VAT and GST Managing the multinational burden
Can indirect tax compliance be easier?
An indirect tax management structure for the 21st century?
"One of the challenges we had as a US based department was how to manage the (indirect tax management) project in 100-plus countries. We recognized that we needed to partner with a Big 4 firm that had local country expertise and that could overcome a lot of the practical issues of time differences, culture, language, etc." The State Tax Counsel for a US multi-industry conglomerate
Summary: Let's look at how multinational enterprises (MNEs) confront the indirect tax challenges posed by operating in a complex world, and how they tackle these issues in practice, drawing on some of the lessons they have learned and the "leading practices" they have developed.
Multinational companies are challenged to meet multiple obligations for value-added tax (VAT), goods and services tax (GST) and other sales taxes around the world — using limited resources who may or may not fully understand the obligations and how to meet them.
Topics this report covers include:
Nine leading practices in international VAT and GST compliance
Leading MNEs continually evaluate how they can better manage their indirect taxes. They are adopting a host of strategies that make better use of their resources through outsourcing, centralization, standardization and use of technology.
- 1. Establish an effective VAT/GST management function
For many MNEs, the first step to improving their VAT/GST performance is identifying a person (or several people) to be responsible for indirect taxes.
Leading class organizations may appoint a global VAT/GST director who reports to the global tax director, supported by regional VAT/GST managers and a team of dedicated in-house indirect tax compliance specialists.
Some may prefer to appoint indirect tax managers in countries or regions where they perceive they have the greatest VAT/GST risk. Assessing the amount of VAT/GST under management can help with this decision.
- 2. Rethink the role of the in-house VAT/GST function:
An indirect tax management
structure for the 21st century?
Increasingly, MNEs recognize that indirect tax management involves a range of activities. It is not only about overseeing accurate compliance or finding "savings" but also bearing responsibility for wider VAT/GST planning and improving indirect tax performance.
As a result, MNEs are appointing VAT/GST managers or directors who bear full responsibility throughout the tax life cycle (tax planning, tax accounting, tax compliance and controversy.)
- 3. Establish internal controls:
An MNE VAT/GST manager may be responsible not only for providing guidance on VAT/ GST processes, but also for monitoring that the instructions are followed, by establishing proper controls.
The indirect tax managers we interviewed for this report all agreed on the importance of oversight, although they have adopted a range of different methods in practice to provide it, including:
Improving coordination with other functions such as finance and accounting, business groups and IT
Using IT solutions to monitor VAT/GST compliance, identify errors, assess and quantify risk and improve performance
- 4. Coordinate oversight with other corporate functions:
The indirect tax manager role does not generally involve completing the VAT/GST returns. But it does commonly involve oversight for the functions responsible for indirect tax compliance, and for ensuring that the people who do the day-to-day operations are aware of what is expected and know when to raise questions.
To be fully effective, the VAT/GST manager should be fully linked to the various stakeholders of the MNE, such as the business units, finance, IT, logistics, sales, legal and HR. The manager should also be recognized within the MNE as the key point of contact for indirect taxes.
- 5. Centralize accounting and reporting:
Around the world, MNEs are increasingly centralizing their accounting, tax and finance functions into shared service centers. A corporate move into a shared service center may be a trigger for examining the organization's VAT/GST reporting structure and the underlying processes.
Using a shared service center approach for global or regional indirect tax compliance can increase efficiency and effectiveness while potentially reducing overhead costs. By improving VAT/GST compliance, shared service centers may also help reduce risks and penalty costs.
Several MNEs which currently use a decentralized accounting model indicated that they would like to move to a centralized accounting model in the future. Barriers cited to using a shared service center for multi-country VAT/GST compliance included:
MNE corporate structure
A lack of coordination of the compliance function
A reliance on an in-country model that has been used for many years although it may no longer meet the group's needs
- 6.Use a GRC framework:
A GCR framework is a holistic approach to effective management and delivery of statutory financial and tax filings. GCR may be used for indirect taxes alone, or, more powerfully, it may encompass a range of the tax and financial reporting functions and processes that are essential to any business.
The aim is to deliver efficiency, control and value.
MNEs can achieve efficiency by developing standardized processes, deploying appropriate technology, and establishing an end-to-end flow of data. Equally important are people with the right skills, managing the right tasks evaluated by the right metrics.
MNEs seek control to achieve quality, consistency and certainty. The results include clearer visibility into risks and risk-related decision-making along with greater stakeholder confidence. For many companies, the transformation of GCR processes can be married to a broader transformation of the finance function at large.
The term value, in this instance, refers to the need to manage costs while enabling growth and optimizing resources such as cash and working capital. Equally important is agility — the ability for GCR processes to be adjusted quickly to respond to changes in organizational structure and strategy.
- 7. Consider outsourcing:
As we reported last year1 , one of the biggest challenges that MNEs face in meeting their global VAT/GST compliance obligations is a lack of sufficient internal resources with the right skills and knowledge.
MNEs are looking at a range of solutions to deal with these staffing issues.
Increasingly, companies are looking to outsourcing as a temporary solution. For example, an MNE may outsource to cover a reorganization or in a new market, with a view to taking the compliance function in-house at a later stage.
Co-sourcing with a third party provider is also becoming a more popular services, whereby certain processes and responsibilities remain in-house.
A key challenge is developing an optimal mix of resources at the global, regional and local levels. To determine the right mix, companies should examine needs, risks and costs. Other critical variables include the skill sets already at hand, as well as the need for flexibility, operational agility and scalability.
Evaluating the decision
In evaluating the decision to outsource, it is important to bear in mind that there is no "one size fits all" solution. It is important to assess the in-house and outsourced options in terms of resources, costs, benefits and risks to understand the options.
- 8. Create positive tax administration relationships:
Tax administrations undoubtedly play a vital role in ensuring that countries receive the consumption tax revenues they need to balance budgets. But the way that VAT/GST is charged and collected by businesses can leave revenue receipts vulnerable to the effects of error, carelessness or fraud.
Many countries have confronted this issue by increasing their reporting and documentary requirements and by increasing VAT/GST penalties. The onus is on the taxpayer to get things right, but, as we have discussed, meeting their obligations can be a significant burden, especially for companies that trade in multiple jurisdictions.
These factors can make the relationship between tax administrations and taxpayers adversarial, creating a climate of mutual suspicion whereby tax inspectors look for problems and taxpayers try to conceal them.
Improving a company's relationship with tax administrations around the world can help to reduce not only penalties and interest but also the management time business disruption arising from frequent unexpected tax audits.
- 9. Use technology to improve VAT/GST management and evaluate performance:
Using appropriate technologies is crucial to managing indirect tax compliance obligations and gaining oversight of their overall VAT/GST positions.
However, too often VAT/GST accounting and reporting systems are not up to the challenge of delivering accurate numbers or submission-ready returns without significant additional work, coding overrides and, even, manual intervention in the system.
But in recent years, a wider range of VAT/GST technology services have been developed, allowing MNEs to actively address these weaknesses. Automating processes and the use of diagnostic tools can help reduce risk by avoiding late submission penalties or by demonstrating to tax authorities and other regulators that the organization takes "reasonable care" in managing its VAT/GST throughput.
The benefits of improved indirect tax processes may also be felt in the wider business. This may include having a faster VAT/GST return completion cycle may free up indirect tax resource for value added activities.
1Source: Ernst & Young VAT and GST: multiple burdens for multinational companies, http://www.ey.com/vatburden, 2010