Set concrete measurable actions (KPIs)

Setting realistic objectives is the starting point for any successful change effort. In order to increase indirect tax function effectiveness it is important to set S.M.A.R.T. objectives and define tasks: add to objective the word by ... as shown in below example. Break down larger tasks into smaller ones.

Read more: Concrete measurable actions

Spreadsheets and VAT Compliance

With human error added into the equation, some defects are going to occur. If the tax function only has MS Excel to perform data transformation to make the data tax ready, the volume of procedures and controls will have to be significantly greater.

The problem is that in Excel altered data can lose its audit trail back to its source: mismatches with a companies ERP system. A point of attention as ERP data is the source of truth by the tax authorities (e.g. e-audits such as SAF-T).

Read more: Spreadsheets and VAT Compliance

Facebook could owe $5 billion in taxes - Jul. 29, 2016

Facebook (FB, Tech30) disclosed on Thursday that it could owe billions due to an IRS investigation into the way it moved assets to an Irish subsidiary to avoid higher taxes.

The IRS tax penalty could total $3 billion to $5 billion, plus interest, according to a Facebook filing with the Securities and Exchange Commission. If so, Facebook says the penalty could have a "material adverse impact" on its financial position.

The tax issue was first disclosed publicly three weeks ago when the U.S. Justice Department filed a lawsuit forcing Facebook to comply with the ongoing IRS investigation. No figures were provided at the time for possible penalties. Source: Facebook could owe $5 billion in taxes - Jul. 29, 2016

(Also) Apple’s, Google's and Coca Cola’s tax assessments are material from an annual report perspective besides financial risks contain reputational risks. See for overview of these tax assessments

• Will ‘tax assurance’ mandatory be reviewed by External and Internal Auditors?
• How does it change the CFO and position of the head of tax (budget, resources, qualifications, etc.)?
• Read more: Transfer pricing and IT needs

Real time VAT ledgers in Hungary

Following the changes announced on ERP and invoicing software requirements in Hungary, the Hungarian government recently announced that businesses issuing invoices using an invoicing software will be required to provide real time data regarding these invoices.

The real time data provision will have to include all transactions in which another business with a Hungarian tax number is involved and the invoice includes at least 100,000 HUF VAT.

The new real time data providing requirement will be introduced in two steps. As the first step from the 1 January 2017 (as a test phase) it will be optional to provide the additional data. The system will go live and the new requirement will become an obligation from the 1 July 2017. The new requirement assumes additional IT development in terms of the invoicing software on the side of the taxpayers issuing invoices.

Since the invoicing software is supposed to be able to provide data for the Tax Authority in case of an audit since the 1 of January 2016, the new requirement is not supposed to put an excessive administrative burden on the taxpayers.

As these rules are in the proposal phase right now, nothing is certain until the Hungarian Parliament approves them. What is certain is that it is never too early to start preparing for these changes, which will affect the administrative obligations of a great number of business.

Read more: Real time VAT ledgers in Hungary

OECD's - BEPS involving interest in the banking and insurance sectors

The report on Action 4, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, establishes a common approach to tackling BEPS involving interest, but highlights a number of factors which suggest that a difference approach may be needed to address risks posed by entities in the banking and insurance sectors.

These include the fact that banks and insurance companies typically have net interest income rather than net interest expense, the different role that interest plays in banking and insurance compared with other sectors, and the fact that banking and insurance groups are subject to regulatory capital requirements that restrict the ability of groups to place debt in certain entities.

The Report therefore provides at paragraphs 188 to 190 that countries may exclude entities in banking and insurance groups, and regulated banks and insurance companies in non-financial groups, from the scope of the fixed ratio rule and group ratio rule, with work to be conducted in 2016 to identify approaches suitable for addressing the BEPS risks posed by these sectors, taking into account their particular characteristics.

This discussion draft has been produced as part of the follow-up work on this issue, which focuses on -

• the risks posed by banking and insurance groups to be addressed under Action 4,
• approaches to address risks posed by banks and insurance companies, and
• approaches to address risks posed by entities in a group with a bank or insurance company.

Read more: OECD's - BEPS involving interest in the banking and insurance sectors

e-Learning modules on VAT

VAT eLearning programme developed by the European Commission consists of 12 individual courses. The eLearning modules on value added tax (VAT) aim at presenting the fundamental elements of the VAT Directive.

The modules have an EU-wide perspective and do not explain national variations or derogations. Having completed all individual eLearning modules on VAT the learner should have a good understanding of the key principles of the EU VAT directive, to be incorporated into national legislation.The twelve eLearning modules on VAT are now available in 15 languages.

Read more: e-Learning modules on VAT

Introducing a new VAT system

On 16 June 2016, the Finance Ministers of the Gulf Cooperation Council (GCC) held an extraordinary meeting in Jeddah, Saudi Arabia on GCC Value Added Tax (VAT). GCC States - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates that make up GCC - will most likely introduce VAT on 1 Jan 2018 or by 1 Jan 2019 at the latest.

