11 minute read 5 Nov 2020
Watchmaker is repairing the mechanical watches in his workshop

Five ways going back to basics can optimize indirect tax operations

By EY Global

Multidisciplinary professional services organization

11 minute read 5 Nov 2020
Related topics Tax compliance Global trade

The COVID-19 crisis shook up the global indirect tax landscape, but it also showed that a robust VAT function relies on firm fundamentals.

In brief
  • The global stress test of the COVID-19 crisis has pushed indirect taxes to the fore of government efforts to replenish the funds spent shoring up economies.
  • Indirect tax compliance obligations are mandatory, but companies have a choice in how to organize their compliance functions.
  • Focusing on the fundamentals, businesses can improve their compliance performance to add greater value to their bottom line.

Managing indirect tax compliance has always required an acute eye for detail, allied with a deep understanding of the bigger picture. This involves appreciating not only powerful external factors such as the shifting global VAT landscape, but the thread of indirect tax weaved through multiple functions within any business, including tax, finance, technology and legal.

As such, indirect tax has always been a complex issue for businesses to navigate and remain compliant with. And the broader the footprint of an organization – with a larger supply chain and greater number of transactions – the more complex the picture becomes.

There is no escaping that the COVID-19 pandemic has already had a significant impact on global indirect tax, with rate changes, supply chain disruption and cash flow among the most pressing challenges. It’s also undeniable that these factors will continue to shift in the months and years ahead as governments implement measures to shore up and rebuild economies that have suffered in this period.

What the COVID-19 pandemic has also done, however, is to highlight weaknesses in certain indirect tax processes. “When you stress test a particular model in compliance, you quickly find some of the cracks and flaws,” explains Pierre Arman, Associate Partner, Indirect Tax & Technology, Ernst & Young LLP. “The pandemic basically forced businesses to take a very hard look at how efficient they are, how many resources they require, and to examine their compliance model at a strategic level. There have been a few surprises around how much work needs to be done to fix some of these issues.”

VAT and indirect taxes will become a more important source of revenue for the authorities. Therefore, it will be more important than ever to get the fundamentals right.
Gino Dossche
EY Americas VAT Compliance Leader and US Consumption Tax Leader, Ernst & Young LLP

The temptation to view indirect tax through a purely “COVID-19 lens” is understandable, but with the landscape becoming more complex as the global supply chain rebuilds itself and indirect tax around the world changes as a result of government action, there is a strong argument to be made for going back to basics.

As Gino Dossche, EY Americas VAT Compliance Leader and US Consumption Tax Leader, Ernst & Young LLP, explains, “VAT and indirect taxes will become a more important source of revenue for the authorities – there has been a lot of money put into the economy that governments will need to get back. Therefore, it will be more important than ever to get the fundamentals right.”

There are five key areas that businesses should ensure are robust in order to optimize their indirect tax operations.

(Chapter breaker)
1

Chapter 1

Ensuring visibility across operations

Visibility is critical to compliance and to avoiding controversy.

Having visibility is critical to remain compliant and in control as indirect tax changes. As Aaron Bromley, EY Asia-Pacific Indirect Tax Compliance & Reporting Leader, Ernst & Young Tax Consultants Sdn Bhd, explains, “The highest priority for any multi-country organization is making sure they can see exactly what is happening across all the countries in which they operate and making sure they stay on top of any changes as they occur.”

Bromley points to how indirect tax compliance has historically been managed in Asia-Pacific. As a diverse region with diverse languages and no common system, as in the harmonized EU, a business operating across Asia-Pacific would typically leave local finance teams to manage operations. “Many regional leaders really didn’t have any idea what was going on until something bad happened, like an audit going wrong. As part of a tax transformation exercise, the responsibility for indirect tax compliance may well have moved from a local country to a regional head and now he or she needs that visibility.”

