Managing indirect taxes: a framework for multinational companies
Many international enterprises want to improve the management of their indirect taxes. An integral framework for control and management of VAT and other indirect taxes is the best approach to achieve the desired goals of efficiency and value creation. Such a framework will allow companies to see their full exposure and to manage their obligations comprehensively and effectively. As a result, the company can reduce risks and deliver more value.
Board members and top managers of multinational enterprises increasingly recognize the important risks and opportunities offered by indirect taxes such as value added tax (VAT), goods and services tax (GST) and sales tax. They are asking themselves important questions. Are we avoiding double taxation in our cross-border transactions? How can we best combine the cost-efficiency of centralized compliance with the need to pay attention to complex local laws? This increased attention is very welcome, since indirect tax errors can have a material impact on earnings.
Recently, risks of non-compliance have grown, as large public deficits have induced governments to increase rates and tax administrations to intensify enforcement. As multinationals ponder important changes to their finance functions, a rethink of their indirect tax management is a natural part of this overhaul. Recent developments in IT are enabling companies to restructure their indirect tax functions in a way that was impossible just a few years ago. Furthermore, VAT and GST management is often seen by stakeholders as an indicator of the strength of corporate tax and financial controls generally.
In short, companies have to deal effectively with indirect tax management. The recent Ernst & Young report VAT and GST – Managing the International Burden maps out the paths that leading international enterprises are taking in this respect. Our research shows that there are many events that may trigger a change in how a company manages indirect taxes:
- A general transformation of the finance function
- A merger, acquisition, spin-off or major business restructuring
- A change in key personnel: CFO, tax director
- A profound operational change: an ERP upgrade, a new shared services center, a global outsourcing project, a tax software implementation
- A negative event: a SOX control failure, an audit surprise, a penalty
Whatever the trigger for change, getting to grips with the intricacies of all their international VAT and GST obligations proves a challenging task for companies. The resources of corporate tax departments and the number of expert employees are typically limited. At the same time, the complexity of indirect taxes is increasing, due to the wide range of different taxes and the ever faster pace of changes in the legal and regulatory frameworks.
Companies would clearly benefit from international efforts of harmonization, standardization and simplification of indirect taxes. However, international tax harmonization is a notoriously slow enterprise and companies have to prepare for the world as it is, not as it should be.
Despite these very real challenges, companies can significantly improve their performance in all phases of the indirect tax “life cycle”: tax planning, accounting, compliance and controversy. A comprehensive framework for managing indirect taxes is a prerequisite for achieving the desired gains in effectiveness and efficiency. As part of such a framework, companies should take into account the management of indirect taxes throughout their complex international supply chains. For each link of a chain, it should be clear what business unit or function (e.g., tax, finance, IT) has ownership of the tasks to be performed.
Many leading multinational companies are already taking various steps to improve their indirect tax management. Here are a few examples from our report:
- A shift of tax compliance from a local to a regional or global function
- A transition of the VAT work to an in-house shared services center under a completely new team
- Strengthening local teams in a global framework in order to deal with regulatory and cultural differences
- Increasing visibility of how much VAT is paid and recovered in each jurisdiction
- Assess the impact of likely changes in the regulatory regime of indirect taxes on different business units within the company
- Implication of the indirect tax manager in the definition of new transactions at an early stage
- An increase of system-based processes and solutions in order to reduce risks and improve VAT compliance
A first and important step to improve indirect tax management is to put somebody in charge. Whereas multinationals based in Europe – with its long tradition of VAT – often have such a person or group in place already, dedicated indirect tax leadership is still less common at non-European companies. Often, it will also be beneficial for a company to establish a dedicated indirect tax function, capable of organizing controls as well as assuming a strategic role. This indirect tax function should not limit itself to compliance; it should plan to improve overall performance and assess indirect tax risks and opportunities. What are the absolute costs and negative impact on cash flow of indirect taxes? How can the company’s processes be adjusted to mitigate compliance risks, reduce costs and create value for the company?
The role of the tax function should be much more comprehensive than just giving formal-legal advice about specific transactions. It should also be engaged in establishing controls to ensure that the correct tax treatment of all transactions is implemented in practice, and thus help companies raise essential questions such as: how can we best integrate our VAT or GST obligations into our global compliance and reporting systems? Does a shared service center make sense for us? Should we fully or partially outsource some of our management of indirect taxes? Answering these questions will help companies establish a framework for control and management of indirect taxes. Such a framework is not a rigid, single model, but rather a way to ensure that all relevant issues of indirect tax management are addressed and aligned with a company’s overall business and risk strategy. Achieving effective indirect tax management is an individual journey; each company will choose its own road. But for all companies, it is a journey worth taking.
by Philip Robinson, Head of Global Indirect Tax, Ernst & Young,
and Yannick Zeippen, Partner, Indirect Tax, Ernst & Young, Luxembourg