testing the effectiveness of a vat control framework using
TRANSCRIPT
Phone: +31 6 8379 0414 Mail: [email protected]
Testing the effectiveness of a VAT Control Framework using data analysis
Introduction The Dutch tax authorities announced on May 19, 2015 that 5,000 of its 30,000 employees will lose their current job, while at the same time 1,500 specialized data analysts will be hired as tax returns will be automatically assessed via data analysis. This is not exceptional as in various European countries taxpayers are already obliged to submit electronic audit files to the tax authorities. This trend will continue due to the availability of data analysis software and the increased focus on VAT compliance by tax administrations. It is also expected that tax authorities will request more and more data from the taxpayers. Business challenge With the tax authorities using more and smarter data analysis to assess the compliance of organizations’ tax submissions, the challenge for organizations is to ensure the data submitted is in compliance with VAT regulations. Data analysis solutions of various market players are generally standard analyses that are generated by a data dump from ERP systems. The main driver here seems to be using data analysis more than anything else. In most cases these analyses do not sufficiently take into account the complexity of business models and specific risk areas. As a result, there are no unequivocal results available and many manual adjustments might be necessary and even worse, risk areas may remain unnoticed.
Our expertise and tooling We start with understanding the supply chain model of the organization and the VAT risks and opportunities that come along with the implemented model. This will be the basis for defining data analysis solutions. The transactional data is checked for irregularities by subject matter experts with vast expertise of VAT complex business models and automation of VAT logic in ERP, tax engines and SAP add-ons. Our objective of data analysis is to identify VAT risks and VAT opportunities. An example: Defects in the area of e-invoicing, iDocs and exchange rates will normally not be found via standard analysis. Although the perception is that these processes are VAT compliant by default, we have discovered VAT errors - incorrect exchange rates for VAT - at various multinationals. This could result in substantial amount of rework, adjustments and VAT assessments by tax authorities. Understanding the business and the transaction processing is a pre-requisite for the execution of effective and efficient data analysis. Using data analysis as a pre-audit could provide insight into both risks and opportunities at hand.
Phone: +31 20 6586344
Mail: [email protected]
Indirect Tax SAP implementation
Introduction For nearly every company, the accuracy and efficiency of local-country VAT compliance is nearly completely dependent on the functionality of the underlying ERP system. Operational malfunctions in a system that is used to manage VAT compliance can lead to substantial financial risks. There are countless examples of the mismatching of VAT treatment of purchases and sales in chain transactions, double payments of VAT and "forgotten" manual adjustments to the VAT filing, all attributable to shortcomings in SAP’s automated VAT solution. Errors in the basic VAT configuration of ERP systems can also carry consequences for an organization. Without the proper VAT rules, many systems are incapable of processing transaction information correctly, so that transactions may become blocked. This has a great impact on logistics processes, invoicing processes and financial processes. SAP introduction The SAP VAT determination logic was developed a long time ago (1980’s) and except for the “plants abroad” logic SAP’s VAT determination logic has not changed. This in contrast with the VAT rules and business models. A brief overview of some of these changes: x the EU VAT laws have been more harmonized (EU VAT
directive) x substantial increase of cross border transactions, x businesses are registered for VAT in multiple countries, x businesses are operating more often under complicated
principal structures x increased number of (integrated) inter-company and supply
chain transactions As a result, there has been a huge increase in the complexity for the SAP system to meet all VAT requirements, which leads to necessary modifications to the standard SAP VAT for many multinational businesses. Modifications of already very complicated SAP systems create a risk for maintenance and half-hearted solutions. At the same
time, tax authorities across the world both sharpen their focus on non- compliant taxpayers and increase their focus on reviewing ERP systems as a source of VAT compliance risks. Businesses have to ensure that the VAT determination logic in the SAP systems is correct, easy to implement and remains VAT compliant.
Our distinguishing capability
Phenix Consulting possesses practical experience and understands SAP's possibilities, but also its limitations and thus the capability to free up resources, reduce manual activities and manage risks. With respect to the possibilities, we can express the wishes to the external SAP consultant in his own language and we can demonstrate how these can actually be achieved in SAP. In practice, we note that certain functionality intended for the support of indirect tax objectives does not get used - due either to reluctance (not within budget) or to a lack of knowledge in this area. From an indirect tax standpoint, the realization that you are part of a larger team in which each of the participants have other priorities is key. This means that effective communication and agreements are essential. Instructions must be understandable and so short and compact that they can also be used as a reference framework and material for the tests. In practice, Excel is often used to record all transactions and to indicate what the VAT treatment, etc. We developed our own normative decision trees for effective communication resulting in effective workforce and less risks.
