Managing Value-Added Tax (VAT) in a Global Environment · Managing Value-Added Tax (VAT) in a Global Environment January 2011 William Jan

Managing Value-Added Tax (VAT) in a Global Environment

January 2011

William Jan

Managing Value-Added Tax (VAT) in a Global Environment Page 2

© 2011 Aberdeen Group. Telephone: 617 854 5200

Executive Summary Research Benchmark

Aberdeen’s Research Benchmarks provide an in-depth and comprehensive look into process, procedure, methodologies, and technologies with best practice identification and actionable recommendations

The purpose of this report is to provide guidance on effective Value-Added Tax (VAT) management. Over 180 companies were surveyed between November and December of 2010 to identify best practices and current capabilities in global transaction tax management. The top-performing companies demonstrated that to achieve a high-level of success in managing indirect taxes (e.g., VAT, sales and use tax, or SUT) a strategic combination of process re-engineering and software automation should be implemented.

Best-in-Class Performance Aberdeen used the following four key performance criteria to distinguish Best-in-Class companies:

• 90% of all government audits in the past five years yielded positive results

• Only 13% of all internal / reverse audits in the past five years revealed overpayments

• 36% decrease in cost of audit penalties / fines over the past two years

• 30% reduction in time dedicated to addressing tax errors over the past two years

Competitive Maturity Assessment Survey results show that the firms enjoying Best-in-Class performance shared several common characteristics, including:

• 73% more likely than their competitors to automate the update of tax rates and laws in a central database to facilitate access

• 67% more likely than their competitors to effectively assess the exposure level to government audits

• 35% more likely than their competitors to employ third-party firms to conduct internal / reverse audits

Required Actions In addition to the specific recommendations in Chapter Three of this report, to achieve Best-in-Class performance, companies must:

• Automate workflow from tax preparation to remittance / recovery

• Enable centralized management of tax information

• Establish standardized procedures for managing government audits

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© 2011 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897

Table of Contents Executive Summary....................................................................................................... 2

Best-in-Class Performance..................................................................................... 2 Competitive Maturity Assessment....................................................................... 2 Required Actions...................................................................................................... 2

Chapter One: Benchmarking the Best-in-Class.................................................... 4 Background................................................................................................................ 4 The Maturity Class Framework............................................................................ 7 The Best-in-Class PACE Model ............................................................................ 8 Best-in-Class Strategies........................................................................................... 9

Chapter Two: Benchmarking Requirements for Success.................................11 Competitive Assessment......................................................................................11 Capabilities and Enablers ......................................................................................13

Chapter Three: Required Actions .........................................................................18 Laggard Steps to Success......................................................................................18 Industry Average Steps to Success ....................................................................18 Best-in-Class Steps to Success ............................................................................19

Appendix A: Research Methodology.....................................................................21 Appendix B: Related Aberdeen Research............................................................23

Figures Figure 1: Core Drivers for Improving VAT Management ................................... 5 Figure 2: Top Challenges for VAT Management.................................................... 6 Figure 3: Strategic Actions of the Best-in-Class..................................................... 9 Figure 4: Standardizing and Streamlining Processes............................................14 Figure 5: Leveraging Domain Expertise .................................................................15 Figure 6: Maintaining Transparency with Auditors .............................................15

Tables Table 1: Top Performers Earn Best-in-Class Status.............................................. 7 Table 2: The Best-in-Class PACE Framework ....................................................... 8 Table 3: Audit Statistics on the Best-in-Class......................................................... 9 Table 4: The Competitive Framework...................................................................12 Table 5: The PACE Framework Key ......................................................................22 Table 6: The Competitive Framework Key ..........................................................22 Table 7: The Relationship Between PACE and the Competitive Framework.........................................................................................................................................22



Chapter One: Benchmarking the Best-in-Class

Fast Facts

√ 44% of all respondents consider highly dynamic government / legislative requirements for VAT as a core driver to improving VAT management

√ 40% of the Best-in-Class companies cited increase in government audit activities as a key pressure to improving VAT management

Despite a recovering global market, governments worldwide are still facing a revenue shortfall. To address this problem, they are strengthening audit initiatives in hopes of claiming additional tax dollars from companies. The area of Value-Added Tax (VAT) has been a prime audit focus, with transaction taxes accounting for a significant portion of government revenue. In Aberdeen’s May 2010 study, Effective Sales and Use Tax Management: Reducing Errors and Increasing Productivity, 47% of companies were accelerating their tax compliance initiatives due to this sharp increase in government audit activities. Aberdeen hypothesizes that to achieve success in managing VAT, Best-in-Class organizations must have effective access to taxability requirements and tax rates for products and services, and streamline processes that support accurate VAT preparation, filing, and remittance / recovery.

