Indirect taxes are part of everyday life in many countries — we pay them on food, clothing, gasoline, vices such as alcohol and chocolate, and our mobile phones.
The levies have long been popular because governments don’t have to wait for a business to generate a profit to collect a tax; all that needs to happen is for a transaction to occur. Going forward, technology will further boost their popularity as digitalization has positively impacted the administration of these taxes.
For consumers, value-added taxes (VAT) and goods and services taxes (GST) — present in more than 160 jurisdictions — are the most common and visible touch points.
Businesses, however, must deal with a wide swath of indirect levies including excise taxes, customs duties, carbon taxes and more. And this list will continue to grow with the expansion of global trade as well as global trade agreements, adding more layers of complexity to the indirect tax compliance labyrinth.
In theory, the typical indirect taxes (VAT) are designed to be a cost to business only to the extent they are the end user of the good or service, with an offset or credit in their supply chain/production.
However, businesses must carefully manage these costs as unclaimed VAT offsets or disputed VAT refunds could hurt profitability. In fact, businesses identified indirect taxes as their No. 2 overall source of risk in the most recent EY Tax Risk and Controversy Survey Series, behind only transfer pricing.