Visibility is critical for multiple reasons. “Not only does it give businesses clarity on how much VAT flows through their accounts globally, but it helps ensure compliance with country reporting obligations as well as across multiple countries, especially intercompany transactions.” says Geert Vandenplas, EY Global Indirect Tax Compliance & Reporting Leader, Ernst & Young Tax Consultants. “How many businesses can comfortably say what is going on around the world? What is their turnover? What are their sales and purchases? How much VAT are they paying? Where do they import and export?”

Businesses can’t have visibility and properly manage their VAT compliance processes across multiple countries if they don’t use technology, because their level of compliance will never be where it should be.
Pierre Arman
Associate Partner, Indirect Tax & Technology, Ernst & Young LLP

No business wants to trigger any controversy or reporting failures. In Vandenplas’ experience, companies that have a central VAT function or the ones that have outsourced their global VAT functions have more visibility. And central to that is making the most of technology.

“In terms of visibility, businesses need to consider people, process and technology,” says Arman. “When they operate in multiple countries, getting visibility becomes far more complex by default. In this day and age, businesses can’t have visibility and properly manage their VAT compliance processes across multiple countries if they don’t use technology, because their level of compliance will never be where it should be.”

Dossche is also keen to highlight the potential added benefits of visibility. “Businesses can use their compliance data or what they see from what goes into their VAT returns to streamline their internal processes,” he says. “They can use the data to be more proactive toward audits and for planning purposes. If a business wants to change its supply chain, does it know what the impact is going to be from a cost perspective? This can be done if a business has visibility of what goes into its returns.”

(Chapter breaker)
2

Chapter 2

Understanding how local operations play into the bigger picture

A global foundation is built locally.

While visibility across international operations is clearly critical, that shouldn’t cancel out the importance of indirect tax compliance on a local level. The two have a significant symbiotic relationship and how information feeds up into the central indirect tax function is key.

“Even if an organization has moved to a more centralized approach, having eyes and ears on the ground for the local changes can’t be underestimated,” says Vandenplas. “Businesses need to be organized in a way that allows the local finance function or service provider to feed information up the chain so that it is captured centrally, which gives proper visibility. By monitoring and tracking changes, businesses can react swiftly.”

The relationship with national tax authorities is important in this regard. If a jurisdiction legislates for a certain change and it is implemented quickly, a company needs time to update its electronic filing system, train its bookkeepers and inform its clients. These are all elements that require time, so it is crucial to understand what is coming up in terms of changes in legislation.

Vandenplas points to Italy as a prime example. “In 2017, tax authorities announced that the VAT rate would change on Christmas Day, but they only made the announcement on Friday 22nd December. There is no company that can adjust its filing system and train its people at such short notice. It’s key to know these things in advance and feed it up the chain – and this is where the relationship matters.”

(Chapter breaker)
3

Chapter 3

How VAT needs to be actively managed

Staying ahead of the fast-moving landscape is critical to compliance.

If the COVID-19 pandemic has demonstrated anything, it’s that the indirect tax landscape can change at speed. In many cases, businesses had to scramble to react not only to the practicalities of managing remote working but also to ensure that any changes to VAT weren’t missed.

In truth, however, indirect tax has always been fast-moving, and the need to actively manage it as opposed to always “firefighting” is something that is broadly acknowledged. Having visibility across indirect tax is fundamental to that but knowing the global VAT footprint is just one factor that facilitates active management. 

“In order to actively manage tax compliance, businesses need to set up frameworks and structures and have risk mitigation processes in place,” Arman says. “One of the ways to have an audit defense is to be able to prove your entire flow of data from the moment it enters your ERP system all the way to where it is filed in any government portal.”

As tax authorities move away from traditional VAT returns and toward more transactional reporting, such as SAF-T and SII in Spain, this is even more critical. Authorities will be able to make the assessment of the VAT due themselves instead of relying on the summary that the companies provide them with. This is a pivotal shift toward near real-time reporting where tax practitioners will have fewer opportunities to amend data and correct potential errors.

