Tax CMS? VAT E-Learnings!
The implementation of a Tax Compliance Management-System („Tax CMS“) or a Tax Control Framework (TCF) becomes increasingly vital for companies. This all more applies to companies with an international business. Thereby, VAT E-Learnings play an important role to ensure the efficiency of a Tax CMS.
Tax CMS – what is this about?
Tax Compliance means „adherence to tax regulations“. Considering the comprehensive tax duties this can mean a special challenge for companies. This is especially true for VAT. This kind of tax does not only concern a relevant number of daily transactions. Additionally, those transactions often involve “Non-VAT-experts. Thus, this tax may bear a comparably high risk potential.
At the same time, one can see an increasing number of local control measures. Particularly electronic filings and documentation enable tax administrations to better monitor the adherence to VAT regulations. A prominent example is the Italian pilot project on E-Invoicing. Another example is the “Making tax digital” initiative in UK. Poland introduces a split payment regime for certain transactions and similar measures to avoid VAT frauds. And more and more countries stipulate mandatory Standard Audit Files Tax („SAF-T“). This for instance applies to Portugal and Lithuania and as of 2020 to Poland and Norway.
Benefits of a Tax CMS
An efficient Tax CMS can address these challenges. And it has further benefits:
- The OECD recommends tax administrations to grant administrative reliefs if a taxpayer has implemented a sufficient TCF. These reliefs may for example concern tax audits. Meanwhile, states lke Australia, Belgium, Italy, Ireland, Poland and the Netherlands have implemented Co-operative Compliance Programs or started respective pilots.
- The German Federal Ministry of Finance stated that a Tax CMS may indicate that a taxpayer in case of a wrong tax treatment did not act wilfully or with gross negligence. Therefore, he may not be subject to tax fraud investigations. And according to the German Federal Court, a Tax CMS may result in a decrease of penalties if a tax fraud actually occurred.
- A Tax CMS may also become relevant if a company applies for a certificate as Authorised Economic Operator (AEO).
- A Tax CMS results in economic advantages and cost reductions.
How to structure a Tax CMS?
A Tax CMS is generally understood as a system of principles and measures established by the company’s management to ensure that the company’s legal representatives and employees as well as third parties like tax advisors observe the applicable tax rules. The OECD defines a TCF as “the part of the system of internal control that assures the accuracy and completeness of the tax returns and disclosures made by an enterprise”. Thereby, the setup of a company’s Tax CMS or TCF must be individually defined. It depends amongst others on the kind of business, business model, size, structure, legal organisation, national and international activities and kind of markets of the company.
But how should a Tax CMS be designed? This depends on local law and the specific requirements of individual countries.
Local Guidelines- example: Germany
In Germany, the Institute of Public Auditors issued a non-mandatory Practical Guidance in 2017. According to this, a Tax CMS should include the seven elements
(1) Compliance Objectives
(2) Compliance culture,
(3) Tax compliance organization with respective responsibilities,
(4) Identification of tax compliance risks
(5) Definition of a tax compliance program
(6) Tax compliance related communication and
(7) Monitoring of the Tax CMS.
The Guidance provides further details on these elements. If requested by the company, an auditor may then review its Tax CMS. He can also certify it if the respective requirements are fulfilled.
A company may consider applying the OECD’s recommendation as stated above if there are no local legal definitions or guidelines. A TCF in the OECD’s view consists of the following six principles or “essential building blocks”:
(1) Tax Strategy Established
(2) Applied Comprehensively,
(3) Responsibility Assigned
(4) Governance Documented,
(5) Testing Performed and
(6) Assurance Provided.
A comprehensive TCF is based on a process-oriented approach. It should document the company’s tax policy and related processes. Furthermore, it identifies (soft) controls and process owners. Thereby, one of the main elements can be a “Risk-Control-Matrix”. This tool describes the tax relevant transactions, responsibilities, the expected norms and potential risks of a non-compliance. Additionally, it contains remarks to identify and manage how these risks.
What does this mean for VAT?
VAT relevant transactions and legal duties
We assume the company has already defined a tax strategy and related compliance targets. As regards the implementation of a Tax CMS for VAT purposes, the first step is to identify all VAT relevant transactions, the applicable legal duties (and rights) and the related tax risks. This means the issuing of proper invoices and correct booking of incoming invoices. Further requirements are documentation and reporting duties. VAT relevant events have to be reported in a timely manner in the tax filings and the tax has to be paid in due time. Thus, the respective filing requirements (for VAT filings, EC Sales list, MOSS report etc), responsibilities and controls are to be defined.
The next step can then be the draft of a Risk-Control-Matrix. This can consists of
- a definition of the current target/performance status as regards the applicable VAT regulations per VAT relevant event
- the consequences of a non-adherence
- how to communicate this
- the status quo of already implemented tax risk mitigation measures
- a description how to implement additional measures and a respective timeline
Depending on the kind of process, appropriate measures can be controls, “four-eyes-principles”, instructions and/or guidelines. After implementation, the taxpayer should document these measures. And he should also regularly monitor their effectiveness. If required, he has to adjust them to changes in law and internal restructurings of processes. Altogether, this requires an in-depth knowledge of the company’s business and including supply chains and contract conditions with customers and vendors .
Internal Communication within the company
VAT related controls are meanwhile supported by different digital products. However, the automatization of processes and controls may not be able to handle complex transactions like warehouse/converter cases, advanced payments and chain transactions. Additionally, the consideration of VAT relevant transactions generally requires to know them. This can only happen if they are communicated by the department in charge to the tax experts. And the tax experts also need to be kept in the loop as regards changes of the supply chain, business model etc. Because: “A consultant is only as good as the information he receives.”
But how shall non-VAT experts assess whether a circumstance may be VAT relevant and should be communicated to the tax expert? Here comes the internal communication into play. The tax experts should be known and communicate VAT requirements to the relevant stakeholders and departments concerned.
Particularly VAT trainings are excellent communication tools and a fundamental part for the success of Tax Compliance. They serve both the required VAT risk control in advance but also the ongoing monitoring. Thereby, VAT trainings should target all persons involved in VAT relevant processes. Addresses should therefore be the Accounting, Sales, Sourcing, Logistics and IT department. Object of a VAT training is then to provide a basic VAT know how and to create a respective awareness. Relevant VAT regulations should be explained in a comprehensible manner and in such a way that they can be easily applied in practice. The company can organise own trainings and should accordingly document them. Alternatively, it can choose high quality VAT E-Learnings with a certification of the course participation. We offer here a basic VAT Online Course as well as an E-Learning about VAT & B2B in transactions.
Currently, there may be no local legal obligation for a Tax CMS or TCF. Its setup and implementation is nonetheless strongly recommendable. This instrument can not only mitigate tax risks as such. It also improves the tax planning and reduces costs and administrative burden.
We are happy to support you here with our VAT E-Learnings.