SAF-T for Poland and SAP

From 1st July 2016 onwards it is required to provide SAFT-PL files in XML format on request of the PL Tax authorities.

Per 1st July 2018 this extended to taxpayers with more than 9 employees or 2 million EUR sales revenue. Foreign businesses not having a branch and/or fixed establishment but that are registered for VAT in Poland fall within the scope of the above reporting requirement when above conditions are met.

On 19 May 2016 the Upper Chamber of the Polish Parliament passed a bill on the amendment of provisions of the Tax Ordinance and of some other acts. According to the bill adopted by the Parliament, the obligation to generate VAT reports in a SAF-T data format and their monthly reporting to the tax authorities will apply initially only to the largest enterprises for each month begun on or after 1 July 2016.

According to new regulation It means that Large Enterprises will be obliged to file VAT reports in the SAF-T data format already on 25 August 2016. Thus, Large Enterprises will be obliged to submit in monthly period VAT register in SAF-T format (according to JPK_VAT structure 4 – VAT register) even if the VAT reporting period is quarterly.

Taxpayers will be obliged to submit the SAF-T format:

• on request in the case of a preliminary tax inquiry, a tax audit and tax proceedings;
• monthly mandatory – with respect to the VAT sales and purchases records only (Article 109(3) of the Value Added Tax Act of 11 March 2004 (VAT records) by submit monthly a SAF-T file that contains VAT sales and purchase records

The first requests to submit audit files at their discretion will likely take place September 2016.  The monthly VAT reports on 25 August 2016.

Not complying with this obligation will not only negatively affect the position of taxpayers during a tax audit but also result in unforeseen tax costs as penalties will be levied.

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SAFT Poland and SAP

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The generation of the SAFT-PL XML files is not included in the SAP Strategy at the moment. SAP is currently only developing an extraction tool for SAP ECC 6 and higher version. Certain companies use “older versions” of SAP and will not be supported by SAP.

Based on SAP's OSS notes, SAP provides only at the moment a functionality for gathering and downloading some transactional data. However, it is not the complete set of data required and the creation of the SAF-T file for the tax authorities is also not included.

The functionality will also only be available for companies established in Poland and not for companies with a foreign Polish VAT registration. In order to be able to comply with the requirements and provide the XML file on request in time, tooling needs either to be developed or purchased.

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Our solution

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A SAFT-PL tool that already works for Portugal that includes also strategy for downloading the relevant data from SAP  for older SAP versions.

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The basic design for a workaround solution is to extract the raw source data from the relevant SAP tables and use software tools to load the relevant data from the source SAP tables, perform additional mappings and data preparations and create the required XML files.

We offer 2 solutions:

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• A software application called Audit Command Language (ACL). This software is commonly used by auditing firms, tax authorities and internal audit departments. The process will be that the client will download the data from SAP and make it available to the Phenix. Phenix will then generate the XML files and some control reports and provide these files and reports available to client for submission.
• A tool in MS Access  in combination with a specific user interface for extracting the data from SAP. The result is a full in-house solution for the client.

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Detailed information about SAF-T compliance and planning

• More info about our SAF-T solution for Poland
• Mandatory electronic audit files a worldwide trend
• Tax authorities peeking at your data

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Contact us for more information

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The changing tax world and company's impact

The 'enhanced relationship' model in UK and new proposals will most likely be copied and implemented by other tax authorities. Penalties when the 'tax rulings' are considered State Aid exceed the external auditor's materiality (5% of turnover: Apple penalty might exceed $ 2.5 bn), impact shareholders value and a company's reputation.

Apple says EU probe of Irish tax policy could be 'material' on April 29, 2015: Apple Inc (AAPL.O) said the European Commission's investigation into Ireland's tax treatment of multinationals could have a "material" impact if it was determined that Dublin's tax policies represented unfair state aid. Apple has warned investors that it could face “material” financial penalties from the European Commission’s investigation into its tax deals with Ireland — the first time it has disclosed the potential consequences of the probe. Under US securities rules, a material event is usually defined as 5 per cent of a company’s average pre-tax earnings for the past three years. For Apple, which reported the highest quarterly profit ever for a US company in January, that could exceed $2.5bn, according to FT calculations. Source: ft.com

Tax assurance will become more and more important and included mandatory in the scope of work of an auditor. That will influence or have a direct impact on senior management's KPIs and (reevaluation of) tax priorities set.

