Summary: As MNEs extend their reach to expand into new markets, they are encountering a range of complex indirect tax compliance obligations. With governments increasingly looking to indirect tax as a policy lever, things quickly get complicated.
MNEs are extending their market reach more aggressively than ever before.
With that extension in reach comes a new range of complex indirect tax compliance obligations.
The multinational indirect tax burden
MNEs’ finance, tax and legal functions may struggle to understand and control this wide range of indirect taxes due to their local nature and tendency to quickly change as governments increasingly use them as a policy tool.
The indirect taxes may include:
- VAT
- GST
- Other federal and local sales and business taxes
- Customs duties
- Excise taxes
Improve your indirect tax performance
MNE taxpayers can significantly improve their indirect tax performance in all phases of the tax life cycle by better managing their indirect tax function.
Advances in technology and process capabilities are providing opportunities that were not available even just two or three years ago. These new capabilities allow MNEs to strike a better balance between efficiency, control and value in managing indirect taxes.
As MNEs increasingly undergo financial transformations (which may include enterprise and resource planning (ERP) system implementations, rationalization projects, changes in tax or financial management and the adoption of a global compliance and reporting framework) it provides a rare opportunity to bring indirect taxes "into the fold."
Enabling the fully managed indirect tax function
An effective indirect tax control and management framework should aim to deliver a fully managed indirect tax function that enables high levels of efficiency, control and value.
The fully managed function enables, among others, the following characteristics:
- Visibility. What does our end-to-end VAT supply chain look like across all phases of the tax life cycle? Which taxes are payable, where, and what is the quantum of the obligation (VAT under management not VAT payable)? Who has responsibility?
- Control. The right level of control addresses the operational, strategic and compliance aspects of managing VAT/GST and aims at achieving 100% compliance — paying the right amount of tax at the right time to the right tax administration.
- Efficiency. Full compliance, using limited resources effectively.
- Value. Optimizing VAT recovery, working capital efficiency.
- Measurement. Developing and executing on appropriate key performance indicators for indirect tax, closely aligned to the business strategy.
Leading practices in managing VAT/GST globally
MNEs are using a range of leading practices to achieve this improved state of effective management of VAT/GST globally, including:
- Establishing an effective global indirect tax function at a number of different levels, including global, regional and local, where appropriate.
- Changing the role of the indirect tax function from the performance of necessary but lower value activities such as completing returns to performing higher value activities such as managing the end-to-end reporting process.
- Forging close relationships between a wide range of corporate departments (such as tax, legal, finance, IT and business units) to ensure indirect tax management is high on the corporate agenda.
- Centralization via the use of mechanisms such as shared service centers (SSCs).
- Leveraging innovative technology tools to standardize and automate accounts payable (AP) and accounts receivable (AR) processes in order to increase accuracy and reduce the time taken to complete returns, diagnose problems, and identify and test planning opportunities.
- Establishing and maintaining good tax administration relationships, especially in those countries where indirect taxes are a known tax administration "hot issue" and where the appropriate levels of in-house control of VAT/GST compliance can reduce audits, penalties and overall company risk rating.
- Outsourcing/co-sourcing compliance opportunities with third party providers to generate process efficiencies and take advantage of local expertise.
What we heard from you
MNEs are increasingly aware of the importance of managing indirect taxes. They are recognizing the impact they have on the business, in terms of the cost of getting it wrong and in terms of the impact on working capital even when the end result is meant to be neutral. In so doing, corporate managers are beginning to understand that it is not the net balance that is important but the gross total of indirect taxes that has to be managed in the business.
Formulating an indirect tax management structure presents many challenges. In reality, this is a recognition of the pervasive nature of VAT/GST across all areas of the business and the fact that managing indirect taxes globally crosses numerous units/departments, companies and functions.
Many of the global companies we spoke to are addressing the challenges of managing indirect taxes effectively with exemplary insights and methodologies. Yet consistently they told us that their ideal framework is still some way off.
The VAT/GST control and management framework is not a single model for organizing the management of indirect taxes. Rather, it is a way to ensure that the major areas of indirect tax management are addressed and that they are aligned to the MNE's overall business strategy and approach to managing risk.
Aspects to effective management of indirect taxes include:
Recognizing that there are three major areas of focus: strategic management of the tax (planning and controversy), operational (accounting for the tax) and compliance
A clear allocation of responsibilities between Tax, Finance, IT and the business units
Raising the profile of indirect tax across the organization as an area to provide value, efficiency and control
Setting clear objectives for indirect tax for each business unit, aligned to the overall strategy of the organization
Measuring indirect tax performance using appropriate key performance indicators
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