Shifting the balance: From direct to indirect taxes

The trend for governments to raise more revenues through indirect taxes seems set to continue. On 30 June 2013, the Belgian government has reached an agreement on the budget 2013-2014. One of the new tax measures that was announced regards lawyers who will become subject to VAT. Hence, lawyers' fees will be subject to 21% VAT, while these are currently not subject to VAT.

The spread of Value Added Tax and Goods and Services Tax is continuing at a rapid pace across the world and the design of these taxes is constantly under review where already in place.

This shift poses new challenges for business. Will a fundamental redesign of the structure of the tax function, as well as finance and procurement departments, be required to correctly identify the costs to control? See the forward looking insights for 10 countries and explore how business can overcome these challenges.

Our thoughts on some of the significant questions you should be asking yourself are set out below. Read the full report for a snapshot of the current global landscape and more pivotal challenges to come.

 

How is your business responding to the key indirect tax challenges:

Is your company managing environmental costs which are likely to increase going forward?

Environmental taxation set to increase in incidence, scope and magnitude

For now attention seems to be focused on pricing emissions of carbon dioxide and other greenhouse gases – through taxing and trading – as well as on disposal of waste and hazardous goods, and fuel consumption (though taxes on fuel duty are arguably not environmental taxes as they are primarily fiscally, rather than environmentally, motivated).

In coming years, we expect the environmental tax base to broaden significantly. Governments will always be looking for new ways to raise revenues, and in the current economic climate to plug existing, and growing, fiscal deficits. Governments will also come under increasing international pressure to transition towards sustainable development and growth, and take steps to respond to the challenges of climate change, resource scarcity and energy security.

Water, land use and biodiversity could all soon become subject to taxation or other forms of pricing. For many businesses, the impact of this could be huge.

Rates of environmental taxation will also probably increase. Although prices on current carbon markets are low, over time market price or tax rates could increase to levels that make ‘business as usual’ activities uneconomical and drive technological adaptation and innovation. The same could also apply to other resources or activities that now, or in the future, are caught in the net of environmental taxation.

In the absence of a global solution to the challenges of sustainable development, climate change and resource scarcity, we expect sub-national, national and regional policymakers to continue to add to (and adjust) the existing suite of environmental taxes, fees, charges, regulations and incentives. The vast array of policies that businesses will be required to operate under will only become more complex.

One thing is clear. Environmental tax and regulation policies will continue to play a significant role in shaping business strategies and operational decisions going forward.

Is your tax function aware of the taxes the business needs to manage and control?

Are environmental taxes, charges, fees and incentives the tax department’s problem?

One of the greatest risks for business of ever-increasing environmental taxes is that they fall through the cracks, either in terms of compliance, or less than optimal management across the business.

Responsibility for these types of business costs (assuming they cannot be passed on) is often unclear. It can fall on one of a number of different departments. In recent times we’ve seen ‘sustainability’ spread from something that is managed separately from core business concerns by a corporate responsibility department, to a fundamental business issue that needs to be embedded throughout every department within a business. We believe that the tax department has a role to play in managing the sustainability agenda and that, to do so effectively, it must work cross functionally with business units to evaluate opportunities for resource efficiency and product redesign on an after-tax basis.

For the tax department, this means not only understanding its role in achieving the business’ sustainability strategy but also making sure the business is paying the right amount in environmental taxes.

Businesses are beginning to wake up to the fact that they typically have no idea what they’re paying in environmental taxes locally, let alone globally. Environmental taxes can be a hidden cost to business. They tend to be lost in invoices which never make their way out of the accounts payable department or never get embedded in the supplier’s costs. These costs represent threats and opportunities, and currently they’re going unnoticed by the tax department.

Has your business assessed how well it’s geared up to react to change?

Complexity versus compliance

Notwithstanding our collective best efforts, internationally, indirect tax rules are becoming more complex and burdensome. Consider, as an example, the increased control on the movement of goods post 9/11. This poses problems for businesses intent on pursuing their business objectives while complying with their tax obligations.

Business is often penalised for errors and mistakes due to the submission of inaccurate returns caused by lack of clarity in both the law and the compliance process. Many of these errors ultimately result in no loss of revenue, but businesses are penalised anyway. It’s not just a question of restitution.

If a business operates in a number of countries, all operating different place of supply determination rules, with different rates of tax, different numbers of payments and different reporting and enforcement arrangements, the level of complexity and therefore the risks run by the organisation are particularly high.

While there are attempts, on the one hand, to simplify such taxes (VAT, for example) in terms of fewer exceptions from common standards, on the other hand, governments remain keen to use taxes to effect redistribution or behavioural change.

Will you continue to be able to import and export your products effectively?

Customs and trade considerations in business structure changes

The rapidly changing world economy is forcing many multinationals to critically assess their operations and priorities around the world. Often, this leads them to conclude that significant restructuring is required, either to address a shift in economic activity towards the emerging world, to rationalise an organisational structure that has grown so fast that it has become unwieldy or inefficient, or other business reasons.

Typically, the planning process to effect such change considers many aspects of the business. What does the sales and marketing department say are the best opportunities? How does the logistics department suggest the supply chain is constructed? Who does the procurement department recommend sourcing from?

One part of any business impacted by all these considerations, but with rarely a seat at the planning table, is the one that deals with customs and trade. Yet any change in business structure is most likely to be first impacted when a container gets stuck at a border or an executive is detained at the border for alleged smuggling of a technical drawing in his briefcase.

It would be wise therefore to have answers to these questions before embarking on a restructuring journey.

Does the global board regularly discuss strategy on indirect taxes?

Indirect taxes should be on the board agenda

Unless businesses engage in policy making on indirect taxes, they will find themselves increasingly used as unpaid tax collectors with less certainty and higher costs of compliance.

Indirect taxes currently represent an amount which is at least 25% of an MNC’s financial throughput. Even though business has accepted its role as tax collector, there are significant risks that mean it may find itself shouldering the burden of taxes which are supposed to be neutral for business. With such large numbers potentially at stake the impact can be significant.

Many governments now see indirect taxes as so closely tied to economic growth that such taxes are increasingly drawn into the political debate. If they’re on governments’ agendas they should also be regularly reviewed at the highest levels in business.

If your organisation is not actively putting forward its views on the global holistic changes likely to take place over the next few years in VAT/ GST, environmental and other indirect taxes, it may find itself struggling to comply with rules designed to suit others.