Managing Risk and Exploiting Opportunities
How confident are you that your business is fully compliant from an Indirect Tax perspective?
In 2016 there were 75,599 more audit and compliance interventions conducted by the Revenue Commissioners compared to 2015 bringing the total to 537,183. In the latest list of tax defaulters, which covers just a three month period to December 2016, over half related to VAT/RCT issues with combined settlements of €6.5 million. This does not however give the full picture as it only represents those that did not make a ‘qualifying disclosure’. The true tax liabilities uncovered by these Revenue interventions is undoubtedly many multiples of this amount.
Quite apart from the reputational damage caused by publication as a tax defaulter and the financial cost of any settlement, the Companies Act 2014 requires directors to include a Directors' Compliance Statement in the annual directors' report. The legal provision requires the Directors to declare that the company has complied with, among other regulatory requirements, all of its obligations under Irish tax law (all tax heads) a breach of compliance with which could give rise to serious criminal sanctions. So failing to comply with your tax obligation could now result in prosecution under two different legal provisions for company directors.
Key risk management challenges
Experience provides us valuable insights into managing Indirect Tax in an operationally effective and cost efficient manner. There are immediate steps that you can take now to develop and enhance the Indirect Tax function, within your business. This should not only lead to better compliance, but reduced risk. It may also help to identify potential opportunities. Key enablers include,
Directors and board members should include tax considerations in their overall business strategy. This means developing and clearly setting out an agreed integrated set of decisions that will support execution of the business model and position the organisation to enhance financial returns whilst addressing tax requirements. The business needs to be clear on its tax risk appetite and have set and clearly defined criteria for making decisions that involve taxes and tax risks. This risk appetite will enable management to establish processes to implement the strategy and provide enhanced visibility of processes and their outcomes.
In some businesses there can be a disconnect between the tax function, particularly Indirect Tax, and the other business units. The operational model for all business units, whether this is sales, finance, legal or IT, must set out clear roles and responsibilities to enable delivery of the tax strategy. The roles and responsibilities within the tax function need to be clearly mapped out, including when and to whom issues need to be escalated.
If there is a reliance on particular individuals to manage the Indirect Tax function and compliance have contingency plans been agreed in the case of absence? There should be formalised ongoing training to help staff to keep abreast of changes in Indirect Tax be it from a domestic or EU legislative perspective or a policy or procedural change from the Revenue Commissioners.
Policy and Procedure:
Indirect tax policies and procedures should be documented, updated at regular intervals, aligned to the business model and from a risk perspective this needs to be managed with clear accountability, authority, and decision making rules at all levels, with inbuilt control functions.
An up to date Indirect Tax compliance process and procedure manual is essential in every business. This should identify all income streams and the associated VAT treatment and impact on the business. For example, is there an element of VAT exempt income which impacts on the overall VAT recovery position? Comprehensive documents provide confidence to both the business and Revenue authorities and assist by ensuring controls are in place and contingency plans can be actioned.
Information and Technology:
Data availability and integrity is paramount to address management needs and to maintain good tax compliance, therefore a data strategy should be in place with a focus on tax requirements. The IT tools utilised must deliver the right data to the right person at the right times to enable consistent, effective responses to business opportunities, risks, and also regulatory reporting demands.
The ability to capture, store, and use data is among the most complicated challenges from an Indirect tax perspective. For example, if the business is relying on excel for VAT reporting are all ERP systems feeding in relevant information in a consistent and usable format. When was the last time that the integrity of the VAT reporting system or excel template was analysed and tested, are the formulas picking up all the relevant cells?
Scheduled periodic reviews are recommended for transactional information such as VAT rates, application of tax codes, inclusion of all relevant income streams, treatment applied to cross border transactions, with a specific focus on abnormal transactions or recurring VAT adjustments.