Knowledge sharing

Saturday, January 30, 2016

Transfer pricing: surviving the new tax world

Yesterday's TP world

  • During design, implemention and maintenance of the company's business model in most cases the company's ERP system is not configured in such a way that relevant intercompany transactional data can be automatically generated or specific high risk intercompany transactions can be monitored realtime.
  • Often TP work is a manual process from data gathering through analysis and beyond.
  • Many multinationals still save documents on the hard drives of local computers and / or local servers without central access.
  • TP process owners have to use MS Word/ Excel and possible SharePoint if there is a central data storage.
  • Spreadsheets are usually found at critical points in the audit trail and are often designed by non-specialists with no system expertise. There is most likely no dedicated IT support to the tax function. 
  • Working with Excel sheets that contain (TP specific homegrown) formulas is risky as for the effectiveness of a control framework you have to rely on work performance and accuracy of your SMEs and preventive and detective controls to manage (e.g. operational) risks.
  • Manual processes due to human error increases tax risk - data is manipulated outside the system and need tax controls to properly manage - but causes also workforce inefficiencies as getting access to the relevant transactional data is a cumbersome and time consuming exercise.
  • TP adjustments are in the rule done at Year End as a lump sum. Only sophisticated companies have a periodical forecasting process and conduct price adjustments to avoid substantial Year End adjustments. 
  • TP planning, implementation and periodical assessment(s) are normally done on a profit  and not  on a transactional basis (consolidated versus individual).
  • The inherent risk is in practice often that what has initially designed and contractually agreed is not in line (anymore) with the (current) factual reality. The financial data could disclose what is really occurring from a business model perspective.

For example, more local risks could for example exist due to (new) services, supply of goods, sales support, amount of employees and their skill set / roles.

The new tax world: anticipate what users would want

  • Countries are implementing mandatory global tax disclosure statements that for example provide information of entities with legal ownership of IP, entities that have no assets or substance (i.e. holding companies). Such disclosures increases operational compliance tax risks. Central storage and access to this relevant information is required.  
  • The new reporting trend requires also closer coordination of headquarters that has relevant knowledge of the global ownership of IP and legal structures.
  • On January 27, 2016 the OECD issued a press release announcing that on the same day Malaysia signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA), bringing the total number of signatories to 79.
  • The goal is that via the Country-by-Country reporting tax administrations, where a company operates, will get aggregate information annually, starting with 2016 accounts, relating to the global allocation of income and taxes paid, together with other indicators of the location of economic activity within the MNC.
  • It will also cover information about which entities do business in a particular jurisdiction and the business activities each entity engages in. The information will be collected by the country of residence of the MNC, and will then be exchanged through exchange of information supported by such agreements as signed today. According to the OECD, the first exchanges will start in 2017-2018 on 2016 information.
  • On 28 January 2016, the EU Commission published its Anti Tax Avoidance Package. The package is part of the Commission's ambitious agenda for fairer, simpler and more effective corporate taxation in the EU.
  • Questions raised by tax administrations or external auditors could make new audit risks visible and could even result in an audit to assess potentially high risk transactions. 
  • MNCs should have an efficient governance process in place to manage BEPS queries.  A shift in roles and responsibilities within the transfer pricing documentation process is one of the areas that should probably be assessed.
  • Many countries are implementing the BEPS recommendation, i.e. master- and local file and CBC reporting due to the new regulations. These regulations will heavily increase the TP compliance work, but will also highlight bugs and errors which were not visible before.
  • In addition the EU Commission is challenging countries on their current APA practices
  • Realtime monitoring of individual intercompany transactions is a 'must have' to manage tax risks properly. TP is under higher scrutiny and therefore TP teams will put more emphasis on managing the IC prices during the year instead of Year End.
  • Besides that it is important that the financial data (still) reflects what has been initially designed and contractually agreed. 

Example is an entity which was previously characterized as a contract manufacturer, this means that the entity is only acting on instructions from the HQ. If the financial data show that purchases come from China, resulting in stock provisions on the balance sheet, and FX results because sales is in EU, the transitions will challenge the contract manufacturer status.

  • From a tax controversy perspective TP documentation is important and often results in conflicting priorities within the tax function (allocation of budget and tax resources).
  • Better resource allocation and process improvement can be achieved via (semi)automated documentations, configure ERP systems to support TP needs or implement add-on or bolt-on tools.

For example, in the area of data and workflow management, entity charting, document storage, reporting and analytics.

  • Tax authorities around the world investing in better tools (data analytics). Some countries want either direct access to systems or have implemented OECD's Tax Audit Files for tax purposes to improve the efficiency of tax audits. The SAF-T is intended to give tax authorities easy access to the relevant data in an easily readable format for both corporate income tax as VAT.

What is the Multilateral Competent Authority Agreement

  • The Multilateral Competent Authority Agreement (“the MCAA”) is a multilateral framework agreement that provides a standardised and efficient mechanism to facilitate the automatic exchange of information in accordance with the Standard for Automatic Exchange of Financial Information in Tax Matters (“the Standard”). It avoids the need for several bilateral agreements to be concluded. The text and signatories of the MCAA can be found here.
  • Its design as a framework agreement means the MCAA always ensures each signatory has ultimate control over exactly which exchange relationships it enters into and that each signatory’s standards on confidentiality and data protection always apply.
  • The legal basis for the MCAA (which is agreed at competent authority level) rests in Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (“the Convention”) which provides for the automatic exchange of information between Parties to the Convention, where two Parties subsequently agree to do so.  