Phone: +31 20 6586344
Mail: [email protected]
Indirect Tax Quantifying risks via statistical sampling
Introduction Incoming and outgoing invoices provide important information about the scale of indirect tax risks within a company. By selecting just a limited number of transactions via a statistical sample a quick insight can be gained into the level of tax risks with minimal human effort needed. The advantages of statistical sampling Statistical sampling has the added benefit of allowing the determination of the exact amount of a tax assessment. For this reason, the Dutch tax authority considers statistical sampling as their preferred tax audit method. For the tax function, statistical sampling is an efficient and effective way to test the effectiveness of its Tax Control Framework. The results could also be used to get indirect taxes higher on the priority list, since managing of material risks that are quantified fall within the KPIs of senior management. Our expertise and approach In our working method, we use the same parameters as the Dutch tax authority during a tax audit. 1. Delivery
The client provides data files following the instructions of Phenix Consulting
2. Sampling Phenix Consulting conducts the sampling using audit software. The client is instructed to gather the selected (physical) invoices, declarations, receipts or other documents
3. Assessment Phenix Consulting evaluates the delivered material and determines the correctness of the VAT entries
4. Quantify In case of incorrect VAT entries and errors, we calculate the potential VAT assessment
5. Remediation Phenix Consulting could provide support remediating findings
Via the 'single audit' method, it is possible to extend the scope to other tax areas such as corporate income tax and wage tax. Our Team x Ferry Geertman (RE, CISA) has a background in
Applied Mathematics. Ferry has vast experience in data analytics, including the design and evaluation of statistical samples as part of internal and external audit
x Hein Kloosterman (RE RA) used to be the chairman of the IT audit professional practice office and chairman of the statistical knowledge group of the Dutch Tax Authorities. Hein has extensive experience with the so-called integrated audits (single audits). Hein is involved in the education in accountancy, both at Nyenrode and the Erasmus University
x Robbert Hoogeveen (MSc, RA) is specialized in the audit of indirect taxes by means of statistical sampling and data analysis
Hein and Ferry are both members of the Steering Committee Statistical Auditing. This steering group is connected to the Limperg Institute and aims to promote the proper (effective and efficient) use of statistical methods and techniques in auditing and related audits of financial statements and reports.
Indirect Tax SAP review
Introduction
During a SAP review we verify the proper design of the implemented VAT configuration. Changes in the business model, master data or legislation will have an impact on the implemented VAT configuration. The SAP review can demonstrate that the VAT configuration must be improved or that additional control measures should be added to the Tax Control Framework. The review can also bring errors and risks to light, allowing a more focused data analysis to take place. After the quantification and evaluation of the risks and errors, these are assigned a risk profile in order to be able to test against risk tolerance. Risk areas In practice, the best way, seen from testing an effective control framework, is often to limit the scope and request the top 3-5 indirect tax risks that exceed the company’s indirect tax appetite:
x Inter-company transactions x Cross-border transactions x Correct deduction of input VAT (VAT paid) Based on these risks areas defined the scope can subsequently be extended. Examples of possible errors in SAP x Not making use of the proper partner functions in SAP for a
supplier who provides services in multiple countries and invoices VAT locally. Result: the standard VAT calculation generates incorrect results.
x Missing/improper VAT registration numbers in customer master data, such that invoicing requirements are not satisfied for cross-border transactions.
x Master data is adjusted and tested in the test environment, but the changes are not included in the final upload to the production system.
x The logic of the tax code structure is disrupted by VAT rate changes, something that could have been prevented using the SAP configuration.
x When performing reverse charge bookings, VAT rate changes do not get changed.
x For cross-border A-B-C transactions, a VAT mismatch between the VAT on procurement and the VAT on sales arises for party B.
x Blocked so-called iDoc (electronic interface documents) because of errors in the OBCD design. Suppliers with invoices in other currencies and the VAT amount in Euro, so that the booked VAT amount is incorrect due to an incorrect exchange
rate. x Incorrect derivation of VAT registration numbers for cross-
border transactions caused by incorrect SAP configuration.
