Keeping the Framework Agile in a Changing Tax World

Building a solid and efficient indirect tax control framework (ITCF) is not easy and requires completing several steps and adopting a thorough approach. However, once developed, the ITCF requires further refinement and adjustments, primarily due to regulatory changes or business growth. That is why it is essential that the ITCF not be rigid, and that key stakeholders understand that developing the ITCF does not mean the work on it is done.

This final article in this series will explore why tax‐control frameworks must evolve, identify the core pillars of agility in the indirect tax realm, show how to embed agility into governance and culture, and provide a glance at what the next generation of tax controls will look like.

Risks of Rigidity and the Need for Structural Flexibility

By assuming a stable, change-free regulatory environment and building an ITCF on those assumptions, businesses risk having an obsolete ITCF within a relatively short period. Of course, this risk is greater for companies operating in multiple jurisdictions than for local small and medium enterprises. 

Nevertheless, building an ITCF without mechanisms for change entails multiple risks: processes may become misaligned with new rules, controls may be ineffective for new transaction types, staffing and technology may delay new tax triggers, and the likelihood of escalating disputes or penalties may increase. Moreover, all the previous hard work might go down the drain due to a lack of agility and flexibility in further development.

To put this into a different perspective. For an ITCF to be genuinely efficient, resist the test of time, and evolve into a mature control system, it must allow for continuous adjustment. When developing an ITCF, businesses must bear in mind that, to keep pace and reduce long-term vulnerabilities, they must abandon a set-and-forget mindset and embed structural flexibility from the early stages of development through to full operationalization, and beyond.

Core Pillars of an Agile Indirect Tax Control Framework

There are several core pillars to consider when developing an agile ITCF. First of all, the tax governance must support modular design. This means that the ITCF should consist of key components, such as tax strategy, process mapping, controls, monitoring, and reporting, that can be easily updated independently without requiring the redesign of the entire system.

Secondly, technology and data analytics must be integrated to allow real-time or near-real-time monitoring of transactions, controls, and exception flows. This assures compliance and serves as a monitoring and testing mechanism. Regarding monitoring and testing, the ITCF should include mechanisms to identify emerging indirect tax changes, such as new e-commerce VAT obligations, and to stress-test the control environment accordingly.

Additionally, the indirect tax control framework must not overlook the human element and the importance of continuous learning and improvement of key stakeholders and employees responsible for ITCF. This also applies to improving the system through constant periodic reviews, feedback loops, and update processes.

Finally, businesses must ensure that stakeholder alignment exists at all times and levels. This means that tax teams, finance, operations, IT, and external advisors must be connected, and roles and responsibilities must be clearly defined so that when change is required, the organisation can act swiftly. By respecting these core pillars, businesses ensure their ITCF grows from a static compliance exercise into a living system that keeps pace with change.

Making Agility a Core Governance Principle

Making agility one of the core governance principles means shifting from rigid-control mindsets to a continuous-adaptation mindset. To start from the top, at the board and executive level, the tax strategy must be periodically reviewed. Therefore, the ITCF should not be reviewed only at implementation, but must be revisited in light of regulatory, business-model, and technology change.

As mentioned in the Indirect Tax Control Framework: Purpose, Benefits, and Core Components article, the three-line defense model is typically used to clearly define roles and responsibilities, escalation routes, and ensure that authorisation pathways do not become bottlenecks.  

However, if in practice there are misunderstandings and miscommunication among key stakeholders, the agile system enables identifying those blind spots and updating the communication system or roles and responsibilities to be more effective and better meet real-life needs. 

Furthemore, in previous articles, specifically Tax Governance and Accountability: Who Owns the Risk and Responsibility? and Development of Effective Controls for Indirect Tax, highlighted tax risk and compliance awareness culture as essential for efficient ITCF. The same is true for the ITCF's agility, where culture plays a pivotal role. Employees and business-process owners must be alert to indirect tax triggers, understand that tax-control frameworks are dynamic, and recognize that adaptation is the norm rather than a one-off project.

Ultimately, if embedded properly, the agility becomes part of the governance DNA, ensuring that the tax control framework remains aligned with business evolution and regulatory changes.

Shaping the Next Generation of Tax Controls

With one eye on the current ITCF, businesses must also look ahead and recognize how the next generation of ITCF will be characterized. From this position, it is safe to say that even greater automation, integration, and predictive insight are becoming key characteristics. The transition from retrospective compliance to real-time prevention and forecasting is already happening.

Therefore, businesses will become increasingly dependent on technology such as process automation, machine-learning-based anomaly detection, and integrated dashboards linking tax-risk indicators with operational data.

Furthemore, the next generation ITCF will be developed under the design for change model, which means the controls will be constructed not only to address current risks but to accommodate future scenarios, including expanding into new jurisdictions or markets or changing business models. 

Additionally, a more transparent and collaborative model, such as a certified ITCF regime that enables closer dialogue between taxable persons and the Tax Authority, will be increasingly utilized. These changes in models reflect a shift from merely complying with rules to building transparency and trust between taxable persons and authorities. 

Conclusion

As we conclude our journey through the “How to Build an Indirect Tax Control Framework” series, it is clear that the final frontier is agility. The design and implementation of effective ITCF remain foundational. However, in the modern tax environment, the ability to maintain effectiveness as the rules and requirements change is what separates a forward-looking organization from those simply wanting to comply with current legislation.

Embedding agility into ITCF will ensure the system remains a strategic advantage in the years to come and that the tax becomes integrated into the business’s evolution, rather than trailing behind it.

Source: Thomson Reuters, New Zealand Inland Revenue, Co-operative Tax Compliance - Building Better Tax Control Frameworks, KPMG