Background Like traditional Sales and Use Tax (SUT), VAT is an indirect tax – tax that is collected from the buyer first before passing it onto the government. However, unlike SUT (which is levied at a common rate during the point of sale) VAT is collected throughout the entire value chain of the goods or services sold, with rates adjusted based on the level of value each member provides towards the final goods delivered or services rendered. Take, for example, a pint-size carton of milk that is being sold by a retailer for $1.00. A 9% sales tax that’s levied on the milk would result in a collection of an additional $0.09 from the customer (end user), which the retailer would then remit to the state / local government. With a VAT approach, however, the same 9% would be charged to the end-user (consumer), but remitted by numerous parties within the value chain. Out of the total $0.09 collected by the retailer, the retailer may only be accountable for remitting $0.04, while the dairy plant is accountable for $0.03, and the farm accountable for the remaining $0.02. The sequence in which the collection flows is in the direction of the financial supply chain:

• The dairy plant pays the farm $.02 in taxes with the sale, so the farm can remit its $0.02 to the government

• The retailer pays the dairy plant $.05 in taxes with the sale, so the dairy plant can deduct the $0.02 that it paid the farm, and remit its $0.03 to the government

• Finally, the retailer collects the full $0.09 from the consumer, deducts the $0.05 it paid the dairy plant, and remits its $0.04 to the government

The “cost” of VAT is essentially spread across the entire sales chain, encouraging each participant to be compliant in their remittance, to avoid impacting others. That said, the greatest risk becomes the tax burden absorbed by the last participant (on what it already paid its suppliers), if the consumer fails to buy its products or services.

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Business Context There are two main advantages of the VAT collection / remittance methodology over that of SUT. For the government, it can begin collecting taxes (gain revenue) on products and services, even before consumer purchase. Secondly, with members of the sales chain helping to enforce tax compliance, the opportunities for tax evasion and delinquency are minimized. That said, there are two resulting implications of such benefits:

1. The responsibility of tax collection and regulations enforcement is increasingly shifting from the government to the companies

2. These companies must now manage a complex series of tax rates and requirements among their partners and suppliers

This study delves into two aspects of global VAT management: the impact of government VAT requirements on corporate tax and compliance departments / entities; and the correlation between technology-supported process improvements and effective VAT management.

From a company’s perspective, the key benefits to successful VAT management are the opportunities to:

• Decrease operational costs (fines / penalties / corrective labor) • Reduce tax overpayments • Increase corporate productivity • Reduce audit risk and exposure • Facilitate / support sales expansion into various regions / countries • Streamline supplier / partner transactions

Figure 1 depicts the top pressure that companies are facing in light of a dynamic regulatory tax environment.

Figure 1: Core Drivers for Improving VAT Management

29%

40%

44%

51%

0% 10% 20% 30% 40% 50% 60%

Corporate mandate to increaseorganizational workforce

productivity

Executive pressure to expandoperations across various

geographic boundaries

Highly dynamic government /legislative requirements for VAT

Increase in government auditactivities

Percentage of Respondents, n = 180

All Respondents

29%

40%

44%

51%

0% 10% 20% 30% 40% 50% 60%

Corporate mandate to increaseorganizational workforce

productivity

Executive pressure to expandoperations across various

geographic boundaries

Highly dynamic government /legislative requirements for VAT

Increase in government auditactivities


All Respondents

Source: Aberdeen Group, January 2011




Survey respondents were asked to identify the top two pressures affecting VAT management, and to voice their concerns on other related pressures. Despite increased government audit activities and dynamic legislative requirements as their top drivers, it is interesting to see the pressure of expanding business into global markets and the need to improve staff productivity rounding off the pressures. Given the intense competitive pressures in the marketplace during the economic recovery, many businesses are looking beyond their borders for new market opportunities, prompting their need for better VAT management. Additionally, to address concerns on labor cost during tough times, companies are issuing mandates to employees to streamline operations and increase productivity - doing more with less. That said, dedicating staff time to work with government auditors and / or correct tax mistakes creates additional operating costs - funds that could otherwise be invested in more productive activities. These pressures are driving companies to explore new VAT management initiatives.

Addressing pressures related to VAT, however, has not been simple. Figure 2 depicts a host of challenges that companies face when attempting to implement effective tax management solutions.

Figure 2: Top Challenges for VAT Management

30%

31%

32%

44%

0% 10% 20% 30% 40% 50%

We have difficulty gaining access totax laws

Our partners and suppliers areusing different tax data formats

Our organization lacks a standardworkflow for managing taxes

We lack the support to adhere todynamic tax rates


All Respondents

30%

31%

32%

44%

0% 10% 20% 30% 40% 50%

We have difficulty gaining access totax laws

Our partners and suppliers areusing different tax data formats

Our organization lacks a standardworkflow for managing taxes

We lack the support to adhere todynamic tax rates


All Respondents


In addition to VAT compliance concerns, companies are often lacking a standard workflow for managing taxes, including a source for retrieving current tax requirements - critical information that tax managers and compliance officers need. On the technical side, companies are facing obstacles surrounding data incompatibility with existing enterprise / operating platforms, lack of automation, and / or inadequate interoperability with systems utilized by the companies' partners and suppliers. With multinational organizations required to track numerous VAT laws, the process becomes even more complex. Together, these challenges present a negative spiral effect: the tax and compliance departments from the buyers




are unable to communicate effectively with their governments on tax requirements; and the suppliers are doing business with buyers that are non-compliant in their VAT practices.

