Actively managing indirect tax costs should be a central part of any taxation strategy. Even if you choose not to claim VAT/GST refunds or reduce customs duty costs, those decisions should be based on deliberation and knowledge of your options and the likely outcomes.
Where are you on the journey?
The first step on the journey toward an effective refunds strategy is to identify where you are on the road. You can then map where you want to be — and the best way to get there.
With indirect tax management, all roads do not lead to Rome! The best approach can vary greatly from business to business, and finding it will depend on many factors, such as the taxes involved, the countries where you operate, your business model, your technology and the cost of finance. The most effective approach often depends on finding the right balance between the value of refund opportunities and the costs of obtaining them.
Developing a refunds strategy road map
You may be at different stages of the journey for different indirect taxes. You may already have fully automated processes to identify and track domestic VAT/GST credits, but you may not take advantage of all your opportunities to use free trade agreements or to recover foreign VAT/GST. An effective strategy may require different approaches for different taxes, depending on the circumstances. In all cases, you will need to assign responsibilities and gain visibility into your tax issues and opportunities. You can then decide how to act and adopt systematic processes, measures and controls to review, implement and monitor what you are doing. And you will need to keep those decisions under review to take into account disruptions in business models, advances in technology, and changes to tax laws, obligations and regulations.
Questions to consider
Identifying the key risks and opportunities, resources and actions for each tax
Identify the indirect taxes you manage and the significant risks and refund opportunities for each.
Identify where you are and where you want to be.
Consider the best options and the likely benefits and costs.
Compare alternatives. Make recommendations.
Agree on the strategy and validate the resource needs, budgets, benefits and actions to take.
Set key performance indicators. Obtain buy-in from other parts of the business.
Implement your strategy. For example, make retrospective claims, restructure operations and implement automation.
Implement appropriate controls to monitor performance.
Keep your strategy under review to take into account changes, e.g., in the business, in tax and customs legislation, and in technology.
Taking technology into account
A successful indirect tax recovery exercise is likely to hinge on your ability to deal with large numbers of transactional line items, contained in large data files. The size of the task can seem daunting, and undertaking it may not appear cost-effective. An indirect tax refunds strategy, therefore, is likely to include the evaluation and implementation of tax technology. This may include tools supplied by third-party vendors, such as tax reporting or workflow management technology. And you may want to explore how to enhance and adapt in-house tools such as enterprise resource planning (ERP) systems. Objectives may include improving tax data quality, automating tax reporting, shortening processing times and enhancing tax business intelligence to drive efficiencies and decrease risks.
Some places to explore
The first step in identifying hidden costs is to know where to look. Gaining visibility into what the business incurs and how it handles the amounts is key. This can require a thorough analysis of the company’s ERP data, but you may need information from other reporting systems, even third parties. In earlier chapters of this report, we identify specific considerations for recovering foreign VAT/GST, dealing with domestic tax credits, and rebating and reducing customs duties, and excise taxes. The table gives some examples of areas where trapped and hidden VAT/GST may be found:
|VAT/GST refunds, credits and rebates — common issues to review|
Travel and entertainment (restaurants, hotels, car hire, and audiovisual and room hire). Can we identify the VAT/GST? Can we claim it? Is the documentation good? Is the domestic VAT/GST claimed? Is the foreign VAT/GST claimed?
Accounts payable. Have we missed claims or overclaimed through processing errors? Is our documentation good? Are any accounts showing VAT/GST where we wouldn’t expect it? How long does it take to authorize invoices? Do delays damage our right to recovery? Do delays hurt our cash flow?
Intercompany charges. Have we been charged VAT/GST? Why? Is it really chargeable? Is it recoverable? Can we mitigate all or part of the tax?
Foreign VAT/GST. Why have we been charged? What are the goods or services? Is the VAT/GST charge correct? Is it recoverable? Do we have a VAT/GST obligation in this country?
Bad debts. Are we reducing our VAT/GST output tax for bad debts? Do we have a process? Are we doing this in every country?
Global contracts. Is the correct VAT/GST being charged? Is it being passed on? Is it being recovered?