When a company does not publish its tax principles, notify the authorities of publication or voluntarily implement and execute a 'Code of Practice on Taxation' the tax authorities' qualification of that company will be a 'High Risk' resulting in an increased risk of tax audits and/or litigation. Tax audits will likely be done via data analytics (OECD's SAF-T) and review of the company's Tax Control Framework.

As the trend is global this would likely apply country by country. There is therefore not really a choice whether or not to participate. This is strengthened as an individual at board level has to sign off the tax strategy published. It is not only about being in agreement but is focused on execution as well. That means a company should have a Tax Control Framework in place where tax material risks  (amount much lower than external auditor's materiality!) are properly managed and continuously monitored.

Essential is the own testing of tax controls as its outcome should be disclosed to the tax authorities to actually prove that the company is 'in control'. 

Although tax audit outcome in the past could have been at an acceptable level, the above is about anticipating the future and shows besides 'Tax Transparency' and 'sign off of Tax Strategy by the board', etc. also a different way how a tax audit will likely be performed in every country in the near future. SAF-T originates as well from the OECD and is developed to make tax audits for the tax authorities more efficient and effective.

A monthly mandatory submission of electronic audit files is a step closer to 'Big Brother is watching you' than the current 'as is' in many countries.

Is a tax risk assessment needed prior to submission? It highly recommended as you leave an audit trail behind with potential unforeseen risks.

In the Netherlands we know that the authorities are reorganizing and recruiting 1,500 people with IT skills. We also know that knowledge and experiences - e.g on tax risk management - are shared between tax authorities and that the governments are in a real need to optimize their tax revenue.
Is it therefore still wise to continu in the same way or is reevaluation of the company's overall 'Audit Defense' tax strategy in order? That is a question that an in-house tax function needs to answer first.

Triggers for substantial change and tone at the top

• Tax Transparency and Code of Practice is high or should be high on the agenda of senior management / Head of Tax
• Change management applies: business model change (e.g. due to State Aid discussion and risk), financial transformation, post merger integration or implementation of COSO ERM as business model, litigation due to aggressive tax planning or is or might be mentioned in public domain

Extraction from the article: Developing a common framework for disclosing tax information by Richard Cornelisse

OECD Tax Administration 2015

Tax Administration 2015, produced under the auspices of the Forum on Tax Administration, is a unique and comprehensive survey of tax administration systems, practices and performance across 56 advanced and emerging economies (including all OECD, EU, and G20 members).

Its starting point is the premise that revenue bodies can be better informed and work more effectively together given a broad understanding of the administrative context in which each operates. However, its information content is also likely to be of interest to many external parties (e.g. academics, external audit agencies, regional tax bodies, and international bodies providing technical assistance).

The series identifies some of the fundamental elements of national tax system administration and uses data, analyses and country examples to identify key trends, comparative levels of performance, recent and planned developments, and good practices.

I have grouped together other key documents in ‘Audit defense strategy‘ and ‘Tax trends‘ for easy access.

