Managing vat in a ssc

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Embedding VAT reportingand compliance in a sharedservice centre environment Multinational businessesare increasingly movingto shared servicecentres (SSCs) as theyseek to transform theefficiency andeffectiveness of theirfinance functions. VATreporting andcompliance can benefitfrom this trend

F or many organisations looking at centralisation, attention has focused histor-ically on creating centres of scale for commoditised processes such asfinance, human resource and information technology. While these are criti-cal to the operation of the business, they are essentially back office functions

not directly related to core business activities. As such, they lend themselves to stan-dardisation and harmonisation across the business, irrespective of geography, wherereal value can be generated by building on economies of scale.

More recently there has been a real drive to focus on a more strategic approach tocentralisation by looking at high-value activities. This has resulted in a two tieredmodel to shared servicing with centres of scale to deal with the high volume, lowvalue activity, and centres of excellence (CoEs) to manage low volume, high valueprocesses. Centres of scale and centres of excellence are essentially service providersto the broader business and are often co-located. However, this is not essential sincewhile at their heart they have similar aims – to support the business, to harmonise andstandardise processes – the skills and labour requirements are materially different andmay not be available in sufficient levels in the same place.

With the move to centralisation, whether managed in-house or by a businessprocess outsourcing (BPO) partner, the question that is often posed is: what shouldhappen to VAT reporting and compliance?

Options for VAT reporting and complianceThe starting point when evaluating the options for VAT reporting is to recognise thatthere is no silver-bullet solution that is right in every situation or circumstance.Equally, while it is true that there will be some very real challenges to deal with inmoving VAT compliance to a central location, the momentum behind the project torealise the wider business benefits means that solutions for VAT will need to befound, often within short timelines.

With that in mind, it is critical to evaluate the issues that such a move will createfor VAT reporting and to establish which options are available that best fit with thebroader business and tax strategy.

There are three emerging models. The first is to centralise the VAT reporting and compliance into the finance shared

service centre with the process effectively owned by finance and resourced largely bynon-tax professionals operating under a lift and shift model (see later).

The second approach is to centralise VAT reporting and compliance into a centreof excellence model owned by tax and resourced largely by tax professionals, poten-tially augmented by finance and accounting staff. As noted earlier the CoE maybe co-located alongside the finance shared service centre but this is not always necessary orindeed practical.

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Whichever option is adopted by the business, and there aremerits to both, the aim should be to standardise processeswherever possible, but with an understanding that variation isrequired to comply with local requirements. Many businesseswho have moved to finance shared service centres have failedto realise the benefits by not ruthlessly driving out the effi-ciencies of standardisation both to manage risk and createvalue. The same rationale applies to VAT compliance.

The final option is to fully outsource the process. With thedevelopment of fully fledged VAT compliance centres operat-ed by professional service firms, this is now a viable optionwhen a move to centralise begins. Indirect tax compliancecentres have been set up to provide businesses with access toa team with the experience of VAT compliance across multi-ple jurisdictions, and with access to relevant language and theinfrastructure of a professional services firm.

The question then is two-fold: should the business in-source or outsource? And if the decision is to in-source,should VAT compliance and reporting sit within a centre ofscale or a CoE?

Centre of scale vs centre of excellence Taking the last question first, it is our view that VAT compli-ance and reporting should sit squarely within a CoE model.With the traditional centre-of-scale model, the intention isnormally to relocate the low-value, high volume processessuch as accounts receivable and accounts payable. Suchprocesses tend to be aligned with standard business processeswhich are defined by the business enterprise resource plan-ning system in use, for example, SAP or Oracle. The genericnature of these processes allows for standardisation acrossmultiple jurisdictions and lends itself to a centralised model.From a finance perspective, a purchase invoice should beprocessed in the same way, whether it is for a French,German or Romanian entity.

VAT compliance does not lend itself to standardisation inthe same way. Putting aside questions around the VAT consid-erations of the business processes such as input VAT deduc-tion and whether to charge VAT on complex chaintransactions, the simple process of producing a VAT returnvaries widely across the world. Even within the EU, no twocountries have identical VAT regimes and all require varyingformats and numbers of filings. Furthermore, in our experi-ence, a tax CoE model is more likely to ruthlessly drive outprocess improvements around VAT to better manage risk andcreate value.

