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Globalisation and constant changes to VAT/GST regimes are adding to the tax complexity burden. Charlotte Rushton of Thomson Reuters considers how businesses should respond

This article was first published in the October 2013 International edition of Accounting and Business magazine.

According to KPMG’s 2013 Benchmark Survey on VAT/GST, two-thirds of respondents in Europe, the Middle East and Africa and one-third in the rest of the world believe that VAT/GST rates will rise in the next three years as cash-strapped governments continue to rely on indirect tax revenue. 

As a result, businesses will have to navigate an even more dynamic indirect tax landscape riddled with tax laws that vary by product type, country, province, state and even city. 

The sheer speed and volume of changes to indirect tax and VAT laws (also known as transaction tax, value added tax, GST, and sales and use tax) are impossible to keep up with without some kind of automation. For businesses that have to collect this tax on behalf of government, VAT/GST changes directly impact the operational resources required to achieve compliance. 

New or higher taxes will have an obvious impact on the consumer, but the impact on businesses is often overlooked. Whether it’s an increase, a decrease or a brand-new tax, each change represents a significant operational and cashflow outlay for businesses that must implement it. As governments continue to tinker with indirect taxes to address budget shortfalls, a business’s best response is to ensure its indirect tax operations are running as efficiently as possible. 

The only constant is change

Indirect tax compliance is a top risk area, especially for multinationals which must deal with changing laws in multiple countries. The inherent complexities of indirect tax compliance make it an even bigger concern for global companies.

A few notable trends driving the complexity of the indirect tax process include: 

  • Limited to fewer than 10 countries in the late 1960s, VAT and GST are today an essential source of revenue for more than 150 countries. 
  • In the US, businesses had to comply with over 580 indirect tax rate changes in 2012; outside the US, there were over 2,000 tax rate and product taxability changes.
  • In the US, 92.3% of the 194 state and local sales tax changes in Q2 2013  represented increases or new taxes. 
  • The US is currently considering passing the Marketplace Fairness Act to allow states to tax online sales made within their borders, even if the seller physically resides outside the state. 
  • Brazil regularly implements new tax laws or makes changes to existing laws. A company doing business in Brazil routinely has to deal with as many as 10 tax law changes in a given week. 
  • In emerging markets, indirect tax systems are evolving quickly. India is set to implement a new GST. China is in the process of replacing its business tax on services with broader-based VAT through a series of pilots. Malaysia also has GST on the agenda.

European tangle

While there is a general trend to increase VAT worldwide, the situation in Europe is not so clear-cut. 

Some European states are relying on higher VAT rates. Hungary has the highest VAT rate in the EU with 27%; Croatia, Sweden, Norway and Denmark are at 25%. In September 2012, Spain hiked its VAT rate from 18% to 21%. And Croatia, Cyprus, the Czech Republic, Finland, the Netherlands, Norway, Serbia, and Slovenia have all lifted their VAT rates. 

Yet some European countries are bucking the global trend, choosing not to increase VAT and even lowering it to stimulate their economies. 

Latvia cut VAT by 1% in July 2012. In summer 2012, France cancelled an increase in its standard rate from 19.6% to 21.2%, although the standard rate is scheduled to increase to 20% in January 2014. Italy continues to delay a 1% VAT rise with the most recent postponement being until October 2013.

Tax best practice 

Progressive finance departments looking to thrive in the wake of the recession know that an integrated approach, in which their technology, people and processes work seamlessly, is key to optimising their tax management process. 

The first step to seamless integration is centralised technology. Consolidating tax management technology across multiple business systems eliminates manual tax determination processes. In addition, it creates a hub from which domain experts can set tax rules and establish corporate tax policies and best practices centrally, automatically disseminating them across the company from a single source. This improves accuracy and reduces workload, providing the company with greater compliance at a lower cost. 

Centralised technology effectively automates the tax compliance process for efficiency and should integrate with corporate finance and accounting applications for sales, purchasing, payment processing and resource planning. 

Also, with a myriad of software delivery models – from software as a service (SaaS) or on-premise – businesses can now choose whichever model best suits their needs. But automation alone isn’t enough, especially if you automate errors. 

Tax domain experts provide the multidisciplinary expertise in tax law, tax policy, research and audit to ensure the highest level of service to a business. Smaller businesses especially may lack qualified tax professionals experienced in all the processes required to achieve and maintain the highest degree of compliance and often choose to outsource this function entirely. 

Whatever approach a business takes, whether to keep it in-house, outsource it or use a hybrid model, it needs to build a team of tax domain experts that can help the business navigate through changes or growth. 

Best practices and best processes ensure that a company can achieve streamlined compliance across the complete tax lifecycle – everything from tax determination and return preparation to rapid reconciliation and preparation of audit reports. As compliance requirements change, a company can automatically be kept up to date. 

While every aspect of a company should be optimised, focusing efforts on indirect tax management is increasingly becoming a top priority for savvy finance departments.

Indirect tax compliance

Calculating and determining taxes is not as simple as it might sound. Each transaction has unique characteristics that affect the specific tax rates applied depending on who, what, where, when, why and how the exchange was made. A business can face multiple, overlapping tax-collecting jurisdictions and tangled rules based on the type of business, location, nexus, or where the products and services will ultimately be used. 

In the US, for example, the average mid-sized business with a presence in all 50 states needs to file around 5,400 returns and process 5,400 cheques to tax authorities (of which there are over 13,000) a year; that’s 450 returns and 450 cheques a month, or 15 returns and 15 cheques a day. Yet the process can’t be spread out over the month but happens in three required payment periods each month.

Charlotte Rushton is managing director Asia Pacific and EMEA for the tax and accounting business of Thomson Reuters

Last updated: 8 Apr 2014