Our approach
Depending on the client's requirements, the following VAT-relevant subjects can be analyzed during a SAP review from for example a risk perspective: x VAT treatment, correctness and the logic of the tax code
structure and attributes such as VAT rate, the defined tolerance percentage when calculating VAT paid, the setting for EU-relevant VAT reporting
x Incorrect VAT rates and reporting (filing and/or ICL listing) x Conditions tables, records and decision tree logic x Incorrect VAT treatment/code and returns x The derivation from VAT registration numbers on the invoice
of the partner functions used – sold_to, ship to, payer and bill_to
x Incorrect VAT number on the invoice, no 0% rate possible x VAT code descriptions for invoices x Incorrect sales invoices x iDoc tables, if applicable x Incorrect exchange rates applied
Phone: +31 20 6586344 Mail: [email protected]
SAP VAT Training Business model in SAP
Phone: +31 20 6586344
Mail: [email protected]
Background The SAP VAT determination logic was developed during the 1980’s and, except for the “plants abroad” logic, SAP’s VAT determination logic has changed little. This is in stark contrast with the significant changes made to VAT rules and business models over the same period. With the aim of creating new sales markets and achieving cost savings, business activities are spread all over the world. Cross-border chain transactions with third parties or within a company (inter-company transactions) have become the rule rather than the exception. The above means that often practical solutions have to be found within the set-up of SAP regarding indirect tax. Phenix Consulting possesses practical experience and understands SAP's possibilities, but also its limitations and thus the capability to free up resources, reduce manual activities and manage risks. Program The following topics are covered in the course: • Developments in the technology market
This section will elaborate on developments and trends in the technology market that have an impact on the indirect tax function of organizations. Examples include changing business models, but also developments in the approach and processes followed by tax authorities.
• Indirect tax functionality in SAP Learn about the opportunities that standard SAP offers to support the Indirect Tax process, but also addresses the limitations of standard SAP.
• Practical work-arounds Discussing best practice work-arounds, but also risks and opportunities of these work-arounds on quality of the indirect tax process.
• Tax software Overview of software solutions (tax engines) available in the market including their advantages and disadvantages.
The training is interactive. Sufficient time is allocated for answering specific questions and issues that you encounter in your organization. A tailor made program is optional via our 'in-depth session' or 'workshop'.
Our offerings We offer the following models: 1. SAP VAT Basic Training - 4 hours The following key VAT concepts and functionalities of SAP and VAT will be discussed:
x Standard SAP design x Standard VAT drivers x VAT on Sales x VAT on Purchases x VAT on FI-Only
2. In-depth session In addition after interviewing and understanding your own operating business models and the design and implementation of SAP your current issues will be discussed and recommendations provided how to come to improvements 3. Workshop The workshop will be completely focused on your 'As Is' and how to get to the 'To Be'. We will provide insight in normative controls, practical workarounds and VAT tools available in the market (e.g. Vertex, OneSource, Meridian and Taxmarc). The latter includes the questions that should be raised during vendor selection. For pricing please contact us. Audience This training focuses on the Tax Function, (SAP) IT staff, finance staff, sales staff and Internal Audit. Contact For more information please contact: Phenix Consulting Ferry Geertman - Managing Director Mobile: +31 6 8379 0414
Portugal Fully automated monthly filing of Standard Audit File for Tax Purposes for companies on SAP
Background
The SAF-T standard, originally created by the OECD, is intended to give tax authorities easy access to the relevant data in a readable format. This leads to much more efficient and effective tax inspections. In 2008, Portugal introduced the Standard Audit File for Tax Purposes (SAF-T) and it became obligatory for entities with head office or a permanent establishment liable to Corporate Income Tax. Since 2013, these entities are obliged to submit billing data and logistic information on a monthly basis to the tax authorities in a specific format. SAF-T and SAP That has caused problems for many companies. The amount of data is large, and the extraction too complicated for a monthly submission of SAF-T files. Within a SAP environment it is very complicated to correctly configure the monthly SAFT report for Portugal and it will take significant resources and time to get the standard SAP report up and running in line with Portuguese tax authority's requirements. Last year 2 changes were announced in the output specifications which require again changes in SAP. For example, have you already implemented the digital signature for the sales invoices in Portugal? The final SAP code, including the 60+ OSS notes, was quite big (30,000+ lines). For one company we have imple-mented our tool as a temporarily solution because the SAP own solution using the DART process would have taken 6 months to implement. Although SAP released a new version without this DART process, certain companies consider our solution still a better fit as it is expected that the Portuguese requirements might change regularly. We have been able to amend our solution to new requirements including testing within a week. The extra advantage is reducing scarce IT resource time and continue to meet requirements going forward.
