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A due diligence investigation not only serves the purpose of mapping the material risks, but quantification of these risks is also essential. A traditional due diligence investigation normally involves completion of standard questionnaires and retrieval of standard information, which is provided by the vendor via a specially designed data room.
When possible incorrect VAT determination is detected, a rough estimation of the magnitude of the VAT risks is made on the basis of turnover and sales figures. This is not ideal for both vendor and purchaser, as it concerns much guesswork and thus usually provides an insufficient framework in price negotiations.
The question is whether there is a method of determining the exact additional tax assessment in an efficient and effective way. It should first be noted that the starting point is always the identification and recognition of material indirect tax risks.
Every industry has its own specific risks and further differentiation is necessary due to the complexity of the implemented business model, and the risks arising therefrom with respect to indirect tax.
Roughly speaking, the largest VAT risks in the following areas are:
Incoming and outgoing invoices provide important information about the scale of indirect tax risks within a company. By selecting just a limited number of transactions via a statistical sample a quick insight can be gained into the level of tax risks with minimal human effort needed.
In order to quickly gain insight into the level of tax risks (i.e. calculation of the potential assessment), statistical sampling can be used.
By selecting a few elements (euros), the reliability of the composition of tax items can be determined to a high degree of certainty, and on the basis of identified errors in the sample, the exact amount of additional tax assessment can be calculated.
The strength of this method lies in the fact that statistical sampling is the tax audit method used by the Dutch Tax Authorities. Calculation is done on the basis of the parameters that the Tax Authorities apply themselves in their tax audit. This method is explicitly approved by the highest Dutch court.
For the tax function, statistical sampling is an efficient and effective way to test the effectiveness of its Tax Control Framework. The results could also be used to get indirect taxes higher on the priority list, since managing of material risks that are quantified fall within the KPIs of senior management.
In our working method, we use the same parameters as the Dutch tax authority during a tax audit.
See for further detailed information 'Quantification of tax risks via statistical sampling' and 'Statistical sampling: ‘single audit’
We combine technical knowledge with industry understanding and knowhow of technologically advanced tools and methodologies available in the market or developed by ourselves.
Technology-related tax risk: understand and address the potential harms and benefits of (new) technology.
Ascertaining proper IT support for ensuring efficient, timely and reliable reporting.
VAT should be considered in every aspect of the process, from concept through completion and beyond. Managing by design — looking at any process or transaction from end to end and factoring in all the requirements and controls essential to designing and optimizing a compliant VAT process.