Richard Cornelisse

Indirect Tax Control Framework – data analysis reveals actual controls

In Audit Defense, Business Strategy, Indirect Tax Strategic Plan, Processes and Controls, Technology on 15/04/2013 at 2:24 pm

Ferry_LinkedIn KEY-GROUP“Tax Control Framework is focusing on managing material risk areas”

Everyone will agree with this statement. The question that arises is how the Tax Control Framework (TCF) remains up-to-date.

In my previous blog I wrote about the combination of Tax Control Framework and Data analysis not always being successful. In this blog I will how data analysis can support in identifying the actual control in place.

It’s a misconception that the TCF for indirect tax is a one-size-fits-all document. In practice, what I encounter is a Tax Control Framework aimed at VAT, but without a clear link to the rest of the organization or overall fiscal objectives. This creates the risk of the TCF becoming static.

The cause usually lies in an external force, for example the Sarbanes-Oxley legislation, which has led to TCFs being set up under great time pressure in order to satisfy supervisory authorities. After some time such a document becomes a paper tiger, used only for “ticking the box”.

An important question is whether relevant control measures from the TCF are evaluated for effectiveness and efficiency on a regular basis and adjusted if necessary. For example, in case a new, direct tax efficient supply chain model is being implemented, it is important that the existing control measures are also evaluated and adjusted to the new business model. The same applies when functions are being centralized, which also raises the question what impact this has on the existing division of roles and responsibilities.

An example I encountered in actual practice is that the Tax Control Framework contains control activities that ensure the application of the 19% rate. After changes in the Netherlands to the 21% rate, the control descriptions have been adjusted, but the question as to whether the control measure is still effective is not being raised.

Another example I’ve encountered is that the control focusing on the quality of the VAT return is based on the assumption that tax codes are used in composing the VAT return. In practice, however, it appeared that the return was being composed on the basis of amounts booked in the General Ledger.

Apart from the question which methodology is more effective in managing the risks, it can be noted that a considerable discrepancy exists between the actual process and the process as described in the TCF. This situation makes it significantly more difficult to determine whether the description is still up-to-date. On the basis of interviews and checks in the system, it will still be concluded that tax codes are being used.

However, data analysis showed that the described situation in the TCF could not be the actual situation. The analysis revealed that the return based on tax codes didn’t reconcile with the actual return and the General Ledger. The return based on the General Ledger did reconcile with the actual return though. But since the TCF doesn’t match the actual situation, we cannot consider the organization being “in control”.

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