As mentioned in previous posts, an organisation needs a credible tax narrative built around a solid tax governance framework in order to be able to manage the expectations of its different stakeholders. Amongst the umbrella of the taxes included in a tax governance framework is a tax that is far from new, but which remains important for organisations to manage effectively: value-added tax (VAT).
Tax governance framework – four-dimensional approach
There are four main dimensions to a tax governance framework: tax strategy and leadership, tax operations, tax risk and control and tax transparency. In this article, we will look at the place of VAT in each of these dimensions.
Firstly, however, it is helpful to understand why it is important to consider this topic in the first place. The main reasons are two-fold.
- VAT savings through increased efficiency and cash flow improvement may be achieved by streamlining the VAT compliance process. This ensures a level playing field for all entities within an organisation, eliminating unnecessary tasks and preventing the duplication of efforts in the VAT compliance process. Moreover, a well-structured VAT governance framework can expedite the VAT reclaim process, enhancing an organisation's cash flow.
- VAT risk management can also be improved by, amongst other things, clearly documenting all tasks in the VAT compliance process and implementing robust preventative and detective internal controls. These controls are designed to identify and mitigate VAT risks before they materialise or escalate. By managing VAT risk effectively, an organisation can safeguard against operational interruptions and mitigate the risk of reputational damage.
So how does VAT play a role in each dimension?
Dimension 1: Tax strategy and leadership
Tax strategy and leadership form the cornerstone of an organisation's tax governance framework. It is here that VAT is integrated into the broader tax strategy, aligning with business objectives and reflecting the company's risk appetite. Leadership must ensure that VAT considerations are embedded in the decision-making process, especially in cross-border transactions or activities where VAT implications can be complex.
Dimension 2: Tax operations
The operational aspect of tax governance is where VAT policies and procedures are embedded and implemented via documented frameworks, policies and other key documents. This dimension ensures that responsibility for day-to-day compliance with VAT laws is clearly documented and that VAT obligations are carried out accurately and in a timely manner, for example through implementing a responsibility assignment matrix, i.e., a RACI framework (RACI – Responsible, Accountable, Consulted and Informed), for VAT operations. In addition to the day-to-day activities assigned to process owners, responsibility from a wider perspective, by identifying emerging risks, should also be included in the tax operations of the organisation.
This dimension also encompasses cross-functional collaboration, i.e., ensuring that the VAT function in an organisation collaborates across various departments such as IT, finance, procurement, supply chain, logistics and sales to ensure that any VAT-sensitive decisions are taken by persons with adequate VAT knowledge, thereby reducing unnecessary VAT risk.
Dimension 3: Tax risk and control
VAT-related risks must be identified, measured, mitigated and monitored to prevent financial losses and reputational damage. This may be carried out by:
- regular VAT risk assessments to identify areas of potential non-compliance or strategic VAT opportunities,
- having a robust internal control framework for each stage of the VAT compliance process, as well as other VAT-relevant areas of the organisation,
- continuous monitoring and periodic testing of VAT systems and controls to help ensure that they are effective and that any deficiencies are identified and remedied promptly.
Robust preventative and detective internal controls can reduce the risk of VAT errors and VAT fraud in an organisation. The quantity and complexities of internal controls can vary depending on the needs of the organisation. Some common examples include ensuring a 4-eye review process on key areas in the VAT compliance process, customer VAT number verification, spot-checks on manually adjusted invoices, an invoice review process and appropriate access controls for VAT-sensitive data.
Dimension 4: Tax transparency
Tax transparency is increasingly important for multinational organisations, with stakeholders demanding greater visibility into tax practices and contributions.
VAT is an important component of a company's overall tax contribution. While it is typically considered neutral for businesses (a cost only for the end consumer), for certain entities, such as some of those that operate in the financial services industry, VAT may be irrecoverable (a cost for the business). The concept of total tax contribution serves as a powerful tool for companies to effectively communicate their genuine contributions to governments. It is therefore crucial for organisations to have a clear methodology backed by a documented audit trail in order to determine the total VAT contribution.
The frequency of VAT audits and the increasing number of macro-economic proposals targeted towards automatic information exchange are rising. These developments carry significant implications for businesses, particularly in terms of reputational risk. Consequently, it is even more important to address VAT diligently and proactively in this context.
Key takeaway
VAT is an integral component of a multinational organisation's tax governance framework. It intersects with each dimension, from strategic planning and ensuring operations are effectively carried out to identifying VAT risks and mitigating such risks through internal controls, all of which allow an organisation to comfortably meet its tax transparency targets.
By effectively managing VAT within these dimensions, organisations can ensure compliance, lower the risk of fraud throughout the organisation, improve VAT cash flow and maintain a strong reputation in the marketplace.
Contact our experts to learn how we can support you in optimising your VAT processes and achieving your compliance goals.
