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1. Indirect Tax Risk Management
KEY Group: a Phenix Consulting company
By Richard Cornelisse
December 2015

2. Our seasoned professionals
Richard Cornelisse
Robbert is a chartered accountant with more than 30
years experience and worked at the Dutch tax
authority and then moved to Shell where he had a
lead role working on indirect tax process and
technology across the group globally.
Robbert has managed numerous global projects and
has worked extensively in designing Sarbanes-Oxley
control frameworks, implementation of multinational
SAP systems, implementing global SAP/Sabrix
implementations.
Richard is a tax lawyer with more than 22 years
experience in advises multinational businesses in
improving the efficiency and effectiveness of their
Indirect Tax Function and Tax Control Framework.
Richard started his career working as manager at
Arthur Andersen and then became a partner in EY
where he led the indirect tax performance team for
Netherlands and Belgium. He specializes in the tax
aspects of financial transformations, shared service
centre migration, and post merger integration work.
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Managing Director
Phenix Consulting
Robbert Hoogeveen
Managing Director
Phenix Consulting

3. KEY Group: a Phenix Consulting Company
A selection of our knowhow to choose from
Indirect tax specialists on a temporary basis who work on a companies own premises such as
taking part of the current (indirect) tax or finance team on a sub-contract or temporary basis.
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4. KEY Group: a Phenix Consulting Company
Table of contents
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Step Topic Page
Methodology 5
Executive summary - senior management buy-in 6
Define Indirect tax objectives 7-13
Measure Zero measurement methods 14-22
Measure Review by internal audit 23
Analyze Zero measurement findings and root cause 24
Control Design VAT risk matrix 25
Control Design VAT control matrix 26-27
Improve Write business case and problem statement 28
Improve Tax strategic plan 29-34
Overview Where you are and where you want to go 35

5. KEY Group: a Phenix Consulting Company
Methodology
• Define - high level process and objective(s)
• Measure - data: collection plan and implementation
• Analyze - zero measurements findings and root cause analysis
• Control - control methods
• Improve - solution: selection and implementation
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6. KEY Group: a Phenix Consulting Company
Executive summary - senior management buy-in
6
If you want to improve quality, you have to first understand what senior management thinks is
important, and what senior management thinks of you

7. KEY Group: a Phenix Consulting Company
Define - indirect tax objectives
• The indirect tax objectives should create, protect and optimize value in the range of
company ’s business objectives
• The tax function should ascertain proper implementation and determine the impact of
changes in businesses, laws and regulations on implemented tax planning
• VAT should be considered in every aspect of a migration process, from concept through
completion and beyond
• Technology-related tax risk: understand and address the potential harms and benefits of
(new) technology
• Commit to pay tax in accordance with all relevant laws and regulations in the
territories of operation
• The objective of the indirect tax department is to minimize unnecessary cash out flow of
output VAT and the complete deduction and reclaim of input VAT where possible
• When executing this objective the cash flow position must be taken into account and no
additional risk on VAT audits must be created that exceeds company’s risk appetite
• Sustain a good and honest working relationships with the tax authorities
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8. KEY Group: a Phenix Consulting Company
Define - risk management objectives
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9. KEY Group: a Phenix Consulting Company
Define - business risks translated to indirect tax
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10. KEY Group: a Phenix Consulting Company
Define - strategic risks
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• Non-routine and significant business transactions that are always a high risk area from an
indirect tax perspective:
• Share issues or sales
• Migrating to a new jurisdiction
• Reorganisations
• Acquisition or disposal of any business or part of a business
• Acquisition or disposal of real estate
• Financial transformation
• Part of the business is outsourced (e.g. a Shared Service Centre or accounts payable/receivable
to a third party service provider)
• Other financial transactions
• VAT should be considered in every aspect of the process, from concept through completion
and beyond
• Managing by design — looking at any process or transaction from end to end and factoring
in all the requirements and controls essential to designing and optimizing a compliant VAT
process

11. KEY Group: a Phenix Consulting Company
Define - financial and compliance risks
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• The correctness of VAT reporting is checked only afterwards by the tax authorities
• Non compliance could result in that over many years an assessment can be levied
• Depends on country’s assessment period: NL is five years
• Increased with interest and penalties
• Penalties for incorrect invoicing can be a percentage of the turnover
• Take for example the risk when incorrectly the zero VAT rate is applied
• The supplier is responsible for ensuring that all the conditions for applying the zero VAT rate are
met
• If not, the tax authorities will seek to recover tax due from this supplier via a levy of a tax
assessment
• If the applicable VAT rate is 25%, the tax assessment will be 25/125 of the consideration charged
• This assessment has to be increased with interest and penalties to determine the total tax burden