Having said that, even if VAT compliance should sit in aCoE, it does not mean that the whole process of preparingand submitting VAT returns should be done exclusively with-in that centre of excellence. Certain elements of the VATreturn process can be delivered to the centre of excellence bythe centre of scale. Processes such as extracting data from theledgers, producing reconciliations of key general ledger VAT

accounts and producing exception reports can be commodi-tised in much the same way as invoice processing. The CoE’svalue-add comes from the interpretation of the data, makingjudgements and managing the exceptions and these are tasksthat lend themselves to the centre of excellence model. Inaddition, by moving much of the data processing activity tothe finance team, it frees time for the CoE to deliver addi-tional services to the business such as operational VAT advice,training and support.

In-sourcing vs outsourcing This decision will largely be driven by the business’ overallview on outsourcing. That aside, outsourcing can acceleratethe move to centralisation and can fill the knowledge gap thatoften arises when a business takes a complex local processsuch as VAT reporting and centralises it. While outsourcingmay have a higher upfront cost to the business than centrali-sation, the continuing costs can be lower given that most out-source providers have their centres of excellence in relativelylow-cost jurisdictions and can provide the economies of scalethat flow from outsourcing.

It is important to recognise that just by outsourcing there

Chris Downing

Director, KPMG in the UK

Tel: +44 (0) 20 7311 2684Email: [email protected]

Chris Downing is a director in the KPMG VAT team in the UK. He hasspecialised in VAT for 13 years. As head of the process & technologyteam, he has led the development of the KPMG approach to bothdomestic and international projects around risk management, systemsimplementation and the finance transformation. This includes the devel-opment and use of bespoke VAT compliance tools, helping clients getmore VAT functionality from ERP systems such as SAP and assisting busi-nesses with the evaluation and implementation of third-party tax enginesolutions.

Downing has wide experience of the business issues and VAT require-ments for global companies, particularly in the area of governance,process improvement and tax technology solutions. He has been respon-sible for managing and delivering both domestic and global indirect taxprocess improvement projects to develop standardised and consistentapproaches to the management of indirect tax risk.

Biography

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is no guarantee that the quality of VAT reporting willimprove. In reality, what is outsourced to the third party is arelatively small, but important part of the record to reportprocess and the provider will not be familiar with businesschanges that could impact on VAT. The adage “garbage in,garbage out” applies equally well to VAT. If VAT is poorlymanaged through the order to cash and purchase to payprocess by the business then, even with the comprehensivedetective controls that the outsource provider will perform,there is a significant risk that VAT returns will be submittedinaccurately.

In fairness these two latter challenges apply equallywhether VAT compliance is in-sourced or outsourced andmust therefore be addressed through transition and throughthe development of working relationships with finance.

Managing the transition to centralised VATreporting Having made the decision to centralise, whether that be in acentre of scale or excellence, the key is to insert VAT into thetransition plan for the broader finance transformation plan.

This will require tax to develop a clear understanding of

the compliance process before it is moved. VAT reporting istoo often treated like a box which can be picked up andmoved, without considering its interaction with the widerbusiness. VAT, as a transactional tax, is wholly dependent onthe quality of the information processed by finance. In tradi-tional, pre-centralised VAT compliance models, the teamresponsible for the preparation and filing of VAT returns hasoften been part of the local finance function. This has ensuredclose connectivity between the business, finance and the localteam. Maintaining this close connection with the transactionprocessing and the business people, sometimes referred to asbusiness partnering, is critical to a successful transition.

Over the last decade, businesses have had varying experi-ences with the centralisation of VAT compliance. In manycases, this has been as a direct result of treating the compli-ance process in the same way as other financial processes, thatis, it is a standard process which can be picked up and movedto a new location with little consideration of local variationsin rules and requirements. This approach is consistent withthe methodologies often used to build centralised financeSSCs. The phrases lift and shift or ship and fix are common-place when it comes to the transition of a finance processsuch as accounts payable, with the underlying objective beingto relocate the process without considering whether anyremedial action may be appropriate. This approach is intend-ed to deliver quick benefits by reducing the cost of deliveryin as short a time as possible. However, should the process bedeficient in any way, the result is the inherent issues are mere-ly replicated in the new location.