Determine the exact amount of risk or saving

In this newsletter we will highlight one of the methods for zero measurement of tax risks: 'statistical sampling' to exactly determine the amount of risk or saving. Why is the exact amount important? We will illustrate this using a due diligence investigation as an example. Such investigation not only serves the purpose of identifying the material risks, but also the quantification of these risks is 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 for example possible incorrect VAT determination is detected, a rough estimate of the magnitude of the VAT risks (or savings!) is made on the basis of turnover and sales figures. This is not ideal for both vendor and purchaser, as it involves a lot of guesswork and thus usually provides an insufficient framework in price negotiations. The question is whether there is a more accurate method  for determining the potential additional tax assessment (or saving!) in an efficient and effective way. 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 with 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. Supportive to the strength of this method is the fact that statistical sampling is the preferred tax audit method used by the Dutch tax authorities in their tax audits. This method is explicitly approved by the highest Dutch court. Defining the scope, designing, drawing the sample and evaluating the results requires a multidisciplinary approach. In addition to indirect tax knowledge, expertise in statistical sampling is required. In case of a due diligence such a sample is not solely relevant for 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 the data room. This can serve as additional evidence of implementation and maintenance of an effective (tax) control framework. Moreover, in the Netherlands the possibility exists to align and discuss the results of the observed 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. Via the 'single audit' method, it is possible to extend the scope from VAT and/or GST to other tax areas such as 'corporate income tax' and 'wage tax'. Click on 'Go to Flyer' below if you want to learn more about 'zero measurement of risks and savings' or select 'single audit' method for debrief. Materiality of tax risks Go To Flyer Go to 'Single Audit method' +1 Tweet Forward Copyright 2015 Global Indirect Tax Management, All rights reserved. This e-mail contains benchmark information useful for self assessments Our mailing address is: Global Indirect Tax Management Attn of: Phenix Consulting Beech Avenue 54-80 Schiphol-Rijk, 1119 PW Netherlands unsubscribe from this list    update subscription preferences Phenix Consulting · Beech Avenue 54-80 · Schiphol-Rijk ·  1119 PW · Netherlands

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Tax engines questions to ask before you commit

Determining the VAT liability and VAT recovery of businesses’ transactions (the system’s indirect tax functionality) can be automated within Enterprise Resource Planning (ERP) systems such SAP and Oracle, or by way of a manual processes.

Multinationals run often various versions of ERP systems without harmonization. The ERP set-up is often per business unit and thus multiple kernels per country are more likely than not. In the last decade, companies have increasingly automated their business processes. The most common method is by using an Enterprise Resource Planning (ERP) system. Such a set up can be hugely complex. This is definitely the case where it relates to European based indirect tax.

As manual processes are subject to human error, automation could - under circumstances - result in performance improvements and savings.

A third party tax engine might be a solution than improving the indirect tax functionality of its own ERP systems when the organization uses multiple ERP systems.  Interfacing via a bolt-on could be an alternative.

In practice, configuration (the amount depends) is needed when companies deal cross border and/or complex business model are set up such as a centralized principal structures. This could cause difficulties in running exception reports to look for missed opportunities, under claimed VAT and potential fraudulent transactions. A lot of (manual) work is required when reconciling the periodic VAT compliance reports from these different sources (divisions, different systems).

As the ERP systems do not have flexible reporting solutions, multiple spreadsheets are often used to reconcile VAT numbers. Manual processes are subject to human error and often inefficient due to the amount of rework (‘hidden factory’).

'Remediate own ERP system' or purchase a 'third party solution’ 

Indirect Tax functionality can be automated (full or to a certain extend) in a company’s own ERP system. The problem might be that multiple ERP systems are used and that interfacing via a  third party tax engine is considered an alternative.

That option means that part of the system functionality is actually outsourced.

Some important questions from a tax software selection to ask

Written by Richard Cornelisse, one of the articles published on Global Indirect Tax Management

When is standard SAP (in)sufficient?

When is Standard SAP sufficient?

Standard SAP itself is only processing a transaction within one specific company code and the consequence is that standard SAP VAT determination logic and functionality for VAT determination should therefore only work for:

• AB scenarios
• Cross border intercompany
• AB scenarios: electronic invoices via EDI/iDoc
• Local ABC scenarios (e.g all legs in France)
• ABC scenario with a static business model (for instance leg B-C triggers always the same VAT treatment)

Any standard SAP gaps could be resolved with limited adjustments the overall VAT determination improved via standard design of VAT condition tables, access sequences, tax codes, tax sensitive master data, configuration of customer VAT registration number.

When is Standard SAP insufficient?

However, standard SAP VAT determination logic and functionality for VAT determination does not work for complex dynamic business models (e.g. Principal-Toller-Agent model) with for example multiple VAT registrations, pick up and drop shipments, chain transactions between legal entities (ABC / ABCD scenarios).

Further explaining the root cause

The SAP VAT determination logic was developed a long time ago (1980s) and except for the “plants abroad” logic, SAP’s VAT determination logic has not changed much. This stands in con-trast with the VAT rules and business models as these have changed significantly.

