Strategically managing indirect tax in Asia-Pacific
Companies no longer have an option to avoid addressing their indirect tax risks and opportunities due to the heightened level of internal and external scrutiny in today’s world of taxation.
Executives are now grasping the importance of indirect taxes which they rated to be the #2 tax risk of concern, behind only transfer pricing, in recent EY tax risk surveys.
As tax authorities embark on increased enforcement programs covering the spectrum of indirect taxes, unfortunately, many companies in Asia-Pacific have not yet placed a corresponding level of emphasis on indirect tax management and this oversight could lead to increased levels of potential risks and exposures.
How the indirect tax burden in Asia-Pacific compares
Companies have higher indirect tax burdens in Asia-Pacific than they may encounter in other parts of the world.
According to the OECD’s 2012 report, consumption taxes now account for almost 31% of all revenue collected by OECD governments and VAT/GST is the third most important type of tax.
The split of Asia-Pacific tax revenue collected from indirect taxes, such as VAT/GST, customs duties and other operational taxes, is dramatically higher:
- China and Thailand collect over 50% of total taxes from indirect tax sources
- Indirect taxes in 10 out of the 14 locations account for a higher percentage of overall tax revenue collection than the OECD average
A regional approach to managing indirect taxes – is it possible?
Organizations in Asia-Pacific are more susceptible to potential tax costs and penalties, as well as reputational risks, as many companies have not deployed sufficient resources and efforts to proactively manage and ensure compliance.
- Same region, different taxes and stages of development
It is no easy task to strategically manage a company’s indirect tax burden in the Asia-Pacific region. Asia-Pacific countries have a wide range of different indirect taxes that can create operational hurdles and result in significant tax costs if not managed appropriately. The different taxing regimes, even though in the same region, are all in different states of maturity and development.
- Leveraging local
But there are also a lot of similarities that can also be leveraged for those taking a regionally coordinated approach to managing indirect taxes.
This work requires a certain level of technical expertise but also needs to have clear ownership and accountability to achieve the desired objectives.
An investment in resources to manage Asia-Pacific indirect taxes should result in a much greater return as costs and risks are reduced through their proactive efforts to enhance indirect tax performance.
4 considerations and challenges for managing indirect taxes across Asia-Pacific:
1. Complex organizational structures
2. Significant and frequent regulatory developments
3. Lack of experienced indirect tax resources in Asia-Pacific
4. Limited systems visibility into the underlying transactions and data
3 aspects of indirect taxes to consider
1. Operational - Transaction processing, data capture, accounting treatment and indirect tax procedures
2. Compliance - Timely and accurate completion of a company’s indirect tax compliance obligations
3. Strategic - Experienced resources gaining a full understanding of the business and how the transactions should be treated and processed in the systems
Closing the gaps in indirect tax management
Based on our experience working with many clients around the region, this evolution is not a one-time set up but is part of a continual upgrading process of understanding, assessing and then proactively managing your Asia-Pacific indirect tax footprint.
For more information on the struggles and successes companies will face along the journey of managing their indirect taxes in this part of the world, download our full report.