The Maturity Class Framework Government tax audits are, by general definition, arbitrary - companies never know when or how they will happen, and there is no specific best-practice or methodology to prevent their occurrence. Any company announcement (good or bad), such as sudden revenue growth, earnings versus taxes paid, multi-national sales expansion, a merger / acquisition, or even an IPO - where there is a significant disruption in the operation of the company, could serve as a trigger event for government auditors. Companies can only reduce their audit exposure and risk by being proactive in their tax due diligence process: making sure that numbers are correct, and that the filings and the remittances are on schedule. These companies can do so by conducting internal audits to ensure accuracy and compliance. At times, internal / reverse audits do reveal overpayments to the government which also implies process inefficiency. That said, if a company were to be audited by the government, it can expect the audit to potentially trace back several years. To that end, Aberdeen uses four key performance criteria to distinguish the Best-in-Class from Industry Average and Laggard organizations (Table 1).

Table 1: Top Performers Earn Best-in-Class Status

Definition of Maturity Class Mean Class Performance

Best-in-Class: Top 20%

of aggregate performance scorers

90% of all government audits in the past five years yielded positive results 13% of all internal / reverse audits in the past five years revealed overpayments 36% decrease in cost of audit penalties / fines over the past two years 30% reduction in time dedicated to addressing tax errors over the past two years

Industry Average: Middle 50% of aggregate

performance scorers

70% of all government audits in the past five years yielded positive results 14% of all internal / reverse audits in the past five years revealed overpayments 5% increase in cost of audits penalties / fines over the past two years 19% increase in time dedicated to addressing tax errors over the past two years



Definition of Maturity Class Mean Class Performance

Laggard: Bottom 30% of aggregate

performance scorers

50% of all government audits in the past five years yielded positive results Lack of ability to track overpayments such that losses could not even be identified 106% increase in cost of audits penalties / fines over the past two years 60% increase in time dedicated to addressing tax errors over the past two years


While the Best-in-Class share comparable performance with the Industry Average in terms of tax overpayments, the notable difference is in the year-over-year decrease in the cost of penalties, fines, and corrective labor. Given that the size of penalties and fines is a function of tax amount difference and days overdue, the Best-in-Class demonstrate that the errors associated with their negative government audit results are of magnitudes smaller than those of the Industry Average or Laggards. Additionally, the Best-in-Class are the only organizations to achieve a year-over-year decrease in audit fines / penalties and corrective labor, whereas all others (defined as the combination of Industry Average companies and Laggard companies) reveal an increase.

The Best-in-Class PACE Model Using effective solutions and / or services to achieve tax management goals requires a combination of strategic actions, organizational capabilities, and enabling technologies that are summarized in Table 2.

Table 2: The Best-in-Class PACE Framework

Pressures Actions Capabilities Enablers Increase in government audit activities

Integrate / streamline tax preparation and filing, and remittance / recovery processes Facilitate tax information exchange within the organization (e.g., Sales, Accounting, Shipping, Procurement)

Published information is available via in-house or third party solution(s) Database for logging / archiving tax transaction history and maintaining audit trail Tax staff oversees the adherence to taxation processes and regulations Real-time access to tax regulatory changes

VAT rate calculation solutions VAT preparation and filing solutions Tax exemption certificate / exception management solutions Tax remittance tools Audit control solutions Order management solutions with the ability to handle VAT management Accounting software XBRL-based financial reporting systems Nexus / taxability evaluation tools Governance, risk, and compliance (GRC) management systems Enterprise tax management systems that manage multiple tax categories E-commerce VAT management solutions Audit risk assessment tools Tax data warehouse




Best-in-Class Strategies Improving VAT management can contribute significantly to the reduction of audit exposure / risk, but many organizations lack the initiatives, capabilities, and technological enablers to mitigate such risks. Organizations realizing Best-in-Class performance have effective VAT management capabilities as defined by: a strong alignment of domain expertise to compliance measures, and effective technological enablers that allow stakeholder access to tax information and regulations for accurate transactions. The strategic actions of the Best-in-Class are identified in Figure 3.

Figure 3: Strategic Actions of the Best-in-Class


While the Best-in-Class companies are about 32% more likely than their competitors to possess streamlined access to correct tax rates / laws for accurate calculations, the most important difference lies in their proactive approach to managing taxes. By consistently conducting preparatory audits to ensure readiness for government audits, these top-performing companies are systematically mitigating their risks and reducing audit exposure.

Table 3 looks strictly at the statistics achieved by the Best-in-Class, Industry Average, and Laggard, with no correlations to the performance metrics used to define them in Table 1. Though it is impossible to establish a causal relationship between the number of internal audits conducted, and the number of government audits experienced, the statistics in Table 3 do seem to support the notion that being proactive has its rewards.