How to get ready?

Read more: Introducing a new vat system

Manage business model change

There is one common denominator that is too often missing from the strategic or planning elements of a business model change — indirect tax. But do these taxes get the attention they need, especially in light of increasingly complicated and globalized business models?

And although these tax considerations may not be among the issues that drive a financial transformation, tax can certainly give rise to some significant and costly challenges. That is particularly true of value added tax (VAT), which hits a number of disparate points within the enterprise as diverse as finance, procurement, IT or HR.

One of the most common side effects of an integration that cannot be fully realized surfaces in the realm of invoicing. For example, large numbers of payable invoices are not correctly coded so VAT is not deducted (in time). Or when the legacy system is only half integrated into the new model, incorrect sales invoices are issued, causing problems for customers, incorrect reporting of tax figures, and missed compliance obligations.

Read more: Manage business model change

Shift from direct tax to indirect tax

CFOs / Head of Tax apparently still focus more on direct tax than indirect tax. This is interesting as from a tax revenue perspective the current trend is a shift from direct tax to indirect tax by decreasing direct tax rates and increasing VAT/GST rates.

Corporate income tax rates are continuing to fall in many countries. Global indirect taxes can amount to as much as 75% of the overall corporate tax burden, with VAT and sales/use tax outlays nearly 40% of total business tax expenditures — almost twice as much as corporate income tax.

More than 160 countries have a VAT regime. In the EU, between 2008 and 2013, the average EU standard rate increased from around 19.5% to more than 21%. The EU average VAT rate is now approximately 21.5%. VAT accounts for more than 20% of total tax revenue (OECD).

Read more: Shift from direct tax to indirect tax

Certain SAP activities illustrated via ‘Brexit’

The impact of ‘Brexit' - its VAT law change - is used to illustrate the SAP activities and resources needed when a company has to deal with a country setting change from UK to Non-EU.

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Assumed VAT law changes

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‘Brexit’ will result that trade between the UK and the EU countries and vice versa will be treated as imports and exports. VAT reporting will change as well as EC Sales Lists and Intrastat reporting will no longer apply. Transfer of for example own stock to or from the UK is no longer considered a fictitious intracommunity transaction.

With respect to chain transactions UK companies or non-EU companies with a UK VAT registration can for example no longer be party B of a simplified triangulation, unless that UK company is also VAT registered in the EU. 

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SAP - assess, redesign and ... test!

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In order to implement 'Brexit', SAP settings have to be changed. In SAP's country table T005 the UK must me changed from EU to Non-EU. That also means that tax determination logic, tax codes, invoice and reporting requirements have to be assessed and any (new) rules implemented as well. Take for example 'Plant abroad' and transfer of own stock to or from the UK, it is no longer deemed a fictitious intracommunity transaction.

Companies that have GB hard coded in their tax determination logic to determine the VAT treatment of UK transactions need to review the logic setup to avoid non compliance.

Besides assessments by the tax function - extra costs when outsourced to external advisor - IT effort has to be scheduled in to make it happen. Change management processes follow strict IT policies and specific and extensive test rules in practice apply before it can go to production. Those mandatory test cycles are time consuming and have a huge impact on resources.

When manual processes and controls are setup to manage complex VAT transaction that includes dealing with the UK new guidance should be drafted and ongoing review take place to control that these new procedures are actually followed up.

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The ideal SAP world of managing change

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• In the ideal world to implement Brexit and the current VAT rules from EU to Non-EU you would go to customizing of SAP and change the EU indicator field from ‘EU’ to ‘Non-EU’ and that the immediate outcome is that UK transactions are considered automatically import and export. Condition records do not have to be reviewed and 'Plants Abroad' settings are automatically updated.
• Test cycles as mentioned above do not apply as the overall functionality has been tested before and has been IT approved as it works.
• It would be ideal as well to have real-time access to UK transactions. That the blue print of the company can be shown so that you are able to immediately zoom in on (chain) transactions involving the UK. That such transactions can be made visible, accessed and changed on the spot. Not only important for UK companies but as well or even more for companies dealing with the UK.
• Suppose SAP would have its own Tax Control Framework that automatically checks non VAT compliance. For example, the UK in a simplified triangulation is automatically picked up and blocked or put in an emergency table just because you have changed the country setting from EU to Non-EU.

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Is that functionality already available? 

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Yes, all above functionality exist, contact.

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Data and technology

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• ERP systems and tax engines
• When is standard SAP (in)sufficient?
• SAP and triangulation
• SAP and import, export and chain transactions
• SAP and plants abroad
• SAP checklist for VAT rate change
• Everything you always wanted to know about VAT in SAP * but were not aware to ask
• SAP implementation
• Tax engines questions to ask before you commit
• SAP and SAF-T Poland
• SAP and monthly SAF-T VAT file in Poland (JPK-VAT)

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Written by Richard H. Cornelisse

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