Measuring VAT/GST management — key performance indicators around the tax life cycle
Effective indirect tax management may be a journey without end — but it is a journey worth taking.
Summary: To reach their VAT/GST management goals, MNEs often adopt a staged approach from a high-level review of the current state through to a full implementation of revised systems and processes.
As we have outlined in this report, MNEs are increasingly aware of their global VAT/GST risks and many are adopting a range of strategies to reduce their risks and improve their performance. But:
- How do you know whether your organization can improve its management of indirect taxes?
- How do you decide whether you should adapt your systems or adopt leading practices?
- How will you secure support and resources to implement improvements?
In our experience, indirect tax weaknesses commonly originate in the following four broad areas, which may be addressed together or individually:
- Strategic. The tax treatment of the business transactions (e.g., the tax technical analysis of core and non-core activities)
- Operational. Record-to-report (e.g., the ERP)
- Compliance. Reporting (e.g., meeting compliance deadlines)
- Documentation. The paper trail (e.g., the proof required for refunds, VAT exemptions
A project for improving indirect taxes involves several functional areas (e.g., tax, finance, business units, IT) and a wide range of information and processes held and managed in different locations.
Taking a staged approach
Often, MNEs adopt a staged approach going from a high-level estimation of the current state of indirect tax management through to full implementation of revised systems and processes.
Based on our experience of working with a range of MNEs worldwide, the project may be broken down into the following broad stages:
- Gap analysis. Identify the current and desired future states and possible benefits from improving VAT/GST management in terms of value, efficiencies and control
- Scoping the project. This includes business needs and the taxes, entities, countries, ERP systems involved and the initial project deliverables
- Mapping and analysis of the organization’s indirect tax footprint. This should include people, processes and technology to identify and prioritize risks and opportunities and possible options
- Agreement on action and implementation
- Sustainability. Review the implementation of recommendations and evaluating whether they have yielded the expected benefits
Using KPIs to measuring VAT/GST management
Measuring VAT/GST management —
key performance indicators around
the tax life cycle
The "tax life cycle" consists of four stages:
- Tax planning
- Tax accounting
- Tax compliance
- Tax controversy
The tax management function sits at the center.
The stages of the life cycle are not sequential. There is no defined start or end point and the different stages may come in any order (e.g., compliance may lead directly to planning).
Through its different stages, the tax life cycle provides a framework for developing key performance indicators that measure how VAT/GST is managed in the context of the whole business.
Case study: global manufacturer improves VAT/GST management
MNE Y is a global manufacturing company, headquartered in the US and organized in divisions. The company worked with Ernst & Young to evaluate its management of VAT/GST processes.
These are the project recommendations based on an examination of MNE Y's current processes and controls:
Educate key business people (controllers groups and business development) about VAT, in order for them to understand the impact of this tax
Educate key business people about importance of contacting the US VAT team within a relevant timeline, so that it is possible to provide proper support/advisory services and determine tax planning, if any
Educate internal audit team about VAT, so that VAT falls within the scope of their review
Provide the internal audit team with sufficient questionnaires and training to carry out a proper VAT review
Incorporate a robust data analysis tool as part of the review process or as a separate exercise. This tool will be tested initially on one entity in a country where a preliminary assessment has taken place — to allow for a comparison of results
Use Ernst & Young India simulation tool
Use Ernst & Young EU VAT number validation tool
Develop clearly defined roles and responsibilities for current and future US VAT team members:
Division ZY — Evaluate whether VAT compliance outsourcing makes sense
Create manuals/check-lists for better understanding and documenting certain topics