Table 3: Audit Statistics on the Best-in-Class

Maturity Class Mean Class Performance

Best-in-Class 27% reduction in risk profile 41% increase in cost savings as a result of not having to pay for negative audit results in the past 2 years

14%

20%

17%

22%

15%

22%

24%

29%

0% 5% 10% 15% 20% 25% 30%

Streamline access to current regulatoryprocedures for tax compliance

Facilitate communication andpromote transparency with auditors

Perform preparatory audits

Provide streamlined access to correcttax rates / laws for accurate calculations


Best-in-Class

All Others14%

20%

17%

22%

15%

22%

24%

29%

0% 5% 10% 15% 20% 25% 30%






Best-in-Class

14%

20%

17%

22%

15%

22%

24%

29%

0% 5% 10% 15% 20% 25% 30%






Best-in-Class

All Others14%

20%

17%

22%

15%

22%

24%

29%

0% 5% 10% 15% 20% 25% 30%






Best-in-Class

"Automation of VAT management solutions has enabled us to manage a large volume of transactions. We constantly receive requests for handling disparate tax data."

~ Tax Manager, Satellite TV Service Provider




Maturity Class Mean Class Performance

Industry Average

5% reduction in risk profile 7% increase in cost savings as a result of not having to pay for negative audit results in the past 2 years

Laggard

Lack of ability to track risk profile such that risk level could not even be identified Lack of ability to track audit results such that cost savings could not even be identified


Aberdeen Insights — Strategy

Companies operating multi-nationally and / or working with suppliers across geographic boundaries are finding the access to regional tax rates and laws to be increasingly difficult. There are two facets to this predicament:

1. Seeking points of contact at government tax offices and establishing effective communication with them to understand tax rate / law updates remains a challenge

2. Once the new rates and laws are posted, their formats can range from paper-based to electronic (or a mix of both), prompting questions around compatibility with enterprise systems designed to leverage this information

Companies with large numbers of tax entities and / or are registered in numerous countries should establish a standard procedure for evaluating taxability, and a process for identifying the source of tax rate / law information, as provided by their respective governments. This can be done internally or through third-party professional services firms. By understanding the factors that impact visibility and access to regulations, companies can better assess the type of tax solution(s) required to support their core business processes.

In the next chapter, we will see what the top performers are doing to achieve these gains.



Chapter Two: Benchmarking Requirements for Success

Fast Facts

√ 44% of the companies consider difficulty in adhering to dynamic tax rates and laws as the one of the biggest challenges

√ 31% of the companies cited partner / supplier tax data incompatibility as a key hindrance to effective VAT management

Chapter One covered how the Best-in-Class are able to reduce their corporate risk profile and cost through their proactive strategies and initiatives. Chapter Two takes a closer look at the mix of tax management solutions and domain expertise that enable a higher level of audit success and productivity.

Case Study — Reducing Black Markets

The benefits of managing VAT effectively are numerous: decrease of operational costs (fines / penalties / corrective labor), reduction of tax overpayments, increase of corporate productivity, reduction of audit risk and exposure, facilitation / support of sales expansion into various regions / countries, and streamlining of supplier / partner transactions. But what are some of the other economic implications? Aberdeen was fortunate enough to receive feedback from a partner at a top Indian accounting firm. "VAT was introduced in India in 1986, as MODVAT or Modified VAT. In India, input tax credit (amount to be deducted from the tax owed) on excise duty was not allowed in sales tax, because there were two taxes on goods - excise and sales tax. The excise tax went to the central government, while the sales tax went to the respective state government," explained the executive. "Over the years, VAT has increased the accountability of traders to the government in India. VAT requires every trader in the goods sales chain (manufacturer / distributor / wholesaler / retailer / consumer) to issue invoices and maintain proper records and accounts, in order to claim input tax credit."

In discussing the VAT system and its impact on the Indian economy, the executive states, "There were lot of black markets (transaction of goods and / or services for which taxes were not paid) in India. With the coming of VAT, black markets have reduced substantially, as now more number of companies file returns and deposit their due tax." When asked about the current and upcoming VAT initiatives in India, he responded, "VAT rate in India is currently 12.5% as per legislation. That said, the states have the freedom to frame their own VAT Act. It is expected that Goods and Services Tax (GST) would be implemented in India in 2011, broadening the tax base, i.e. merging VAT and service tax." Such impacts on the economy have prompted various governments to consider adopting or improving the VAT system.

Competitive Assessment Aberdeen Group analyzed the aggregated metrics of surveyed companies to determine whether their performance ranked as Best-in-Class, Industry Average, or Laggard. In addition to having common performance levels, each class also shared characteristics in five key categories: (1) process (the




approaches they take to execute daily operations); (2) organization (corporate focus and collaboration among stakeholders); (3) knowledge management (contextualizing data and exposing it to key stakeholders); (4) performance management (the ability of the organization to measure its results to improve its business); and (5) technology (the selection of the appropriate tools and the effective deployment of those tools). These characteristics (identified in Table 4) serve as a guideline for best practices, and correlate directly with Best-in-Class performance across the key metrics.

