Knowing the indirect tax rules for your business operations and applying them correctly are key actions in avoiding assessments and penalties. But taxpayers and tax administrators do not always agree on the rules.
Complex local legislation, evolving business models and widely different compliance obligations in different jurisdictions add to the risk of disagreements.
Inside, we examine the challenges that taxpayers face around the world. We also outline some leading practices for avoiding and resolving indirect tax disputes and for preparing for successful tax audits.
VAT/GST and customs—high on the tax agenda
In recent years, issues related to managing indirect taxes — such as VAT, GST, customs and excise duties — have risen higher on the corporate agenda. What factors have brought these taxes and duties to the attention of C-suite executives?
Indirect taxes are growing in importance as sources of tax revenues and as instruments of governmental policy. As a result, tax and customs administrations are focusing more attention than ever on indirect tax compliance and enforcement.
At the same time, the “fair tax” debate has turned a spotlight on corporations' tax affairs generally. Initially, attention focused on direct taxes, the debate has now expanded to include questions such as:
- How should VAT/GST apply to cross-border transactions and the digital economy?
- What is the interplay between customs valuation and transfer prices?
These topics are drawing far greater attention not only from tax administrations but also from regulators, the media and the general public. Large tax assessments can damage corporate reputations as well as profitability.
Businesses around the world are under pressure to improve financial performance. And they are increasingly aware of the intense scrutiny they face from a range of internal and external stakeholders.
In the process, they are asking more of their tax and finance functions, challenging them to reduce risks and meet the company's obligations more effectively, using limited resources.
These functions are being asked to go beyond tax compliance and tax accounting. They are being asked to contributing to companies' financial performance by reducing costs, facilitating processes and improving cash flow.
Increasingly, tax and trade functions are also actively participating in strategic decision processes to provide financial and nonfinancial impact analyses.
Indirect tax controversy matters
The consequences of controversy – and the business drivers for avoiding or resolving it – are particularly strong for indirect taxes. Getting everything right all the time and in every country is hard.
Errors, uncertainty and disagreements abound – often leading to assessments, penalties and disputes that go far beyond the tax or finance function.
- A dispute with customs may not just be a tussle over taxes - it can mean genuine business disruption: Customs can seize a trader's goods or shut down operations. Even a delay of a few hours for an unexpected customs inspection can breach contractual conditions for just-in-time deliveries or hold up valuable production schedules.
- Uncertainty over charging VAT/GST can leave the wrong party out of pocket: Most VAT/GST registered businesses are not the final taxpayers —rather they collect and remit the tax due from their customers, effectively acting as tax collectors. Not charging tax, or not charging the right amount of VAT/GST at the time of sale can be costly. If tax is later deemed to apply to the sale and the charge cannot be passed on to the customer, the tax collector can become the taxpayer – funding the VAT/GST out of its profits.
Actively engaging with the tax agenda, anticipating future audit activity and developing a strategy for dealing with controversy can reduce the impact of inspections on day-to-day operations and improve audit outcomes.
Managing indirect tax controversy
Often, there is a lack of clear ownership around indirect taxes, particularly from a compliance or financial statement perspective. No one person or department is responsible for the end-to-end process, and different parts of the business may expect others to pick up the responsibility, resulting in operational gaps.
Tax, trade and finance functions must collaborate in this process to ensure there are no weaknesses and gaps. They must work with one another and with other functions within the organization (for example, legal and IT) and with third parties (for example, customs brokers).
C-suite executives can also play a key role in ensuring that indirect taxes are managed responsibly within their organizations by assigning responsibilities and resources to these functions.
Managing indirect taxes requires clear responsibilities, efficient systems, documented processes and robust controls.
It involves thinking about controversy in every phase of the tax life cycle: tax compliance, tax accounting and tax planning - to identify and rectify issues before they become the subject of a tax dispute.
To better equip your company with proactive planning, we offer insights and in-depth analysis on a number of issues influencing global indirect tax developments.