The VAT landscape and rules have gone from fairly simple to rather complex. Cross-border transactions changed from solely export to a new category within the EU: Intra community transactions (goods and services) with distinct rules and new formalities to manage.

New business models have resulted in an increase of intercompany transactions, the use of chain transactions, drop shipments and pick up transactions.

These are causing IT bottlenecks to implement as Standard SAP VAT determination logic and functionality do not work for these complex dynamic business models.

The root cause is that both Standard SAP and bold-on tax engines exclusively focus on transactions within a single company; it only assesses the underlying individual transactions and fails to link the current transactions to the VAT results of previous transactions.

When more than 2 parties are involved, the VAT treatment depends on the VAT treatment of the prior transactions:

• ABC (D) transactions involving supplies of goods and which are transported to another Member State or Member States. In that case it is important to identify in which part of the chain the intra-EC supply and local supply or supplies take place (see below 'Cross border drop shipments')
• ABC transactions involving 3 parties in the supply-chain, which are identified for VAT purposes in three different EU countries, and for which the goods are transported directly from EU country A to EU country C. Under certain additional country specific requirements (not harmonized amongst the EU member states) such a transaction may qualify as triangulation, so that the re-spective “simplified triangulation rule” would be applicable
• ABC (D) transactions involving a supply of goods which are exported to a place outside the EU. In this case, it is important to identify in which part of the chain the export takes place in order to determine the impact on the VAT qualification of the other parties in the chain transaction (see Import / Export transactions ABC transactions)
• ABC (D) transactions involving a supply of goods which are imported to a place inside the EU. Again, it is important to identify in which part of the chain the export takes place in order to determine the impact on the VAT qualification of the other parties in the chain transaction (see Import / Export transactions ABC transactions)

When we take the first bullet as an example of the complexity, one could think of the possibility that the invoice flow and physical flow of goods have a mismatch.

That could be the case if party B request party A to deliver the goods directly to party C in another Member State (i.e. see below drop shipments). Standard SAP will determine the VAT qualification based on the ‘ship-from’, ‘ship-to’, ‘material’ and ‘customer tax classification’ information in SAP.

It will for instance not take into consideration the multiple VAT registrations from party B.

That would mean that not only the transaction A-B but also B-C cannot be derived correctly. From a legal perspective only one transaction can qualify as a zero rated intra-EC supply. In such ABC cases, one of the 2 transactions should be charged with local VAT.

An exception exists - second bullet above - when the supply chain fulfills all requirements of the simplified triangular. Under these strict conditions both transactions could be zero VAT rated.
The supplier is responsible for ensuring that all the conditions for applying the zero VAT rate are met.

Financial impact

If not the supplier does not meet the conditions for using the sero VAT rate, the tax authorities will seek to recover tax due from this supplier via a levy of a tax assessment.

If the applicable VAT rate is 25%, the tax assessment will be 25/125 of the consideration charged and thus impacts the business KPI EBITDA (profit margin erosion). This assessment has to be increased with interest and penalties to determine the total tax burden.

Without adjustment of Standard SAP setting, an incorrect VAT treatment would be determined causing non compliance risks.

Specific areas of attention

Cross border drop shipment

Specific considerations about triangulation

• DK company code sells to DK customer
• Stock is not available and is purchased from NL Company code with NL stock location
• Direct shipment from Plant NL01 to customer

Result: wrong VAT treatment with potentially twice an 0% rated intra EU supplies
Root cause: Standard SAP is not able to link the VAT treatment of AP and AR as data is gath-ered at company code level and cannot be linked to AP and AR

Simplified triangulation

Specific considerations about drop shipments

• Country specify rules apply when triangulation is allowed (country by country deviation). Different local rules apply when Party B is VAT registered in ship-to country where the customer receives the goods
• If the supplier (plant or third party) is not set up in SAP the ship-from location will not be known during billing and sales
• Standard SAP requires manual intervention

Import / export transactions ABC transactions

Specific considerations about export/import

• Define the correct legal partner for VAT
• Determine the correct ship-to country
• Differentiate between export/import and out of scope