Table 4: The Competitive Framework

Best-in-Class Average Laggards Automated workflow for tax preparation, filing, and remittance / recovery

55% 37% 37% Standardized procedures for addressing negative audit results (payments and corrective actions)

Process

55% 29% 13% Tax staff oversees the adherence to taxation processes and regulations

70% 55% 48% Financial executives ensure the alignment between tax management objectives and corporate initiatives

61% 44% 43% Training programs in place to ensure adoption of proper VAT practices

51% 43% 31% Third-party firm(s) provide internal / reverse audits

Organization

42% 33% 27% Published tax information is available via in-house or third-party solution(s)

73% 62% 36% Automated and periodic update of tax rates and laws

69% 42% 34% Real-time access to tax regulatory changes

66% 52% 50% Centralized management of billing tax information

64% 44% 43% Centralized management of procurement tax information

Knowledge

58% 39% 33% Tax overpayments are consistently tracked (for recovery)

70% 48% 42% Tracking of costs associated with negative audit results (fines / penalties / corrective labor)

58% 48% 28% Ability to effectively assess the exposure to government audits

55% 34% 28% Ability to accurately assess the risk of negative audit results

Performance

53% 37% 23%



Best-in-Class Average Laggards VAT management technologies currently in use:

Technology

50% VAT rate calculation solutions 53% VAT recovery solutions 53% electronic publication of tax rates and laws 55% audit control solutions 60% governance, risk, and compliance (GRC) management solutions

33% VAT rate calculation solutions 41% VAT recovery solutions 38% electronic publication of tax rates and laws 43% audit control solutions 54% governance, risk, and compliance (GRC) management solutions

31% VAT rate calculation solutions 32% VAT recovery solutions 27% electronic publication of tax rates and laws


40% audit control solutions 33% governance, risk, and compliance (GRC) management solutions

"Automation of VAT management processes has allowed us to decrease the number of employees needed to support our tax compliance function."

~ Manager, Compliance Department, Yum! Brands, Inc.


Capabilities and Enablers Based on the findings of the Competitive Framework and interviews with end-users, Aberdeen’s analysis of the Best-in-Class reveals that to effectively manage VAT, companies need to provide the necessary tools to their stakeholders to gain visibility to a dynamic regulatory environment, and / or enable process automation to reduce calculation errors.

Process In addition to automating the workflow for tax preparation, filing, and remittance / recovery, and standardizing procedures for addressing negative audit results (payments and corrective actions), organizations are looking at streamlining sales order tax calculations, standardizing registration and taxability evaluation procedures, and standardizing the workflow for sharing information with auditors (Figure 4).

Multinational organizations transacting in many countries have a higher risk of audit exposure. To mitigate this elevated risk, particularly in light of a distributed / disparate set of employees, a common set of procedures need to be implemented to address internal tax management and external tax pressures. With competitive forces driving many companies to expand into new sales territories, it is in their best interest to provide good impressions (through good compliance practices) to governments that grant them rights to do business thereabouts.



Figure 4: Standardizing and Streamlining Processes

56%

52%

36%

47%

27%

20%

0%

10%

20%

30%

40%

50%

60%

Streamlined salesorder tax

calculations basedon tax rates / place

of supply

Standardizedregistration and

taxability evaluationprocedures

Standardizedworkflow for

sharing tax andaccounting

information withauditors

Per

cent

age

of R

espo

nden

ts, n

= 1

80

Best-in-Class All Others56%52%

36%

47%

27%

20%

0%

10%

20%

30%

40%

50%

60%

Streamlined salesorder tax

calculations basedon tax rates / place

of supply

Standardizedregistration and

taxability evaluationprocedures

Standardizedworkflow for

sharing tax andaccounting

information withauditors

Per

cent

age

of R

espo

nden

ts, n

= 1

80

Best-in-Class All Others


Organization It is safe to say that with any major corporate initiative, the first step towards success is attaining executive support. In VAT management, the responsibility lies predominantly within the tax department. Most executives recognize the need to reduce audit exposure in their VAT practices, and are constantly evaluating how to best align their staff expertise with tax compliance requirements. That said, Best-in-Class organizations take the alignment a step further by encouraging compliance support from their staff members beyond the tax department (Figure 5). Additionally, they seek all options, including staff training, software implementation, or augmenting their tax management team to include third-party experts. This constant involvement and resource management process is what enables Best-in-Class organizations to outperform their competitors.




Figure 5: Leveraging Domain Expertise

Best-in-Class



Knowledge Management To offer transparency externally to government auditors, and internally to the tax and compliance staff, an organization should possess a robust database (a centralized repository) of tax rates, laws, and transaction records / audit trails. Decisions and corresponding actions are only as good as the information used to make them. Having the real-time capability to store, share, and change tax information becomes the key to increasing transaction accuracy and reducing audit risk. Employee turnover in organizations has always been a concern to executives. Losing one or two residential tax experts within a company can prove to be quite disruptive to workflow. Having an effective knowledge management system in place can mitigate this risk by providing the necessary support during such staff transitions and / or losses. Figure 6 depicts an important knowledge management capability possessed by the Best-in-Class.