If you however decide to go for the SAP own solution the Phenix Consulting could provide testing support to ensure that the outcome is in line with the Portuguese pre-defined data request. About our solution Phenix Consulting has created a standalone tool that is using the relevant data from the SAP tables by which the required output reports are created which will be automatically transformed to a proper SAFT-PT XML file via MS Access. How to use in practice?
1. Outsourcing without any installation needed
The client provides data to Phenix Consulting, we return SAFT-PT XML file and subsequently the client submits the data file to the tax authority.
2. Insourcing via installation at company environment It is also possible to deliver the tool so it could be used in-house. The company’s employees are trained (easy to use) and no external data transfer is necessary. Requirement is that the company has MS Access.
3. Testing when SAP own solution is used During testing we will review whether the output is in line with the Portuguese pre-defined data request.
Insourcing via installation: Services overview
x Installation of our SAFT-PT XML tool x Definition of required source data from SAP and provide
guidance and documentation for downloading the source data from SAP
x Customize scripts to import all SAP source data and transform all source data into required output data
x Test results and update/change the scripts to specific requirements/settings
x Prepare the required SAFT-PT reports for submission to tax authority for the reporting month
x Provide user training of the tool x For an agreed period we will update the scripts in case of
any changes in the format of the SAFT-PT reports as published by the Portuguese tax authority.
x Documentation of the tool will be provided
Phone: +31 20 6586344 Mail: [email protected]
Internal Audit Data analytics as enabler for supporting the realization of business objectives
Objective
Internal Audit has to contribute added value in realizing business objectives and support performance improvements initiatives proactively. Both 'risk and control evaluation' as well as data analytics are competencies needed to realize such aim. These competencies have to be aligned to perform any activity effectively. Data analytics could be used to establish process improvement within and beyond Internal Audit (e.g. contribute value to planning). Internal Audit:
x performs controls testing and risk assessment on a
frequent basis (near real-time) and in an automated manner
x identifies risk areas before they have an impact on the business and is perceived as proactive in identifying risks and improvement opportunities
x transfers knowledge to business to achieve overall optimization
Case study credit invoices
1. Business Objective: Sales invoices should be paid within
30 days after issuance. Delay in cash collection has a negative impact on cash flow position
2. Risk description: Cancelation of sales invoices and issuance of new invoices leads to the situation that the business objective is not realized
3. Measure: Using data analytics, the date of the original invoice is compared with the cash receipt date of the newly issued invoice. The magnitude of late cash receipt and the number of days exceeding the payment terms are determined
4. Root cause: The root cause of the incorrect issued invoices was improper use of the system caused by insufficient knowledge of the employees
5. Remediation: Process owners followed a training and ERP system was modified to better support the invoicing process
6. Delegation: Internal Audit documented the solution and provided business management with the queries and analysis performed to enable business management to periodically assess the realization of the business objective
Our approach x Select a business process as pilot together with Internal
Audit and the business x Understand the strategic objectives of this process x Define the risk areas x Define the indicators that link to these risks (data-driven) x Define data needed to build data analytics solution x Build and implement the solution to measure the
indicators x Measure efficiency and effectiveness improvements of
Internal Audit x Share results with the business x Support business to incorporate the solution as their own
monitoring tool
In every stage of the project Phenix Consulting will challenge you using best practices to ensure a sound decision making process Our team x Ferry Geertman (RE, CISA) has a background in Applied
Mathematics. Ferry has vast experience in data analytics, including the design and evaluation of statistical samples as part of internal and external control. Ferry has extensive experience in advising about and evaluating of (IT)- risk manage-ment and internal controls for multinationals.
x Robbert Hoogeveen (MSc, CPA) is specialized in the design of solutions in which tax requirements, business processes, and system functionality are integrated, the implementation and the assessment of indirect tax functionality in SAP and tax engines, the design of indirect tax return processes, and the audit of indirect taxes by means of statistical sampling and data analytics.
