With the Holiday Season nearly upon us, we look at some of the key points that businesses with 12/31 year ends should be considering before the punch and silly hats take over our lives. Indirect Tax has often taken a backseat during the year end process and that may need to change as these taxes become more and more important.
1. Transfer Pricing Adjustments
As Q4 comes towards a close, many businesses may be thinking of making adjustments to inter-company pricing in order to meet targeted profitably levels around the world. Businesses should be aware that there can be significant challenges for retrospective pricing adjustments and that even prospective changes in import values may trigger questions from a Tax Authority. Residual Profit Split Methodologies also carry significant risks and the true underlying valuation of services can be hidden. Adjustments made after 12/31 that are booked in that final year end must also have the indirect tax impact assessed and reported. Too often we see inter-company adjustments be unreported for VAT purposes.
2. Balance Sheet Reconciliations
Large balance sheet VAT values (DR or CR) should be appropriately cleared down and any material unreconciled items clarified. Judgment calls may need to be made in respect of large VAT assets that have not been recovered to determine if a write down of the asset due to impairment is required. Any balance sheet item over 6 months old that has not been settled or recovered needs review.
Many countries allow for VAT to be recovered prior to payment of an AP invoice. Business should consider whether an accrual for VAT incurred in Q4 but not posted until Q1 needs to be undertaken in order to present a true and fair year end representation. Accruals often need pre-approval or may not be allowed at all, however, businesses should examine the process for recovering VAT on purchases to ensure it is as efficient as possible and minimizes cash flow impact.
4. Auditor Interaction
US audit firms are becoming savvier when it comes to their reviews of balance sheet VAT accounts. Errors or omissions in VAT accounts are often as a result of a flawed or weak process in another part of the business. Being able to proactively address VAT adjustments or issues with your external audit team will give them comfort on what can be a large working capital item.
5. Upcoming Year Priorities
Finally, look ahead now to start determining indirect tax priorities. With all that goes on at year end, you’ll suddenly find that it’s February and the year is 1/12th complete. Have a plan and work it effectively over the year.