Profit and loss (P&L). What unexpected VAT/GST costs are attached to expenditures? Is this correct? Why is it not recoverable? Do we have a VAT/GST obligation? What could we do differently?
Balance sheet. Are all the VAT/GST receivables on our balance sheet viable? When are we likely to get repaid? What are our receivables costing us?
Building the team
Assigning roles and responsibilities and establishing performance targets and benchmarks are crucial to developing and implementing an indirect taxes refund strategy. As indirect tax director, trade director or leader of the tax function, you may take the lead. However, you will need buy-in and contributions from people and systems across your organization, not only to identify likely crunch points and opportunities but also to remain aware of future plans that may affect your strategy. Key functions are likely to include:
- Tax and legal
You may also need to look outside your country and organization for information, services, technology and know-how.
Why act now?
Managing indirect tax refunds, credits and rebates may not be a cutting-edge topic. After all, many of the methods for driving indirect taxes out of the P&L and improving working capital are not new. But business is undergoing constant change. The approaches and decisions of the past (even a few years ago) may no longer be appropriate based on recent developments in tax, business and technology. Taking a fresh look at how you deal with the fundamentals can bring surprising rewards. Some key factors:
- The economic landscape In recent years, many companies have faced increasing pressure to improve financial performance and manage working capital more effectively. This trend started with the economic downturn and has intensified in some sectors as a result of digital disruption. By reducing VAT/GST and duty costs and pursuing credits and refunds more persistently and cost-effectively, the indirect tax function can play a valuable part for the whole organization.
- More indirect taxes to manage A global business may have more indirect taxes to manage and more opportunities to mitigate them. Globalization of the supply chain may lead to more cross-border movements of goods and additional duty costs. Or the employees of a multinational corporation may travel to more countries and incur more foreign VAT/GST on hotels and restaurants than in the past. As these indirect costs increase, so do the benefits of acting to avoid or rebate them. That may change the decision about whether an action is worth pursuing.
- The changing indirect tax landscape Legislative change and changes in world trading relationships are also contributing to the need for global companies to manage indirect tax costs more effectively and to seize opportunities. For example, the introduction of VAT/GST in India and the Gulf Cooperation Council may significantly increase the taxes that flow through the accounts of companies that operate in these regions. With global trade, a new free trade agreement or a new customs code can significantly affect the duty costs for businesses that trade between affected countries.
- The changing direct tax landscape Actions related to the wider tax agenda can also influence indirect taxes. In recent years, tax administrations have focused on preventing base erosion and profit shifting, resulting in a greater emphasis on permanent establishment status and intercompany supplies. As a result, customs values may face greater scrutiny as governments collect more transfer pricing information. The focus on local presence may require foreign traders to register for VAT/GST locally more often, perhaps boosting input tax recovery in some countries while jeopardizing past claims in others.
- Greater visibility and scrutiny in the digital age As customs and tax administrations demand real-time data, taxpayers may need to refine their reporting processes. This requirement can be onerous, but it can also bring benefits. It may provide greater visibility into the indirect taxes incurred and where they sit in the organization, allowing the company to devise new strategies to drive out costs.
- Technology-driven changes to the “go/no-go” decision The widespread use of technology is probably the most significant development to shape a company’s indirect tax refunds strategy. Data analytics, robotic process automation and benchmarking programs are changing the cost-benefit equation for credits, rebates and refunds by allowing companies to collect, analyze and process data from more sources more quickly, accurately and cheaply. Previously, making and defending a claim may have cost more than the tax involved. But that calculation may no longer hold true. The indirect tax function can also take advantage of technology adopted by other parts of the organization. The introduction of robotic processing for company travel claims may change the decision about whether and how to recover foreign VAT. Costs can be reduced — and benefits enhanced — when eligible costs are identified in seconds through optical recognition technology rather than in days or weeks through laborious after-the-fact manual processing. Besides boosting the efficiency of refund claims, tax technology can improve accuracy. Claims will stand up better to tax authority scrutiny, making it likelier that amounts will be received on time.