Phone: +31 20 6586344 Mail: [email protected]
Phone: +31 20 6586344
Mail: [email protected]
Financial Statements Optimizing financial audit using statistical sampling
The advantages of a statistical sample The challenge financial audit is facing is to deliver high(er) quality with less man hours. The use of statistical sampling allows to give an unqualified opinion for the financial statements with minimal effort. Statistical sampling also provides a sound base for the identification of risks and therefore optimizes prioritization of audit work streams. If a sample contains errors, a quantifiable result in terms of precision and reliability can be quickly obtained. One of the great advantages of sampling is that both expected and non-expected errors can be identified. Case Study Verifying the correctness of costs is part of an annual audit. The sample is designed with a confidence of 95% and a precision (materiality) of 1% of the total volume of expenditures. These parameters determine the sample size regarding the total expenditures at 300 (monetary) units. The sample on costs is a proportionate part of this 300. If the sample contains no error, the maximum error in the costs is equal to the initial precision. In addition, other applications of statistical sampling are also possible. Our approach 1. Scope definition: determination of the population
and the construction (= which metadata are needed) of the population; requirements for the sample; determining what should be audited, including the documentation thereof;
2. Delivering data: data files are provided based on the suggestions from Phenix Consulting;
3. Selection of the sample: Phenix Consulting draws the sample using audit software and parameters are interactively established;
4. Review: the auditor assesses the individual transactions on the basis of the source data and determines the audit values of the transactions;
5. Quantification: if errors are noted Phenix Consulting quantifies the maximum impact;
6. Further research: Phenix Consulting can support in prioritizing next steps based on errors found.
Our Team x Ferry Geertman (RE, CISA) has a background in
Applied Mathematics. Ferry has vast experience in data analytics, including the design and evaluation of statistical samples as part of internal and external audit
x Hein Kloosterman (RE RA) used to be the chairman of the IT audit professional practice office and chairman of the statistical knowledge group of the Dutch Tax Authorities. Hein has extensive experience with the so-called integrated audits (single audits). Hein is involved in the education in accountancy, both at Nyenrode and the Erasmus University
x Robbert Hoogeveen (MSc, RA) is specialized in the audit of indirect taxes by means of statistical sampling and data analysis
Hein and Ferry are both members of the Steering Committee Statistical Auditing. This steering group is connected to the Limperg Institute and aims to promote the proper (effective and efficient) use of statistical methods and techniques in auditing and related audits of financial statements and reports.
LiNKiT Consulting and the KEY Group announce the
launch of their joint venture company, Phenix Consulting.
This company is based in Amsterdam and besides
this provides its services through branches in Berlin
and Cologne. Phenix Consulting provides specialized
SAP®
services and products from a tax, financial and
control perspective and has a clear focus on the
international market.
The strength of Phenix Consulting is built on bringing
together two businesses with different – but
complementary - strengths to provide integrated
business solutions for clients. The KEY Group’s
strengths lie where business control, information
technology and tax come together, whereas LiNKiT
Consulting has particular expertise in finance and
control - specifically in business consulting, SAP®
implementation and the development of innovative
business and software solutions.
The establishment of Phenix Consulting strengthens
our position in the international SAP®
consultancy
marketplace. All of our clients benefit from the
synergies realized by LiNKiT and KEY Group
working together – more so than either company
could provide individually. These synergies result
from our ability to exploit economies of scale, focus
resources & expertise and with a critical mass that
supports broader geographic delivery.
Closely related to this is our objective of innovative
SAP®
product developments and our mutual desire
to expand, balance, fill out and diversify our own
product lines. Phenix Consulting continually strives
to develop innovative SAP®
products and broaden
our product lines.
Examples of our
innovative products include:
The combined resources of the two companies allow us to deploy not just experienced, talented
consultants but also draw on our intellectual property & copyrights, and the strong leadership skills from both
the LiNKiT and KEY Group leadership teams. Please refer to the Phenix website to receive a complete overview
of 'who we are' and 'what we offer': www.phenix-consulting.nl
LiNKiT Consulting and KEY Group launch their Joint Venture
Phenix Consulting – international specialists in Tax, Financials & Controls
EBIEBICOCKPIT
SAF-T
SAF-TFILING
SAF-T Filing
Across the globe many multinational companies are facing challenges
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This is a solution for the
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