VAT/GST Performance Advisory


VAT/GST control framework

A company’s tax control framework that meets generally accepted control standards provides:

  • insight into the areas prone to VAT risks (awareness),
  • management has established the extent to which it is prepared to accept risks, and
  • internal controls have been implemented that are appropriate given the material risks identified.

A Tax Control Framework (TCF) is an internal control instrument specifically aimed at the tax function within a company and an integral component of a company’s business control framework, which is different for every organization. It is a system (process) to identify, mitigate, control and report tax risks.

The ultimate objective of a TCF is to be in compliance with tax laws and reporting requirements and manage the risks that exceed the companies' risk appetite.

A TCF should prevent tax errors, identify opportunities in a timely manner and perform correct filings at the right moment.

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.

A review should take place of the categories of VAT risk the company is facing as well as the likelihood of occurrence, its potential impact and mitigation measures. Review the company's risk appetite and risk tolerance and the way in which risks is measured.

Below gaps might give rise to some important considerations from a benchmark perspective:

  • Inability to comply with local VAT rules — Although the root cause will vary from one company and country to another, the risk is likely to arise because of the fundamental lack of resources with local knowledge, clear VAT policies and procedures, technology enablement and controls and metrics to facilitate and monitor compliance. In most cases, there is some combination of these causes.
  • System incompatibility — It isn’t uncommon to find that the ERP system or other available technologies do not support for example SSC staff as fully or effectively as required in making sound decisions related to VAT.
  • Processes not clearly defined — Staff sometimes find themselves operating without clear descriptions or instructions as to how certain processes should function internally. That typically includes specific division of duties and defined responsibilities for every task and the person assigned to perform it, as well as the protocols for communicating with the tax office to receive updated information, escalate issues and solicit valuable feedback. The more pieces missing, the greater the risk.
  • Non-existent or inadequate processes and documentation — Since indirect tax guidance is not typically part of the brief, staff may not have access to VAT training, manuals or web-based technology to support their decisions and activities relative to VAT.
  • Insufficient communications — Staff may also be hampered by inadequate or unorganized communications between the indirect tax function and other operational business units (e.g., IT, logistics, group tax department) within the organization, making it very difficult to identify and address any crossover issues relating to VAT.
  • Non-existent or inadequate compliance controls — An indirect tax control framework and key performance metrics that focus on relevant indirect tax risk must be in place to provide the stability and transparency required to both enable and sustain compliance. None of these “risk drivers” are insurmountable or prohibitively complex to overcome. That said, there are some equally significant VAT-specific rewards in a well-run and well-founded indirect tax function.
  • Performance improvement — Companies have seen a reduction in both manual effort and error rates in VAT processes from automating VAT decisions in an ERP environment and (or) using technologies available on the market such as tax engines and certain web-based applications.
  • Better time management — More time is available to tax staff to set up and implement VAT strategy and planning. Since problems can be anticipated at an earlier stage and action taken to pre-empt or solve them.
  • Process improvement — With for example a SSC doing a good portion of the “heavy lifting,” the organization has more time and resources to review, adjust, structure and optimize existing VAT processes. It may also lead to the development of a VAT team to operate as part of the overall international tax team.
  • Consistency and flexibility — An efficient and effective tax functioncan provide the company with a consistent operating model as well as flexible organizational design to support growth, profitability and compliance. Once the company has evaluated the risks and rewards and conducted any other due diligence, the processes begin for identifying the VAT-critical functions, diagnosing the current state and designing the structure that will enable any effective migration.

The Key Group supports clients with setting up a robust VAT/GST control framework.