Read more: Transfer pricing: surviving the new tax world

Thursday, January 28, 2016

Diagnose the current state and future objectives of your SSC plans

The goal is to make sure that the outsourced VAT processes and functions are transferred and continue operating as effectively and efficiently as possible.

That means determining whether the current processes operate satisfactorily as is or need to be improved, factoring in any potential or existing differences and taking into account the complexity of the existing processes and the variations between these processes in each of the business units to be supported by the SSC.

As you begin to diagnose the current state and future objectives of your SSC plans, some of the questions that can help you determine the impact of VAT prior to migration.
  • Do we have sufficient insight into current VAT processes including all manual adjustments, workarounds and internal quality assurances processes?
  • Are the processes specific and well-documented and are they adequate to the new environment?
  • Do we understand the scope of personnel changes that may occur as we migrate to the SSC?
  • Have we captured all the relevant knowledge from personnel who may decide to leave the organization?
  • Are we retaining access to and information about existing manual processes and procedures and offline solutions?
  • To what extent do current processes depend on local VAT expertise and technology?
  • How much will be lost in the event of a transfer to SSC?
  • To what extent are different processes required from one jurisdiction to another?
  • Who has final responsibility for the VAT compliance process at present and who will own it upon transfer to the SSC model?
  • Where are the essential process controls being carried out?
  • How does the SSC model deal with local VAT risks in terms of internal communication and coordination?
Read more: The intersection of VAT and shared service centers?

Monday, January 25, 2016

M&A integration

Once a commercial and tax-efficient structure is determined—one that addresses both historical and potential risk—it is time to take the theory behind the structure into the realm of practice.
  • Who is taking care of filing VAT registrations?
  • When should you apply for VAT registration, since average lead times in jurisdictions can be several months?
  • Who is responsible for maintaining a structure and making sure the business is acting in accordance with the model?
  • How is this communicated throughout the organization?
  • How will ongoing monitoring be handled?
Most ERP systems, including SAP, Oracle, JD Edwards, and Peoplesoft, are equipped with some form or forms of VAT functionality. However, they typically still require significant configuration and may need to be customized to deal properly with indirect taxes.

They will also need to be updated and tested to reflect new contracts and billing flows. Ownership of these tasks must be determined and communicated up front, so that the ERP system can accurately issue invoices from day one.

Thursday, January 21, 2016

Increase revenues or reduce costs and expenses, so that earnings are improved

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.

It is about extra man-hours, additional costs due to rework (credit/debit notes) and retrospective corrections and/or disclosures. Example: how much rework is required before numbers received from finance systems can be used?

  • Does the process of preparing and compiling the client’s VAT return take more than 5 man days? (starting from the moment of VAT-data collection until the VAT return is approved and filed).
  • Are manual adjustments made to ERP figures before inclusion in VAT Returns?

Imagine how much you could save if the problem was completely eliminated.

Read more: Process improvement

Wednesday, January 13, 2016

Indirect Tax Function Effectiveness

Our thought leadership publications

The global tax environment is in a state of fast change. A shift to indirect taxes represents the global trend and combat tax evasion and VAT fraud a high priority. Driving indirect tax management therefore becomes more and more important. The key to success in the management is the ability to translate indirect tax knowledge into a workable business process.

Our aim is to share our expertise with you through the Global Indirect Tax Management website, to create and share current state benchmarking knowledge, to inspire and also challenge your department functions through offering modules that can be used to scope process gaps from an indirect tax perspective.

Global Indirect Tax Management website

Executive summary 

Measure the problem and determine why it exists

"Measure the magnitude of that problem, determine why the problem exists, and generate a set of solutions to ensure that the problem goes away."

When high risk indirect tax areas and lowest performing VAT processes - that have a direct impact on the company's VAT objectives - have been identified, the next step is to measure the performance in term of effectiveness and efficiency of each of these processes

The first phase is therefore a zero measurement that identifies key indirect tax risks and worst performing processes that in the end should be improved. Identify the lowest performing indirect tax processes that have the most direct impact on the company’s business and tax objectives.

To assess and measure indirect tax performance:
Read more

Risk process

Friday, January 8, 2016

Tax Risk and Control Matrix

In order to allocate resources to risk and cost saving areas that matter, we determine together the level of risk appetite of the company is accepting.

This facilitates prioritization in the deployment of resources. Having defined acceptable levels of risk leads to resources not having to spend time on further reducing risks that are already at an acceptable level.

Subsequently for the area of risks that exceed the company's risk appetite we set up (automated or manual) controls. It is about clear responsibilities, effective systems, documented processes and risk based controls.

The ultimate objective of a TCF is to be in compliance with tax laws and reporting requirements and manage the risks that matter (risks that exceed the companies’ risk appetite). Such framework ensures that an organization has adequate control over its tax processes. A TCF can prevent tax errors, identify opportunities in a timely manner and perform correct filings at the right moment.

A company’s VAT control framework system is effective if it provides insight into where material VAT risks may arise in the company (awareness), while the degree of risk tolerance is established internally and where appropriate control measures are taken with respect to these risks.