplinary approach. In addition to knowledge on indirect tax, expertise in statistical sampling demanded.

A sample is not solely relevant for due diligence of the purchaser. Also the selling party can benefit from sampling with regard to preparatory work for a prospective takeover. When a statistical sample is drawn and the results are acceptable, the conclusions can be proactively taken into a data room. This can serve as extra evidence of implementation and maintenance of an effective control framework.

Moreover, in the Netherlands the possibility exits to align the results of the findings with the Tax Authorities, which provides more certainty regarding the adopted tax position. All this can positively contribute to the sales negotiations, including the amount of guarantees and/or discounts that are to be provided.

It should first be noted that the starting point is always the identification and recognition of material indirect tax risks. Every industry has its own specific risks and further differentiation is necessary due to the complexity of the implemented business model, and the risks arising therefrom with respect to indirect tax.

Roughly speaking, the largest VAT risks in the following areas are:

  • Cross-border transactions: legitimate application of the 0% rate
  • Inter-company transactions: correct application of the VAT determination in the chain
  • Input VAT: justified input VAT deduction

A good start is half the battle, and can lead to significant cost reductions in the future.

Via Due Diligence: Quantification Of Tax Risks With Statistical Sampling / Richard Cornelisse

Indirect tax function effectiveness: Formulating Indirect Tax strategy

In Business Strategy, Indirect Tax Strategic Plan, Processes and Controls on 04/07/2014 at 12:00 pm

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When determining the tax strategy, we advise at least the following elements to be considered:

  • Tax function objectives
  • Alignment of the indirect tax strategy to the overall business strategy
  • Organizational model of the business vs. of the indirect tax function central vs. decentralised
  • Risk profile of the company and the tax risk profile
  • Scope of taxes covered
  • Entities covered
  • Tax roles & responsibilities
  • Tax resources internal & external
  • Possibly the tax strategy is detailed per tax role and/or applicable tax, either by formulating the specific strategy or detailing the tactics on how to achieve that strategy short term vs longer term.

Risk tolerance factors

In determining the Risk profile of the company, indirect tax risk tolerance factors can be formulated that must be applied to all significant transaction evaluation decisions. Factors we see included are:

  • Technical complexity of tax planning
  • Strength of external opinion
  • Complexity of implementation and maintenance
  • Downside risk and exit strategy
  • Potential benefit
  • Risk of law changes
  • Reputation risks
  • Size and impact of the transaction

via Indirect Tax Strategy Framework /Richard Cornelisse

Indirect tax function effectiveness: Acquisition and Divestment Checklist

In Business Strategy, Indirect Tax Strategic Plan, VAT planning on 02/07/2014 at 12:00 pm

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  • Financing VAT in asset sales/purchase should not be overlooked by both seller and buyer (for the buyer recovery of input VAT on assets can be far longer than anticipated and need to be built into financial models)
  • What VAT exposures/practices are there which may impact the anticipated purchase price (including any subsequent purchase price adjustments), for either asset or stock/share transactions?
  • Can VAT financing be reduced by making use of reliefs for transfers of going concerns (mainly available in European jurisdictions) in respect of asset sale/purchase?
  • Set up tools that calculates VAT (and other transfer taxes) due on asset transactions
  • Review tax [VAT related] clauses to ensure beneficial position for seller/buyer
  • VAT registration locally of new corporations in helping buyers to meet compliance obligations from day 1, including arranging deferments, carry over of rulings etc, and sellers in meeting VAT invoicing and other practical aspects in completing deals, which if overlooked can reduce expected net proceeds
  • Where any closures take placeresultingin cessation ofVATable activities, businesses need to:
    • Ensure input VAT costs incurred by correct entity so as to recover this VAT
    • Plan for means of recovering input VAT incurred post closure/VAT registration
    • Build into financials need to account for VAT on any assets on hand i.e. those not disposed of

Via M&A Integration And Indirect Tax: Managing The Moving Parts Before, During, And After A Transaction / Richard Cornelisse

Indirect tax function effectiveness: Achieving Stakeholder Satisfactions

In Benchmark, Business Strategy, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, Technology, VAT planning on 30/06/2014 at 12:00 pm

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Assume that a Tax Function of a company should work under the same market principles as tax advisers and that the in-house customers are the executive management, finance, procurement, IT, logistics, internal audit, HR, legal etc. Customer satisfaction is achieved by managing the expectations and relationships of internal customers, tax authorities, external auditors and other stakeholders.

The first is to determine the requirements of client satisfaction of senior management C-level. Based on the above it seems that C-level executives consider indirect tax of lower priority than the indirect tax function generally does.

Is the root cause misinterpretation or not understanding and speaking the same language?

The next step – to achieve mutual understanding – is to get agreement with senior management at the level of indirect tax risk appetite of the company in the worst-case scenario.