Customer pick up

Specific considerations about customer pick up

• Country specific rules apply when a customer picks up the goods and the goods leave the country
• 0% VAT rate for intra EU is only allowed if supplier can prove that goods have left the country
• If proof is not available the tax authorities could assess the supplier for VAT

Services

Specific considerations about services

• Default place of supply rule should be the country of establishment of your customer
• Standard SAP: place of supply is by default ship-to
• Default rule has exceptions (e.g repair services connected to immovable property)

Written by Richard Cornelisse, one of the articles published on Global Indirect Tax Management

SAP review for VAT and GST

A SAP review should highlight where the VAT configuration could be improved or if additional control measures should be added to the business’s Tax Control Framework.

The SAP review can also identify where errors occurs and there are increased risks allowing a more focused data analysis to take place. After the quantification and evaluation of the risks and errors, these are assigned a risk profile for further testing of risk tolerance.

During a SAP review for VAT and GST the proper working of the implemented VAT configuration has to be vericated. This will provide understanding of how changes in the business model, master data or legislation will have an impact on the implemented VAT configuration.

Examples of possible VAT errors encountered in SAP include:

• Ineffective use of the proper partner functions in SAP for a supplier who provides services in multiple countries and invoices VAT locally. This can result in the standard VAT calculation generating incorrect results.
• Incorrect derivation of VAT registration numbers for cross-border transactions caused by incorrect SAP configuration.
• Missing/improper VAT registration numbers in customer master data, such that invoicing requirements are not satisfied for cross-border transactions.
• Master data is adjusted and tested in the test environment, but the changes are not reflected in the production system.
• The logic of the tax code structure is disrupted by VAT rate changes. This can be mitigated using the correct SAP configuration.
• When performing reverse charge bookings, VAT rate changes do not get changed.
• For cross-border A-B-C transactions, a VAT mismatch between the VAT on procurement and the VAT on sales arises for party B.
• Blocked iDocs (electronic interface documents) because of errors in the OBCD design.
• Suppliers with invoices in other currencies and the VAT amount shown in Euro. This results in an incorrect VAT amount due to an incorrect FX conversion

Written by Richard Cornelisse, one of the articles published on Global Indirect Tax Management

Quantification of tax risks via statistical sampling

Sampling is the process of taking only a proportion of the total population of available data, when measuring the entire population would either be too expensive or take too much time. To ensure that sampling is done correctly, the sample must be representative of the larger population and be taken randomly. A random sample ensures that any one sample has an equal likelihood of being taken.

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.

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

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

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.

Written by Richard Cornelisse, one of the articles published on Global Indirect Tax Management

VAT determination of incoming invoices

The purchase order (PO) and the vendor invoice are the VAT relevant data sources used to determine the VAT treatment of incoming invoices.

However, the vendor invoice data is in general not available in SAP. However, in order to automate the VAT determination, it is essential that external information is added in an easy and intelligent way.

In practice, many of the incoming invoices are still processed manually. AP clerks, who are not VAT experts, have to select the correct tax codes and thus determine the VAT treatment and reporting. In order to manage this process, detective controls should be executed to check whether this is done correctly.

This is labor-intensive and poses a major area for VAT errors, such as failing to deduct the correct input VAT in the VAT return. It will therefore be an area of investigation during a tax audit.

When an incorrect VAT result is caused by the incorrect data in the PO, the remediation takes place via updating the PO with correct data and re-processing the related transactions (goods receipt, etc). Such a process causes workforce inefficiencies due to the hidden factory.

Definition of ‘hidden factory’ or ‘hidden operation’ : 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 a result, return precious time and money to the business.

The AP clerk often fully relies on the purchase order and is unaware that this purchase order might no longer reflect the actual situation.

For example, if the vendor decided to execute the transaction differently from what had been initially agreed upon – the vendor decides to deliver from another country as locally the goods were not in stock. This causes a gap between data in SAP and the formal invoice (i.e. incorrect use of goods supplier partner function). That gap has to be closed.

Additional complexity arises when the purchase orders relate to services and not to materials or when the VAT is not fully deductible.

