Indirect tax can drive costs for shared service centers: executives are increasingly looking to SSCs for tasks as diverse as customer service, property management and human resources. And, though the reasons may vary, one key consideration is often absent from the discussion: indirect tax.

AuthorCornelisse, Richard
PositionTax Strategy - Shared service center

An arguable upside of the global credit crisis is that it provided many companies with an added impetus to look for ways to improve processes, manage costs, increase functionality, raise customer satisfaction, eliminate redundancies and extract additional value. One approach growing in popularity is migration to a shared service center (SSC) model.

About 27 percent of the respondents to a recent Ernst & Young survey of global executives indicated that they plan to increase their use of SSCs over the next year for functions ranging from property management to customer service, from information technology software and network management to human resources and accounting.

As varied as the drivers for this model and its uses may be, one common denominator is often missing from the discussion: indirect tax. And although these tax considerations may not be among the issues that drive a shared service decision, tax certainly can lead to some significant and costly challenges.

That is particularly true of the value-added tax (VAT), which hits a number of disparate points within the enterprise as diverse as finance, procurement, information technology or human resources.

For multinational companies, these touch points also can arise in a wide range of countries and taxing jurisdictions, As multinationals move steadily toward the shared service model to meet their varied objectives, the responsibility for indirect taxes migrates with them, primarily in the form of VAT and goods and service tax (GST).

Complexity in managing these taxes increases exponentially when cross-border activities are involved, especially in today's VAT environment, where all too often controls are external, processes are manual and procedures are not documented.

Historically, the activities around transactions giving rise to indirect taxes have been handled by in-country entities more familiar with local regulations and compliance requirements and accustomed to the rules and obligations for invoicing, liability, rates, accounting and reporting specific to each of the myriad jurisdictions.

But what happens when VAT and GST functions are transferred to an offshore shared service center in some faraway location? How complex will the operational requirements be when one SSC is dealing with countless transactions that originate in multiple countries and languages and fall under the auspices of a variety of cultures and authorities?

Getting ahead of possible problems before they arise in practice is one critical way to make sure that the company reaps the benefits intended from an SSC migration. VAT needs to move to the top of the priority list whether a new SSC is being designed or an existing one evaluated.

Examining Risks and Rewards

Since cost savings are among the most common reasons for an SSC, companies often go to what are considered low-wage countries such as the Philippines, Hungary, Poland, India and the Ukraine. An additional upside of these countries has been the availability of educated and multilingual talent.

Often overlooked, however, is a full understanding of the processes and controls needed to effectively and efficiently manage indirect tax. With this knowledge gap come important considerations:

Inability to comply with local VAT rules. Although the root cause will vary from one company and country to another, the risk...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT