Tax Control Framework

A Tax Control Framework (TCF) is an internal control instrument specifically aimed at the tax function within a company. A TCF is not limited to the Tax Department, but an integral component of a company’s Business- or Internal Control Framework (ICF). 

The ultimate objective of a TCF is to be in compliance with tax laws and reporting requirements and manage the risks that matter (risks that exceed the companies’ risk appetite). Such framework ensures that an organization has adequate control over its tax processes. A TCF can prevent tax errors, identify opportunities in a timely manner and perform correct filings at the right moment.

VAT Control Framework

A company’s VAT control framework system is adequate if it provides insight into where material VAT risks may arise in the company (awareness), while the degree of risk tolerance is established internally and where appropriate control measures are taken with respect to these risks.

What we offer

In order to allocate resources to risk and cost saving areas that matter, we determine together the level of risk appetite of the company is accepting. This facilitates prioritization in the deployment of resources. Having defined acceptable levels of risk leads to resources not having to spend time on further reducing risks that are already at an acceptable level. 

Subsequently for the area of risks that exceed the company's risk appetite we set up (automated or manual) controls. It is about clear responsibilities, effective systems, documented processes and risk based controls. 

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Control activity examples in five risk areas that we investigate for material risks

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Take aways 

  • Set up a project charter that will take effect preferable during feasibility but ultimately during design
  • Write a business case and problem statement
  • Define scope of the project
  • Define objectives and goals of the project
  • Involve stakeholders and define priorities
  • Set measurable milestones
  • Ensure that the right sponsors provide buy-in.
  • Identify (project) risks and how to manage them
  • Jointly validate and refine the project plan and develop a roadmap to success
  • Hold regular meeting to track progress of the various work streams

Although the potential application is just to the UK, you will clearly want to consider being consistent across jurisdictions.

The tax department objectives and strategies are aligned with the company’s business objectives. Updates take place periodically.

Without a proper tax policy it depends on your personal influence within your organization to kick-start a change. Often that results in a fragmented approach, as not all stakeholders will be convinced. The outcome is that this will negatively impact defining standardized and global controls.

To ensure that group companies act consitently globally and to ensure that group companies benefit from best practices applied by other group companies, but also to ascertain acquaintence with policies and subsequent appropriate application of tax policies across the group.

Policies, procedures, working instructions and manuals are accessible and distributed to relevant employees.

To ascertain input from tax department before transaction, changes in activities, operations, structure and ensuring that unacceptable tax risks will be prevented where possible. Ensure BU's act in line with tax strategy.

VAT should be considered in every aspect of the process, from concept through completion and beyond.

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.

The key to success in the management is the ability to translate tax knowledge into workable business processes.

Identify the lowest performing indirect tax processes that have the most direct impact on the company’s business and tax objectives. These are then targeted for improvement. Generate and select a set of solutions to improve the performance.

The tax department risk management strategy differentiates between strategic, operational, financial and compliance risks and contains detailed action plans for managing these risks. Managing risk is about making decisions at all levels of an organization, to limit the effect and likelihood of threats happening and to increase the effect and likelihood of opportunities.

Assess that tax advice given is also correctly implemented:

  • Factual pattern has not change
  • Procedures and risk monitoring functions accordingly
  • Configured in system(s) or manual processes
  • etc.

And impact of changes in business, laws and regulations on implemented tax planning.

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.

If not correct, the tax authorities might seek to recover tax due from this supplier via a levy of a tax assessment. If the applicable VAT rate is 25%, the tax assessment will be 25/125 of the consideration charged. This assessment will be increased with interest and penalties to determine the total tax burden.

In order to solve a problem, we also have to identify it completely, and not just settle for the most apparent symptom of that problem.

In order to fix a problem, we have to first understand the root cause thoroughly. We have to accept the possibility that the problem involves far more than what is immediately apparent and will require more work than is estimated at the beginning. 

Define the causes of defects, measure those defects, and analyze them so that they can be reduced.

  • How did the results happen?
  • Why did they happen?
  • What specifically caused them to happen?

An ERP review should highlight where the VAT configuration could be improved or if additional control measures should be added to the business’s Tax Control Framework.

In order to get senior management's buy-in for change and accept indirect tax priorities it is important that proper visibility exist of the amount of VAT/GST under management in the key jurisdictions.

To avoid any reputation damage and negative publicity around taxes, through building a tax control framework.

The internal tax function should always have insight into the areas for attention through this logbook. The risk register should contain the following labels: number, name of the risk, risk definition, cause for the risk to occur, risk category and the risk owner.

  • Apple’s and Coca Cola’s tax assessment might exceed $2,5 bn
  • Material and reputational risk
  • Will ‘tax assurance’ mandatory be reviewed by External Auditors
  • What information will be requested?
  • What will be the impact on Internal Audit?
  • How will review likely take place (e.g. Big Data discussions)
  • What is the overlap with tax authorities tax audit approach?

Ascertain that unacceptable but existing tax risks will be identified.

Do not spend time on further reducing risks that are already at an acceptable level.

Tax department professionals are appointed to support multidisciplinary teams during non routine transactions and or substantial business transactions.

To ensure that group companies act consistently globally and benefit from best practices applied by other group companies. To create and raise awareness on tax policies, tax risks and changes in laws & regulations.

Lack of support by management means that any improvements in quality are often temporary. The aim is that management will be encouraged not only to support change, but to become actively involved in making it happen.

Identify the key processes of their organization, measure their effectiveness and efficiency, and initiate improvement of the worst performing processes.

In order to allocate resources to risk and cost saving areas that matter, we determine together the level of risk appetite that the company considers (non)acceptable.

Having defined acceptable levels of risk leads to resources not having to spend time on further reducing risks that are already at an acceptable level.

If the startpoint is a zero measurement we could show that this beginning could have an end game: how a tax strategic plan for the short and long term should look like and what needs to be done to get there.

A split should exist of roles, functions and responsibilities between tax department and the business are well documented in manuals, procedures and working instructions.

A typical multinational today might look like a Rube Goldberg contraption—a complex of moving parts that must connect one to another for tax, regulatory, and reporting purposes.