As indirect taxes – value-added taxes, goods and services taxes (GST), sales taxes, excise and customs duties – are becoming more important to governments worldwide, tax collectors increasingly make use of technology to ensure companies comply.
The shift from corporate taxes to indirect taxes has, for example, brought about value-added taxes in so many countries that VAT and GST have become the third most important income source for governments, behind social security contributions and personal income taxes, according to KPMG research. And electronic reporting requirements and data extraction often support tax authorities’ efforts to track companies’ payments and conduct aggressive audits and investigations, according to a 2013 EY poll of indirect tax professionals in 86 countries.
Corporate tax, trade and finance departments, which are increasingly asked to help reduce costs, manage risk, facilitate processes and improve cash flow, have begun to tackle the large amounts of transactional data their companies generate. They’re also managing the wide variety of indirect tax filing requirements their company has to meet in different countries, according to an EY report on how to manage indirect tax data, that goes hand-in-hand with the poll results.
Many companies have adopted electronic invoicing and archiving solutions and outsourced their indirect tax functions to shared services centres that take care of filings in multiple countries. But frequently, tax authorities stay a step ahead by requesting increasing amounts of information, sharing it and comparing data from different businesses. “Tax and customs administrations are focusing more than ever on full compliance and using risk analytical tools to target their resources to tackle tax leakage and tax avoidance,” according to the EY report.
Filing requirements regularly aid tax authorities in their quest.
Large companies must often file multiple reports related to their VAT and GST payments, according to the EY poll. In at least half of the countries represented in the poll, these filings must be done electronically.
In addition to VAT/GST returns, companies must supply details about transactions, customers or suppliers in 44 of the 86 countries. Electronic filings are generally preferred to register for VAT/GST and record changes in registration details, such as a change in address or changes in business activity.
In 80% of the countries represented in the poll, authorities use electronic data extraction to perform tax audits.
Some companies have begun to upgrade their indirect tax strategy to better face the challenges. These upgrades involve operational, compliance and strategic aspects and tend to focus on data-based tools. Here are ten tips they’ve put into play:
- An internal tax and customs audit and analysis can highlight missed opportunities and potential exposures, prioritise remediation steps and improve internal controls and monitoring.
- Identify areas on the company’s enterprise resource planning platform that can improve electronic data capture at the point of transaction. Determine what the upgrade is supposed to accomplish: improved visibility, cost reduction, a better relationship with the tax administration or fewer risks.
- Work flow/calendar tools can spotlight compliance problems by tracking tasks that have to be completed for the company to meet filing and payment deadlines.
- Specialist tax software may be necessary to get rid of spreadsheets and perform tasks for which the company’s enterprise resource planning platform isn’t set up – for example, to automatically determine the taxes in each country where the company does business.
- Bring together everybody in the company dealing with indirect taxes and form a dedicated team that then collaborates with other teams in the company.
- Make sure scanning, e-invoicing or e-archiving software is fully VAT/GST compliant.
- Mobile dashboarding capabilities provide at-a-glance updates for key performance indicators across the entire tax performance spectrum, including tax rates, compliance status and liabilities.
- Diagnostic tools and data analytics can pinpoint weaknesses in indirect tax reporting and identify opportunities to improve performance. Companies can outsource this service or invest in in-house software.
- Make sure data are cleaned before they are analysed. Also, sharing data within a company can increase their accuracy.
- Align tax operations and compliance to overall corporate goals to ensure indirect taxes are managed effectively within a framework.
While tax authorities get more sophisticated about collecting indirect taxes within their borders, the problem of collecting indirect taxes from remote sellers has also been raised as part of the Organisation for Economic Co-operation and Development’s Action Plan on Base Erosion and Profit Shifting. The OECD is concerned about situations in which a company will have a significant digital presence in another country but not be liable for taxation in that country.
The OECD says in its discussion draft on digital economy challenges that remotely delivered digital goods and services create a VAT/GST collection problem and “often result in no or inappropriately low amount of VAT collected” because compliance by nonresident companies is “essentially voluntary”. While the OECD is still considering how to solve this problem, it is likely that any multinational solution will place further requirements on corporations to produce large amounts of data and will make indirect tax strategies all the more important.
Related CGMA Magazine content:
“Corporate Tax Burden Shifting to Indirect Taxes”: Corporate tax rates have decreased worldwide in the past six years to help countries attract investment, but indirect taxes are on the rise. So are tax audits and penalties as a source of revenue. Find out the six tax trends companies are likely to encounter worldwide.
“The Countries With the Most Business-Friendly Taxes”: In the past eight years, paying taxes has become easier and the tax burden lighter for many small and mid-size companies around the world, according to research by the World Bank and PwC. Find out which countries have the lowest tax rates and the least compliance hassles.
“Foreign Tax Collectors Threaten to Ensnare Internet Sellers With ‘Virtual’ Nexus”: As countries look to increase tax revenue, the concept of virtual permanent establishment may give them another tool to impose taxes on companies currently beyond their reach.
—Sabine Vollmer (email@example.com) is a CGMA Magazine senior editor.