For many tax professionals, the prospect of moving a taxcompliance process to a new location and worrying aboutidentifying potential deficiencies at a later time will makethem uncomfortable. It is important therefore to ensure thatprocess improvements to achieve the to be state are hardbaked into the transition plan.

In building the transition plan careful consideration shouldbe given to these three areas: people, process and technology.

PeopleThe basic component of any compliance team is the peopleresponsible for producing the reports and filing the returns.Historically, the role of tax compliance has predominantlybeen handled by individuals from a finance background withbasic VAT knowledge. The skills such team members bringare apparent as any VAT compliance process requires assur-ance over the quality of the accounting data as well as judge-ment over VAT decisions such as post-ledger adjustments. Itstands to reason that a similar mixture of skills should besought in a centralised team, whether on an in-sourced or out-sourced basis.

The finance skills required for a centre of scale may beconsidered a generic, readily available skill set relevant tomultiple jurisdictions and something which can be easily

Gary Harley

Partner, Head of Indirect Tax, KPMGEurope

Tel: +44 (0) 20 7311 2783Email: [email protected]

Gary Harley is head of indirect tax for KPMG Europe and before thatwas head of KPMG’s global indirect tax practice for five years. Asidefrom his practice leadership role, he is the partner in charge of KPMG’sprocess and technology team, a team that he set up three years agorecognising the market need for VAT specialists with a strong under-standing of process, systems and technology

Harley has worked with clients to develop their global tax strategy takingaccount of functions, objectives, organisation and key performance indica-tors to embed appropriate process and controls in the underlying businessprocess

Harley has considerable experience of advising clients on the effectivestructuring and management of VAT on a multinational basis and has ledmany international projects focusing on risk management, value creationand managing complexities of managing VAT across multiple markets.

Biography

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standardised and/or accessed. The same cannot be said ofthe expertise required in a VAT CoE. With the accountingrole being managed by the centre of scale finance team, theCoE can focus on a good understanding of the intricacies ofthe VAT system, local knowledge of the tax jurisdiction andthe conventions for making adjustments in that country sothat sound judgement is applied to the VAT complianceprocess. In reality these are two different skill sets andwhether the business opts for centres of scale or excellencein their SSC design, it needs to make sure it has access toboth skills sets.

A significant experience by early adopters of centralisedVAT reporting has been the loss of local knowledge of, forexample, rules, rates and requirements, which was previouslyan intrinsic component of the local VAT return process.Managing this knowledge gap that delivers on the value-addaspects of the compliance process is critical to an efficienttransition. Where a business determines to centralise andretain compliance in-house, understanding how to access andmaintain this knowledge will present a real challenge. Simplequestions of determining changes in filing formats or local taxauthority practice are issues which should be evaluated andplanned for. This is something that an outsource provider canprovide as a matter of course.

ProcessCentralising the VAT return preparation process will not onits own deliver a more accurate return. In short, the centralVAT compliance team cannot focus purely on the data com-ing out of the ledgers; a level of assurance must be gained overthe transaction processing in the purchasing and sales process-es to ensure that the key tax risk areas of the business arebeing managed effectively. This is achieved by identifyingthese key risk areas, determining the process by which theyshould be managed and what control should exist and thendefining accountability & responsibility for their perform-ance. Many progressive organisations are using methodologiessuch as three lines of defence to define a control frameworkfor tax and the rest of the business to operate to ensure con-tinued compliance and drive continuous improvement.

In relocating any process, whether finance or VAT compli-ance, it is essential to consider how this interacts with localrules on issues such as knowledge of local legislation, locationof document storage and the right of access for audit. Sometax authorities require pre-authorisation before a business canmove to a central location if this means that the underlyingdata will no longer be stored in the country. Furthermore,how a centralised VAT compliance team will manage taxaudits should also be considered. Historically, understandinglocal conventions on VAT audits has typically been a functionof the local tax or finance team. Removing this part of theequation can compromise the ability to maintain an effectiveworking relationship with local tax authority teams.