Figure 6: Maintaining Transparency with Auditors


42%40%

34%

30%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Compliance staff providesinternal / reverse audits

Accounting staff oversees taxoperations (in lieu of tax and / or

compliance staff)

Perc

ent

d,

age

of R

espo

nen

ts n

= 1

80

All Others42%

40%

34%

30%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Compliance staff providesinternal / reverse audits

Accounting staff oversees taxoperations (in lieu of tax and / or

compliance staff)

ent

d,

Best-in-Class All Others

n =

180

ents

pon

e of

Res

agPe

rc

53%

69%

0% 20% 40% 60% 80%

Database forogging / archiving

tax transactionhistory and

maintaining audittrail


l

Best-in-Class

All Others

53%

69%

0% 20% 40% 60% 80%

Database forogging / archiving

tax transactionhistory and

maintaining audittrail


l

Best-in-Class

All Others



Performance Management Before a company makes an investment, it evaluates the potential Return on Investment (ROI). This is the case in many corporate initiatives, but particularly important in tax management. Why? Most investments in professional services and / or software are geared only towards reducing cost, and increasing top-line revenue. With tax management, it is about reducing cost, reducing risk, maintaining compliance, increasing staff productivity - and by adding all these factors together, a company effectively increases the bottom-line profit. That said, to evaluate the success of a tax management initiative and its ROI, a series of performance measurements must be implemented to compare the initiative's before-and-after levels of audit penalties / fines and corrective labor costs, audit exposure / risk, and overpayments.

Technology "Automation offers significant benefits in our tax management processes: flexibility, time savings, troubleshooting, accuracy of taxes, and training tools among many others."

~Staff, Public Sector Organization

In a dynamic regulatory environment, where tax rate changes are numerous and frequent, it becomes apparent that human capabilities are at a disadvantage over software automation. Working in all global time zones around the clock, technology has enabled the capture and use of dynamic tax rates to increase corporate productivity. Saving hours of hands-on tax rate research among their staff, companies can effectively minimize resource costs and manually-induced errors. With multinational organizations dealing with numerous tax rates and changes, calculation accuracy can be enhanced through the use of VAT calculation software - where tax updates can be extracted and leveraged in real-time.

An important element of managing VAT is tax recovery. By implementing effective recovery capabilities, whether it is through a professional services firm and / or a software platform, organizations can reduce costs and improve bottom line profitability. Whether it is through an existing enterprise-level tax management solution or through a point solution, organizations should leverage electronic publication of tax rates and laws to stay current on their VAT requirements. Information transparency to auditors is an integral part of effective VAT management. To facilitate government communication and audit tasks, audit control solutions should be implemented.

Finally, VAT, among other business-related taxes, contains risk and compliance elements that can significantly impact an organization's overall liability. As such, VAT management should be viewed as a critical segment of the corporate Governance, Risk, and Compliance (GRC) architecture. Leveraging GRC solutions to support VAT initiatives can greatly reduce an organization's risk profile.




Aberdeen Insights — Technology

As an effort to save on hardware procurement and maintenance costs, companies are looking into using Software-as-a-Service (SaaS) deployments to support their tax management requirements. By using this remote service, where the tax engine is being hosted by its vendor, companies essentially outsource their tax processing responsibility to a technology entity - where a dynamic database of tax rates constantly ensures accurate tax calculations for sales transactions across various states, regions, and / or jurisdictions. Some SaaS tax solution providers also have e-commerce support capabilities as well, where tax calculations are integrated seamlessly with online checkout systems.

In terms of technology deployment methodologies among organizations, Aberdeen's latest study reveals that only 8% of companies are currently implementing SaaS tax solutions, while the majority of companies are still deploying their tax solutions on-premise (71%) or off-premise / via datacenters (21%). Of the 8% of SaaS users (resulting in a relatively small study sample), 50% of them achieved Best-in-Class status per the key performance indicators outlined in Table 1, and all of them have annual revenues of $50 million or less (the threshold that Aberdeen uses to define small companies). That said, despite larger enterprises possessing robust ERP platforms that accommodate tax management solutions, small companies with smaller budgets are finding ways to support their tax management processes with cost-effective technologies to achieve success.



Chapter Three: Required Actions

Fast Facts

√ Best-in-Class companies are 66% more likely than the Laggard companies to deploy VAT recovery solutions

√ Best-in-Class companies are 61% more likely than the Laggard companies to deploy VAT rate calculation solutions

Whether a company is trying to move its performance in VAT management from Laggard to Industry Average, or Industry Average to Best-in-Class, the following actions will help spur the necessary performance improvements:

Laggard Steps to Success • Standardize procedures for addressing negative audit

results (13% of Laggards currently have this capability in place, compared to 29% of the Industry Average). A delay in responding to negative government audit results can greatly increase the risk of additional fines and / or future audits. By having a protocol in place to address payments and corrective actions, Laggards can ensure a timely response to government requirements. These protocols should also specify individual(s) or team(s) responsible for executing such tasks.

• Establish training programs to ensure the adoption of proper VAT practices (31% of Laggards currently have this capability in place, compared to 43% of the Industry Average). Possessing VAT domain expertise is critical in support of VAT compliance. Having a "champion" onboard who communicates effectively with the government contacts on rate and law changes is imperative, but passing such knowledge to fellow colleagues who are responsible in managing VAT is equally important. By conducting such organizational training, Laggards can better their chances of achieving positive audit results.

