Best practice Key Performance Indicators – measuring VAT compliance success

One of our NetSuite partners that helps businesses of all sizes achieve compliance with transactional taxes, including VAT, sales and use, excise, communications, and other tax types. Avalara’s Strategic Alliance Manger, Tariq Mahmood and Reece Duncan, Senior Manager within their Solutions Consulting team will explore automation in relation to VAT Compliance and demo Avalara’s VAT Reporting software.

We invited Avalara to provide some VAT reporting insights that would be helpful to businesses interested in the solution, especially if they’re finding the traditional, time-hungry financial tasks a challenge; from extracting data to checking invoices. It’s over to Alex Baulf, Avalara’s Senior Director of Global Indirect Tax to talk VAT compliance KPIs…

Whether you prepare VAT returns in-house, outsource indirect tax returns to a third party, or use a shared service centre or centre of excellence, how do you assess performance and what success looks like? It is certainly best practice to set Key Performance Indicators (KPIs) in relation to indirect tax compliance. While these can be localised at a country or regional level, it is recommended that KPIs are scalable to have a consistent policy and for benchmarking and ease of comparison, as well as to identify best practice or flag common areas of risk.

Key performance indicators in relation to tax can help measure the company’s or a specific team’s performance against established goals, which can be set in alignment with broader organisational goals approved by management and the VP/C-Suite level that oversees finance, accounting and tax risk management.

Examples of KPIs that we see businesses adopting include:

• % of VAT returns submitted on time
• % of VAT payments made on time
• VAT returns are accurate (using exception reporting to assess this)
• VAT return numbers reconcile to the General Ledger (GL), with variances explained
• implement strategies to reduce tax process costs
• post VAT to purchase ledger with relevant tax code within 5 days of receiving invoice
• report all VAT return/GL discrepancies at least 72 hours before submission.

Some of these success metrics are easy to measure and relatively straightforward to quantify, for example:

• penalties raised by tax authorities
• interest on late payments or assessed tax
• date of submission of returns (evidenced by filing receipt).

Other metrics may require more sophisticated data analytics and exception reporting to identify possible discrepancies, errors, and incorrect tax calculations. Some examples of checks on VAT data that businesses can carry out as part of the VAT or GST return preparation process (for example using an automated VAT return compliance solution like Avalara’s VAT Reporting) include:

• duplicate supplier invoice number
• unacceptable exchange rate
• invalid customer or supplier VAT registration number
• output VAT is greater than expected
• input VAT is less than expected
• VAT has been charged in error based on customer location.

As the direction of travel for VAT compliance is clear – it is the digital submission of transactional data in real time to the tax authority (via e-invoicing and e-reporting), the importance of getting the VAT calculation and reporting correct first time becomes even more important. Tax authorities will be able to run their own analytics, exception reporting and even AI and machine learning over complete datasets, not only identifying errors and discrepancies requiring further analysis, investigation or audit, but also gaining insights that can be used across different taxes and areas of risk e.g. customs duty, corporate income tax and transfer pricing. Businesses should act now to future-proof their indirect tax function and consider how technology can automate VAT processes and reduce risk.