12. KEY Group: a Phenix Consulting Company
Define - operational risks
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• Hidden factory or hidden operation definition:
• The rework and cover ups, the hours and days of wasted time in a company of people
who constantly correct mistakes (unnecessary rework)
• It is about extra man-hours, additional costs due to rework (credit/debit notes) and
retrospective corrections and/or disclosures
• During assessment of any solution:
• Determine the amount of increase of workforce efficiency
• How much rework is avoided
• Risk exposures are decreased

13. KEY Group: a Phenix Consulting Company
Define - materiality of indirect tax risks
• Materiality and size of tax risks:
• Absolute amounts, VAT complexity and change
• Reputational risks:
• Tax authorities (e.g. horizontal monitoring agreement)
• Public domain (e.g. response of the public when failure is disclosed)
• Suppliers (e.g. impact on commercial relationship when invoices are not paid)
• Customers (e.g. impact on commercial relationship when invoices are incorrect)
• External auditor (e.g. impact of errors on financial reporting and shareholders’ value)
• Tax risk appetite
• What amount of assessment is still considered an acceptable tax audit outcome
• Having defined acceptable levels of risk leads to resources not having to spend time on further
reducing risks that are already at an acceptable level
• Zero measurement - identify key indirect tax risks:
1. VAT throughput
2. Statistical sampling
3. Data analysis
4. ERP review
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14. KEY Group: a Phenix Consulting Company
Measure - the key numbers under management
Example of a Dutch MNC
• Total annual NL VAT cash throughput (input plus output VAT): EUR 2.8 billion
• Errors in output and input VAT have a direct impact on EBITDA (margin erosion)
• 1% +/- adjustment is material and impacts shareholder’s value
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15. KEY Group: a Phenix Consulting Company
Measure - understand the impact
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Example US MNC

16. KEY Group: a Phenix Consulting Company
Measure - understand the top VAT risks
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AP VAT example

17. KEY Group: a Phenix Consulting Company
Measure - understand ERP VAT errors
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SAP example
• Ineffective use of the proper partner functions in SAP for a supplier who provides services in
multiple countries and invoices VAT locally
• Incorrect derivation of VAT registration numbers for cross-border transactions caused by
incorrect SAP configuration
• Missing/improper VAT registration numbers in customer master data, such that invoicing
requirements are not satisfied for cross-border transactions
• Master data is adjusted and tested in the test environment, but the changes are not reflected
in the production system
• The logic of the tax code structure is disrupted by VAT rate changes. This can be mitigated
using the correct SAP configuration
• When performing reverse charge bookings, VAT rate changes do not get changed. For
cross-border A-B-C transactions, a VAT mismatch between the VAT on procurement and the
VAT on sales arises for party B
• Blocked iDocs (electronic interface documents) because of errors in the OBCD design
• Suppliers with invoices in other currencies and the VAT amount shown in Euro. This results
in an incorrect VAT amount due to an incorrect FX conversion

18. KEY Group: a Phenix Consulting Company
Measure - understand process errors
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VAT determination of incoming invoices/SAP example:
• The purchase order (PO) and the vendor invoice are used to determine the VAT treatment of
incoming invoices
• Vendor invoice data is in general not available in SAP
• Incoming invoices are often still processed manually
• AP clerks, who are not VAT experts determine the VAT treatment and reporting
• Detective controls have be set up to check whether this is done correctly
• Labor-intensive and poses a major area for VAT errors
• When an incorrect VAT result is caused by the incorrect data in the PO, the remediation
takes place via updating the PO with correct data and re-processing the related transactions
(goods receipt, etc)
• Workforce inefficiencies due to the hidden factory
• The AP clerk often fully relies on the purchase order and is unaware that this purchase order
might no longer reflect the actual situation
• Vendor decided to execute the transaction differently from what had been initially agreed upon
• Deliver from another country as locally the goods were not in stock

19. KEY Group: a Phenix Consulting Company
Measure - statistical sampling
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Statistical sampling:
• Quick insight into the level of tax risks by selecting a few elements (euros)
• The reliability of the composition of tax items can be determined to a high degree
of certainty
• On the basis of identified errors in the sample, the amount of the tax assessment
can be calculated (as if performed by tax authorities)

20. KEY Group: a Phenix Consulting Company
Measure - sampling actions
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The steps to calculate the exact amount of exposure