• Create access to published tax information, whether done in-house or via third-party solution(s) (36% of Laggards currently have this capability in place, compared to 62% of the Industry Average). In addition to improving VAT domain expertise, organizations must have effective visibility into the accurate tax information necessary for calculations and taxability evaluation. This is vital, particularly for multinational organizations that must deal with many tax rates and law changes. By improving visibility to current legislative requirements, Laggards can greatly reduce the risk of error and audit exposure.

Industry Average Steps to Success • Assess the risk for negative audit results (37% of the Industry

Average currently have this capability in place, compared to 53% of the Best-in-Class). Being able to predict the probability of obtaining negative audit results demonstrates a company's ability to isolate factors that attribute to them. These factors may include calculation inaccuracy, inadequate information visibility, and / or poor execution. By being able to assess the risk for negative audit results,




the Industry Average can become more proactive in their mitigation strategies and compliance measures.

• Automate workflow for tax preparation, filing, remittance / recovery (37% of the Industry Average currently have this capability in place, compared to 55% of the Best-in-Class). Streamlining the entire VAT management process can greatly reduce the potential for disruptions associated with calculation errors, lost forms, and delayed payments. Additionally, staff resources can be better allocated to increase efficiency. By automating the VAT management processes, the Industry Average can minimize clerical errors and maximize organizational productivity.

• Track tax overpayments systematically to ensure recovery opportunities (48% of the Industry Average currently have this capability in place, compared to 70% of the Best-in-Class). Organizations that over-remit in their tax payments due to calculations errors or fear of underpayment are demonstrating inefficiencies in their VAT management processes - inefficiencies that contribute to unnecessary costs. By capitalizing on opportunities to recover overpayments, the Industry Average can improve their bottom line profitability.

Best-in-Class Steps to Success • Leverage third-party firm(s) to provide internal / reverse

audits (currently, 42% of the Best-in-Class have this capability in place). With top organizations possessing initiatives to expand rapidly to global markets, finding / hiring in-house VAT domain expertise to conduct internal / reverse audits may prove challenging. This is particularly evident when initiating operations in new countries, where these organizations may find it easier to hire on-site tax consultants, who are already knowledgeable about the local VAT rates and laws, in order to expedite their development. To maintain industry leadership, the Best-in-Class should continue to evaluate the level of tax domain expertise available in house, and seek external tax consulting services if internal resources fall short of requirement. Having a team of external tax professionals could also add a layer of liability protection between the organization and the government auditors by offering visibility to the preparatory work that was already performed.

• Assess the exposure to government audits (currently, 55% of the Best-in-Class have this capability in place). Having a systematic assessment of audit exposure and risk enables timely mitigation actions. By tracking the change in audit exposure and risk, top organizations can gauge the effectiveness of their tax management processes and solution(s). To maintain industry leadership, the Best-in-Class should continue to monitor risk levels alongside their self-audit initiatives to ensure readiness for potential government audits.


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Additionally, an unexpected elevation of risk / exposure may indicate a deficiency in the VAT management process and / or solution - valuable information that allows these organizations to evaluate areas of change or improvement.

• Ensure the alignment between tax management objectives and corporate initiatives (currently, 61% of the Best-in-Class have this capability in place). Often times the benefits of effective VAT management is siloed within the tax and compliance departments. However, the cost savings, liability reduction, and staff productivity improvement are benefits that resonate loudly with C-level executives. Like all departmental level objectives, tax management objectives should be communicated clearly to upper management to ensure proper alignment to corporate initiatives - whether it is to decrease operational costs, reduce corporate risks, and / or improve resource allocations. To maintain industry leadership, the Best-in-Class should continue to ensure executive support on effective VAT management - this can be done by identifying how tax management objectives can aid in corporate initiatives.

Aberdeen Insights — Summary

Many companies only seek professional tax assistance during times of audit. Subsequently, these tax consulting firms must then perform an incredible amount of due diligence and government communication to ensure compliance. The hours spent on corrective actions are often greater than those that their clients invested in preventative measures. The lesson here is that being proactive, systematic, and judicious in improving VAT management pays greater dividends than being reactive to audit situations. Many tax consulting firms recognize this, and have been deploying client training programs as part of their audit management support. Successful firms further add client value by recommending and, in most cases, deploying tax software to assist in the compliance process. As a client company, it is important to work with a firm that recommends process re-engineering and software adoption based on alignment to the client's tax management objectives - and not on preferred-software status and / or application interoperability criteria.

From the data gathered for this report, Best-in-Class companies demonstrate that having tax domain experts alone to execute on tax management initiatives is simply not enough to yield success. These companies rely on process and workflow automation to ensure compliance with government requirements. To achieve this level of efficiency, Best-in-Class companies leverage internal and external experts to ensure proper technology integration and adoption. Thus, they build a strong alignment between domain expertise and compliance measures that allow significant reduction in corporate risk profile.



Appendix A: Research Methodology

Between December 2010 and January 2011, Aberdeen examined the use, the experiences, and the intentions of more than 270 enterprises employing VAT management solutions in a diverse set of industries.