If you know the risk appetite, you have to identify the lowest performing indirect tax processes that have the most direct impact on the company’s business objectives e.g. benchmark and measure. Short problem statements for the gaps found should be written. They should include an estimate of savings or the amount of hours currently lost due to rework.

Hidden factory or hidden operation definition: 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 result returns precious time and money to the business.

 

Identify a problem, measure its magnitude, determine why the problem exists, and generates a set of solutions to ensure that the problem goes away.

These statements can subsequently be prioritized and validated with top management. Various solutions are presented with cost-benefit analysis, so a constructive discussion with top management can be held about what is needed to close these gaps e.g. budget and/or resources needed or necessary for change of systems, processes and controls etc.

In the worst case the gaps will not be closed, but at least you have achieved mutual awareness and hopefully responsibility. However, if the problem is material and addressed in the right way it will more than likely be dealt with accordingly, because it has now become a mutual responsibility.

Via Achieving stakeholder satisfactions / Richard Cornelisse

Indirect tax function effectiveness: Quantification of Risks and Root Cause Analysis

In Audit Defense, Indirect Tax Strategic Plan, Processes and Controls on 26/06/2014 at 12:05 pm

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As a follow-up of the VAT throughput exercise, statistical sampling could be used to measure the company’s ‚as is’ performance. Sampling has the added benefit that the exact amount of any tax assessment by the tax authorities is calculated.

The result could be used to get indirect taxes higher on the priority list, since managing of material risks that are quantified falls within the KPIs of the CFO.

For a root cause analysis the following questions should be asked in order seek to understand what caused the outcome:

  1. How did the results happen?
  2. Why did they happen?
  3. What specifically caused them to happen?

A root cause analysis is normally started via data collection and data analysis or ERP review and a clear understanding of the current processes.

Understanding the root cause is the first step to controlling outcomes. From a saving perspective, you want to know how to make them happen again, from a risk perspective you surely want to know how to prevent them the next time.

Via How to increase indirect tax function’s effectiveness / Richard Cornelisse

Indirect tax function effectiveness: VAT Throughput

In Indirect Tax Strategic Plan, Processes and Controls on 24/06/2014 at 12:03 pm

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Indirect tax often has low priority and that the focus of senior management is primarily on direct tax effectiveness. As a starting point to change this mind-set the VAT throughput – amount of VAT under management – could be used.

The VAT throughput could calculate via the company’s annual report based on the following data:

  1. Regional/country turnover
  2. Average of VAT/GST/SUT rates across regions/countries
  3. Cost of goods sold
  4. Indirect expenses, sales, administration, R&D, general
  5. Labor costs
  6. Estimated percentage of inter-company transactions.

The estimated amount of VAT/GST under management could be calculated as a total amount with potential impact in total profits but also the impact on earnings per share. It will be the ‘language’ that the CFO understands.

Via How to increase indirect tax function’s effectiveness / Richard Cornelisse

Indirect tax function effectiveness: Indirect Tax Positions are properly Disclosed, Presented and Documented

In Audit Defense on 19/06/2014 at 12:00 pm

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Tax controversy considerations and requirements are built into the preparation of the indirect tax return and those responsible for indirect tax controversy review indirect tax returns to verify indirect tax positions are properly disclosed, presented and documented.

An overview of some best practice approaches:

  • There is a process for managing indirect tax positions and documentation
  • Documentation is updated throughout the life cycle of an indirect tax position
  • Workflow/document management tool supports the process
  • The indirect tax function seeks proactively to engage with tax authorities and tax policy makers on a global basis to establish strong relationships in all jurisdictions in which the business operates
  • Developing a winning strategy to support an indirect tax position requires having clear insight about your tax policies and execution, how the tax authorities conducts their examination, anticipate next moves, etc.
  • Standard global processes exist for indirect tax enquiries and litigation with supporting documentation stored in a central repository

An non-exhaustive overview of questions that could be useful as a guideline

  1. What is the nature of the desired relationship between taxpayer and tax authorities?
  2. Who decides what resources to allocate to audit issues?
  3. What are the typical blockers to managing audit information?
  4. What are the audit approaches of the tax authorities?What is the impact of any new approaches?
  5. What information has to be shared mandatory on tax authorities request understanding the rules of the game?
  6. What is the companys strategy re disclosing exposures?
  7. Why is the audit conducted?
  8. What is the time schedule and scope?
  9. What is the financial impact re any non compliance?
  10. Is there a reputational risk that needs to be considered?
  11. How can the audit be more streamlined or even accelerated e.g. how to set up a joint tax audit plan?
  12. Is there a tax policy to maintain an audit summary sheet outstanding issues, status etc?
  13. What is the number and amount of penalties assessed or paid on VAT/GST assessments ?
  14. What is the number of unanticipated exposure assessed or paid and what is the root cause?
  15. What is the cost of audit defense?

Via A roadmap to a sound ‘Audit Defense’ Strategy / Richard Cornelisse

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