Getting on top of VAT compliance in this way can also help reduce the possibility of controversy. “The decisions that you make, even well-intentioned, might lead to audits and trouble down the road,” says Bromley. “Businesses need to assess whether there is a better way to manage the process. Is there something they can do earlier in the compliance chain to stop them getting to that point? What can they do earlier that means things such as audits are smoother and that if they get an audit, they are prepared for it and have the data?”

(Chapter breaker)
4

Chapter 4

Using technology through the VAT life cycle

Using the proper tools moves toward a faster, more compliant audit.

Central to achieving visibility and ensuring active management – and contending with the move to transactional reporting – is technology. And the role it will play in the future of indirect tax is significant.

“VAT is evolving,” says Vandenplas. “We are seeing authorities collecting more and more transactional data and moving toward a faster audit. Businesses submit their return, and within seconds they get detailed questions asking for more information. Some countries are moving toward the daily submission of data. This gives businesses no time to analyze their data; no time to correct the data they submit to the authorities, and that is where technology comes in. It will help assess the quality of the data on a continuous basis.”

It’s clear that there is some work to be done in this area. According to EY 2020 Global Tax Technology and Transformation Survey (pdf), 46% of tax functions are not overseeing real-time submission of transactional data.1

A company is going to have to make the decision whether to in-source and build it themselves or instead consider a co-sourcing or even full outsourcing arrangement, where they leverage off the technology investments of external providers.
Aaron Bromley
EY Asia-Pacific Indirect Tax Compliance & Reporting Leader

It’s important, however, that the indirect tax function optimizes its use of technology and that includes deciding where in the life cycle it should be used. “If you break down the entire VAT life cycle, it can be split into accounting, compliance, controversy and planning,” explains Dossche. “The accounting aspect, such as accounts payable, is typically owned by the finance function, and there is the opportunity to automate certain processes to make sure the VAT amounts are captured properly.”

The next step, around compliance, is where tools can be used to transform data and put it in the right format to file it to the authorities. Many of these tools already exist, and compliance can be enhanced further using visualization tools which help in creating that all-important visibility.

The challenge, of course, is which technology to choose and also how to source it. There is plenty of off-the-shelf software, but it typically can’t be tailored, so is limited in its scope. As VAT reporting evolves, businesses will need better management, interrogation and manipulation of data before it goes into the returns. And that includes the use of analytics to give them some insight into that data, whether that be around errors or trends.

“The challenge with technology, especially if you want to use it end to end, is that it can be very expensive to build and maintain,” says Bromley. “So, a company is going to have to make the decision whether to in-source and build it themselves or instead consider a co-sourcing or even full outsourcing arrangement, where they leverage off the technology investments of external providers.”

(Chapter breaker)
5

Chapter 5

Balancing outsourcing, co-sourcing and insourcing

Managing resources comes down to individual need.

Technology is just one key area in which decisions around sourcing will have to be made to ensure that indirect tax is actively managed in an optimal way, providing visibility and ensuring compliance.

In the EY 2020 Tax and Finance Operate Survey (pdf), Kate Barton, EY Global Vice Chair – Tax, noted, “The amount and pace of change affecting tax and finance operations is relentless, and businesses can’t afford to delay transforming their tax and finance functions if they want to be both compliant and a value-added partner to the business.”

In response to this challenge, 73% of respondents to the survey said they are more likely than not to co-source some critical activities in the next 24 months in order to add value, reduce risk and decrease cost.2

The challenge for many businesses is finding the perfect balance between outsourcing, co-sourcing and insourcing. And this very much comes down to individual needs and expectations.

 

Summary

Indirect tax compliance has never been more critical, and having control and visibility are key to ensuring that businesses meet their obligations and minimize controversy. Going back to basics and ensuring that the fundamentals are in place can help build a robust foundation for future success. 

About this article

By EY Global

Multidisciplinary professional services organization

Related topics Tax compliance Global trade