Study Focus

Responding finance, tax, and corporate management executives completed an online survey that included questions designed to determine the following:

√ The degree to which VAT management solutions are deployed in their business and the financial implications of the technology

√ The structure and effectiveness of existing VAT management solutions

√ Current and planned use of VAT solutions to aid tax and financial activities

√ The benefits, if any, that have been derived from the implementation of VAT management initiatives

The study aimed to identify emerging best practices for VAT management solutions, and to provide a framework by which readers could assess their own management capabilities

Aberdeen supplemented this online survey effort with interviews with select survey respondents, gathering additional information on VAT management strategies, experiences, and results.

Responding enterprises included the following:

• Job title: The research sample included respondents with the following job titles: CEO / President (9%); CFO (17%); EVP / SVP / VP (7%); Director (17%); Manager (23%); Consultant (7%); Controller (8%); Staff (7%); and other (5%).

• Department / function: The research sample included respondents from the following departments or functions: Tax management (34%); finance / administration (19%); corporate management (9%); information technology (9%); accounting (8%); and other (21%).

• Industry: The research sample included respondents from several industries. Financial services (8%), IT consulting / services (6%), Wholesale / distribution (6%) were the largest contributors.

• Geography: The majority of respondents (76%) were from North America operating multinationally, followed by Europe (12%), Asia / Pacific (7%), Middle East / Africa (3%) and South / Central America and Caribbean (2%).

• Company size: Thirty percent (30%) of respondents were from large enterprises (annual revenues above US $1 billion); 37% were from midsize enterprises (annual revenues between $50 million and $1 billion); and 33% of respondents were from small businesses (annual revenues of $50 million or less).

• Headcount: Fifty percent (50%) of respondents were from large enterprises (headcount greater than 1,000 employees); 28% were from midsize enterprises (headcount between 100 and 999 employees); and 22% of respondents were from small businesses (headcount between 1 and 99 employees).




Table 5: The PACE Framework Key

Overview Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows: Pressures — external forces that impact an organization’s market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive) Actions — the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product / service strategy, target markets, financial strategy, go-to-market, and sales strategy) Capabilities — the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products / services, ecosystem partners, financing) Enablers — the key functionality of technology solutions required to support the organization’s enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management)


Table 6: The Competitive Framework Key

Overview The Aberdeen Competitive Framework defines enterprises as falling into one of the following three levels of practices and performance: Best-in-Class (20%) — Practices that are the best currently being employed and are significantly superior to the Industry Average, and result in the top industry performance. Industry Average (50%) — Practices that represent the average or norm, and result in average industry performance. Laggards (30%) — Practices that are significantly behind the average of the industry, and result in below average performance.

In the following categories: Process — What is the scope of process standardization? What is the efficiency and effectiveness of this process? Organization — How is your company currently organized to manage and optimize this particular process? Knowledge — What visibility do you have into key data and intelligence required to manage this process? Technology — What level of automation have you used to support this process? How is this automation integrated and aligned? Performance — What do you measure? How frequently? What’s your actual performance?


Table 7: The Relationship Between PACE and the Competitive Framework

PACE and the Competitive Framework – How They Interact Aberdeen research indicates that companies that identify the most influential pressures and take the most transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute those decisions.





Appendix B: Related Aberdeen Research

Related Aberdeen research that forms a companion or reference to this report includes:

• The E-Payables Solution Selection Report: A Buyer's Guide to Accounts Payable Optimization; October 2010

• Global Trade Management: Strategies for Mastering Trade Compliance and Supply Chain Complexity; September 2010

• Strategic Supply Chain Planning: Priorities of the Chief Supply Chain Officer; September 2010

• E-Payables 2010: The Strategic Value of Accounts Payable Automation; August 2010

• Transportation and Global Trade Management: Mastering Compliance and Complexity; August 2010

• Sales and Operations Planning: Strategies for Managing Complexity within Global Supply Chains; July 2010

• Evolving Dynamics of Corporate Banking Relationships: Enhanced Payments for Improved Cash Flow; July 2010

• Effective Sales and Use Tax Management: Reducing Errors and Increasing Productivity; May 2010

• Global Payments: Maximizing Cash Flow with Electronic Payments and Process Automation; May 2010

• Invoicing and Workflow: Transforming Process Automation into Operational Cost Control; April 2010

• E-Payables Benchmark 2009: Accounts Payable Rising; September 2009

• E-Payables: Electronic Payments Reduce Your Payment- Processing Costs; July 2009

• Global Trade Compliance in the Corporate Spotlight: Improvement Initiatives for 2008; March 2008

• Global Trade Compliance Priorities in 2008; March 2008 Information on these and any other Aberdeen publications can be found at www.aberdeen.com.

Author: William Jan, Senior Analyst, Financial Management & GRC, ([email protected])

Since 1988, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter — the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.2 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500. As a Harte-Hanks Company, Aberdeen plays a key role of putting content in context for the global direct and targeted marketing company. Aberdeen's analytical and independent view of the "customer optimization" process of Harte-Hanks (Information – Opportunity – Insight – Engagement – Interaction) extends the client value and accentuates the strategic role Harte-Hanks brings to the market. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 723-7890, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com. This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc. (110810a)

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Managing Value-Added Tax (VAT) in a Global Environment · Managing Value-Added Tax (VAT) in a Global Environment January 2011 William Jan