TechnologyEnhanced technology has possibly been the single biggestenabler of an effective centralised VAT reporting and compli-ance process. The basis of any VAT compliance process is thefinance system and historically, this has often been the part ofthe VAT process most overlooked. Businesses are increasinglylooking to tax sensitise their ERP systems to allow key VATdecisions to be automated and captured at source. However,many businesses still do not fully use the native functionalityavailable in systems such as SAP to manage VAT data effec-tively by moving to a more automated and preventativeapproach to the management of the tax.

Key areas where many businesses can enhance their sys-tems ability to calculate and report VAT include:• Better automation to remove the need for manual adjust-

ments• Standardisation of tax codes to ensure consistency• Tax sensitisation of general ledger accounts to prevent the

posting of transactions without tax codes• Automation of VAT decision for payables transactions

where a self-assessment is required, for example, reversecharge

• Better use of master data to automate Intrastat andEuropean Sales List (ESL) reportingBy implementing better VAT processes and controls into

an ERP system, a business will drive better quality data thatwill benefit the compliance team ultimately by reducing theneed for manual adjustments or detective controls.

The second aspect of technology which is becoming moreprevalent is the use of VAT reporting tools such as iVATReporting. The benefit of a fully integrated reporting tool isclear: it is integrated with the ERP system to provide a seam-less reporting and filing solution. While this remains the endgame for many businesses moving to a centralised team, it isultimately an unrealistic prospect. Rarely can a return be filedwithout the need for some form of manual adjustment or cor-rection, whether for lack of export documentation, importVAT or bad debts. However, while it may be unreasonable tobelieve that full automation is possible, it does offer manybenefits which should be considered in the resourcing struc-ture of the central team: the potential for staff reduction,knowledge management and value-add activity.

The first benefit of a reporting tool is the potential reduc-tion in staff it may offer. Centralisation often focuses on alabour-cost arbitrage by moving activity from a jurisdictionwith high labour costs to one where employment is cheaper.However, the real long-term benefit is to be gained fromautomation and standardisation. A large compliance teamusing spreadsheets will still be largely dependent on manualprocesses to extract and manipulate data before producingthe draft returns. Tools such as iVAT Reporting can automatethis process, extracting data from systems such as SAP, per-forming validation checks and pre-populating filings. Using

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such a solution will reduce the number of staff required andremove the need for spreadsheets and manual processeswhich so often lead to compliance errors.

The second major benefit is that part of the knowledgerequirements are now managed by a third party. VATApplications, a Belgian company that owns iVAT Reporting,support not only the software, but also the content for the fil-ings, be it VAT returns, ESLs, Intrastat, or other local filings.This removes the need for the centralised VAT complianceteam to monitor filing formats and allows them to concen-trate on the key tasks at hand.

The final benefit in removing the manual return processesis it allows more time for the team to focus on high valueactivity. With an automated process in place to deal with themechanical activity, VAT compliance could theoretically bestructured with fewer staff at a more senior level, allowingthem to focus on the review of the draft returns, analysis ofthe data and a focus on providing greater assurance over thequality of data and, perhaps most importantly, building rela-tionships with the rest of the business and providing highquality, real time advice.

Centralisation trend gathers paceThe move to centralisation of VAT reporting and, indeed, out-sourcing is gathering pace and is a clear direction of travel.There are many early adopters that have set the standard butdevelopments in technology in particular make the transitioneasier to deliver the process improvements, both in terms ofbetter management of risk and the creation of value whichmust surely be a key part of any business case.

Possibly the biggest challenge to managing such a transitionwill be the limited time available to manage the process. Thebusiness momentum behind such a transition will be signifi-cant and tax will need to work within the wider businesstimelines. Balancing the effort in maintaining continuouscompliance for registrations transitioning while devoting suf-ficient time to designing the future compliance team struc-ture will put competing demands on resources. To ensure asuccessful and sustainable solution is created, it is essentialthat the former does not compromise the development of thefuture team structure.