This Blog is about managing the perception of C-level and realize own tax objectives. Writing a set of standard indirect tax objectives is not that difficult. It is a paper exercise. Why? At the moment that these objectives are validated, specific goals have to be set within these boundaries. The goals have to be specific, measurable, acceptable, realistic and timely (SMART goals). You need to know where you want to go and set up a roadmap how to get there. The next steps is to sell this within the own organization in order to get access to the tools to make it happen. That might mean: “Managing the perception of C-level”.
Benchmark against trends in the market could be supportive. It provides an overview of the experiences of others and is useful for setting own priorities going forward. This is the first step, measuring ongoing performance the next.
The Indirect Tax Strategic Plan has various building blocks. To make it more user-friendly, the benchmark findings I gathered from Big4 surveys, are tagged to these building blocks.
The Root Cause Of Defects
If you look at the overall picture some defects shown are the cause effect of other defects. Based on these finding, the root cause is likely the company’s culture, organizational structure, overall business processes and/or maybe a wrong perception of top management about indirect tax.
This follows from this ‘top down’ overview:
- Executive considering indirect tax not material and a high priority. The low risks evaluation of indirect tax likely results in budget constraints
- Lack of specific VAT/GST measurable performance goals visible to the CFO
- Lack of proper prioritization between lower value activities and higher value activities. Indirect Tax function has many competing priorities and insufficient time or resources
- Historically, the tax function in general focused on other areas, allowing other departments and local offices a free hand to deal with the company’s indirect taxes
- Finance and Accounting is in the majority considered accountable for Indirect Tax
- It seems that the indirect tax department is often the last to know what is going on, is forced to be the show stopper when other parts of the business thought they were are ready to ‘go live’
I refer to my guest Blog ‘The Conflict Between ‘Actual To Budget’ Controls And ‘Budget-based Compensation Targets’. That Blog dealt with company’s culture, business objectives and the conflict sometimes of personal performance targets.
Some Governance And Mandate Needed First
If you know 1) the current state, 2) where you want to go and 3) have set up a roadmap how to get there, it is important to get a clear view of what is needed to meet these goals.
Someone wrote in literature that the first step to improve indirect tax management is to put someone in charge. Is it that easy or is that an example of one minute managership.
Assume that the significant majority of the findings are applicable to your organization. Do you want to have end responsibility under these circumstances? Is delegating end responsibility to a new recruited global or regional leader going to contribute any positive change?
Having the responsibility without the tools is like being Michael Schumacher without a car. Not likely you are going to win a Formula One race. That means an unhappy Michael.
Accountability for indirect tax is often still in Finance & Accounting. If you look at the findings is it likely that top management is going to support any change via issuing new policies about governance and mandate? More important, provide the new recruited or appointed indirect tax leader with the necessary tools for success such as:
- Extra resources
- Performance evaluation of people who work outside the tax function but has a role in managing indirect taxes (e.g. people in the finance function preparing VAT return, Shared Service Center staff re posting of AP invoices).
Without such support being end responsibility is in my view not a favorable position. If culture or organizational structure has to change, involvement of top management is mandatory. Without their support you will be on a mission impossible.
How to get their support?
Being Effective And Efficient At The Same Time
Is being fully compliant a realistic goal?
Effectiveness is the degree to which organization meets and exceeds the needs and requirement of their customer. When is effectiveness achieved? For the tax function if all risks are managed and opportunities spotted and implemented.
As indirect tax resources are normally scarce it is important that the available time is used in the most efficient and effective way. I refer to the findings about competing priorities and insufficient time or resources. Besides that managing all risks is cost inefficient and will have impact on efficiency beyond indirect tax.
Efficiency refers to the amount of resources consumed in being effective. Efficiency can be measured in time, cost, labor, or value. It is about being efficient and effective at the same time and therefore about making the right choices.
In order to allocate resources to risk and reward areas that matter, the maximum level of risk appetite of the company in the worst case scenarios need to be determined. This facilitates such prioritization as defined acceptable levels of risk means that resources do not spend time on further reducing risks that are already at an acceptable level.
Speaking The Language Of C-level
What are the requirements of client satisfaction of the C-level. Based on the above it seems that C-level consider indirect tax of lower priority than often the indirect tax function does. Is the cause effect misinterpretation or not understanding and speaking the same language?
The first step – to achieve mutual understanding – is to get agreement with top management on the level of indirect tax risk appetite of the company in the worse case scenario.
What do we know further about C-level?
They have to manage a lot and that means that prioritization is part of their natural skill set. It is about measure of risk and opportunity (selection via being material or not) and if indeed material what is needed to make it happen (balancing costs against gain).
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. It 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 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 change of systems, processes and controls etc).
In the worse 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 more than likely it will be dealt accordingly. Why? It has become now a mutual responsibility.
How do you see this? Do you agree?
Richard Cornelisse is CEO of the KEY Group and worked previously as Big4 Partner in the Tax Performance Advisory and Indirect Tax Practice and blogs on Tax Function Effectiveness and Tax Control Framework developments.
- How Internal Audit could contribute value in realizing indirect tax objectives? (indirecttaxtechnology.com)
- Taxmarc™: your best SAP solution for Indirect Tax Automation (indirecttaxtechnology.com)
- The KEY Group measures Indirect Tax Performance and improves where necessary (richardcornelisse.com)
- Merger and Acquisition – Integration And Indirect Tax: Managing the Moving Parts Before, During, And After a Transaction (indirecttaxtechnology.com)
- VAT Control Framework (indirecttaxtechnology.com)
- Indirect Tax Can Drive Costs For Shared Service Centers (indirecttaxtechnology.com)
- Everything You Always Wanted to Know About VAT in SAP * But Were Not Aware to Ask (indirecttaxtechnology.com)