Written by Richard Cornelisse, one of the articles published on Global Indirect Tax Management

Tax authorities peeking at your data

The OECD has issued in May 2005 a guidance note on the development of Standard Audit File –Tax (SAF-T) and recommends the use of SAF-T as a means of exporting accurate tax accounting data to tax authorities in such way that can it can be analyzed easily.

Portugal has implemented this guidance per January 1, 2013. On monthly basis, companies are obliged to submit the SAF-T (PT) reports for sales invoices to the tax authorities. Besides the SAF-T (PT) requirement there is also a Portuguese requirement to implement a digital signature for all sales invoices.

From a risk management perspective mandatory data filing should give food for thought. The submission of the SAF-T file means that a taxpayer has to provide specific data to the tax authorities every month.

From a tax controversy strategy it is common practice that before information is provided to the authorities, a company performs a risk assessment and determines the worst case scenario to avoid unforeseen tax risks.

The more efficient use of technology lowers costs of collection and compliance. More and more tax administrations around the world are implementing electronic auditing of a business’s financial records and systems.

What if there are glitches in your data, input errors, empty fields, awkward descriptions in fields or apparent inconsistencies?

A checklist re submitting data to the tax authorities:

• Have you analyzed the data and performed a tax risk assessment?
• What are the tax authorities doing with this data: perform data analysis?
• Does not meeting the requirement result in a higher risk of a tax audit?
• What are the KPIs of the tax authorities?
• If not impacting the present does the company show a audit trail that can be retroactively be investigated and backfire to tax position taken (ammunition for contra arguments, increase of penalties)
• If the data provided does not meet the required data format could this result in a higher risk of a tax audit?
• To avoid unforeseen risks or mitigate this risk is it not necessary to perform a data analysis prior to submitting data, as an internal pre-audit?

Written by Richard Cornelisse, one of the articles published on Global Indirect Tax Management

Incorrect VAT numbers

It is 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 numbers.

We checked VAT numbers during data analysis exercises. In practice, it appears that 5 to 25 percent of the existing VAT numbers in the customers and/or vendor master data are incorrect or invalid.

From a VAT perspective, this is a material tax risk area as the 0% VAT rate might have incorrectly been applied and the risk amount involved would most likely exceed the company's risk appetite.

This especially applies when cross-border transactions are part of normal course of business. It will therefore be an area of investigation during a tax audit.

An important control measure in terms of material indirect tax risks 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.

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).

Financial impact

If not correct, the tax authorities might seek to recover tax due from this supplier via a levy of a tax assessment.

If the applicable VAT rate is 25%, the tax assessment will be 25/125 of the consideration charged. This assessment will be increased with interest and penalties to determine the total tax burden.
Written by Richard Cornelisse, one of the articles published on Global Indirect Tax Management

Infrastructure - challenges and improvements

It is important that hard copies and electronic corporate documents, tax files, and tax records are organized and retained and accessible and for example not stored on employees’ hard drives. Besides easily accessible it should be backed up under company’s IT policy. Tax audit adjustments including settlements are documented and archived for future use.

When no documentation exists for critical tax processes tax authorities or corporate record retention requirements have not been considered it is important to set up a process for documentation. This process should be reviewed frequently and has to be updated for changes in operating environment.

Effectiveness of the tax department could be improved when the tax department has adequate supporting technology and tools and/or systems that don not need significant manual input. Tools and technologies are used in an integrated manner and tax data is only collected once and reused.

The indirect tax department formally engages with key stakeholders on a regular basis to exchange knowledge and such contribution are supported by technology.

ERP and other systems are properly configured for VAT to support compliance, financial reporting and planning and there is dedicated IT support for tax.

The tax department has access to critical systems and applications and the right VAT configuration is implemented and maintained accordingly moving forward.

A substantial improvement is available if technology tools and systems to increase effectiveness and reduce risks could replace spreadsheets.

Systems and processes should also be in place to maintain critical data needed for tax and strategic decisions on a periodical basis considering reporting, compliance, auditing and planning needs.

Written by Richard Cornelisse, one of the articles published on Global Indirect Tax Management