21. KEY Group: a Phenix Consulting Company
Measure - data analysis
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• Data analysis on transactional and master data from the ERP system
• Sales, purchase and/or general ledger transactions
• Review of automated VAT decisions by the ERP system or manual VAT decisions by
employees
• Define objectives:
• Cost reduction: by identifying potential cost savings and limiting expenses (for instance
by tracing VAT that was erroneously not deducted)
• Risk analysis: tracing incorrect VAT determination or reporting incorrect returns and/or
saving opportunities
• Compliance: by identifying possibilities to improve the quality and efficiency of internal
control
• Understanding the supply chain model of the organization and the VAT risks and opportunities
that come along with the implemented model
• Irregularities or opportunities in the transactional data is checked by subject matter experts

22. KEY Group: a Phenix Consulting Company
Measure - example SAP review
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• Define objective: highlight where the VAT configuration could be improved or if additional
control measures should be added to the business’s Tax Control Framework
• Check proper working of the implemented SAP VAT configuration, identify where errors
irregularities occur or opportunities exist in the company’s SAP set up:
• VAT numbers
• Foreign VAT registrations
• Plants abroad
• Tax procedures
• Intercompany/iDoc
• VAT registration number selection for customers
• Tax code structure
• EU code set up
• Tax tolerance
• GL accounts for tax
• Deferred VAT
• VAT condition records

23. KEY Group: a Phenix Consulting Company
Measure - review by internal audit
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• One of the objectives of Internal Audit is via a risk based methodology to provide
comprehensive assurance to the Board and senior management that companies’ material
risks areas are managed efficiently and effectively
• Built the internal business case for change via an objective review by internal audit

24. KEY Group: a Phenix Consulting Company
Analyze - root causes
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Some benchmark examples
• After measure the magnitude of the problem(s), determine now why the problem exists, and
generate a set of solutions to avoid future issues
• Set up a risk register that contains all identified inconsistencies (number, name of the risk, risk
definition, risk category and the risk owner)
• Identify the root cause of the problem(s) and add to risk register

25. KEY Group: a Phenix Consulting Company
Control - design VAT risk matrix
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AP VAT example

26. KEY Group: a Phenix Consulting Company
Control - design VAT control matrix
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27. KEY Group: a Phenix Consulting Company
Control - VAT control matrix
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• The designed VAT risk matrix shows the risks that need to be managed
• Design VAT control matrix:
• Control objective
• Risk that is managed
• Guideline control
• Testing
• Process ownership
• To illustrate high level examples ‘sales system’ and ‘working trade capital’ controls

28. KEY Group: a Phenix Consulting Company
Improve - business case and problem statement
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• When sponsorship is needed from the business or senior management in order to implement
solutions
• The risk register and the solution selection should be used to write:
• a business case
• a problem statement

29. KEY Group: a Phenix Consulting Company
Improve - tax strategic plan
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A plan or method for obtaining some goal or result. Identify key processes and measure their
effectiveness and efficiency, and initiate improvement of the worst performing processes:
• Group business strategy and indirect tax objectives
• Risk management
• Governance and performance
• Strategy oversight and sponsorship
• Management reporting of indirect tax risk
• Relationship with tax administration
• Indirect tax objectives and key performance indicators
• People and organization
• Roles and responsibilities and reporting lines
• Resourcing
• Training
• External tax advisors
• Alignment with business units

30. KEY Group: a Phenix Consulting Company
Improve - tax strategic plan
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A plan or method for obtaining some goal or result. Identify key processes and measure their
effectiveness and efficiency, and initiate improvement of the worst performing processes:
• Process and controls
• Indirect tax planning and significant business transactions
• Indirect tax compliance and financial reporting
• Internal auditing of indirect tax
• Technology and data
• Finance and business systems and data
• Indirect tax systems
• Workflow information and management
• Reporting and work-papers

31. KEY Group: a Phenix Consulting Company
Improve - a roadmap for a tax strategic plan
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32. KEY Group: a Phenix Consulting Company
Improve - examples of strategic tax objectives
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33. KEY Group: a Phenix Consulting Company
Improve - examples of strategic tax objectives
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34. KEY Group: a Phenix Consulting Company 34
Improve - examples of strategic tax objectives

35. KEY Group: a Phenix Consulting Company
Where you are and where you want to go
35
A roadmap to indirect tax function effectiveness:
• Why is management necessary and what needs to be done?
• How to realize objectives via best practice approaches, tools and methodology
• How to increase indirect tax function effectiveness
• Realizing senior management buy-in
• Writing a business case, problem statement and calculate Return on Investment
• Planning of non-routine transactions
• Indirect tax strategic plan
• Templates for VAT strategy plan
• Tax control framework
• Risk management
• Data and technology including VAT and SAP
• ERP systems and tax engines
• When is standard SAP (in)sufficient
• SAP implementation
• Reporting