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Indirect Tax Benchmarking

Forces of change

Forces of change

Forces of change

An array of internal and external forces is shaping the current priorities and future plans of today’s indirect tax and trade compliance functions. Some of the most important changes are happening in the following areas.

Forces of change

Continuing spread of indirect taxes

Except for the United States, the vast majority of countries have or plan to establishindirect tax systems and current indirect tax bases have continued to broaden. Nowthat India, China and the Gulf states have or will soon implement their value-addedtaxes/goods and services taxes (VAT/GST), centrally administered indirect taxsystems are in place in over 160 countries.

With increases in indirect tax rates and widening of indirect tax bases, complexity is alsoon the rise. Businesses need to process ever more data to ensure they collect and paythe right amounts of indirect tax on all their purchases and sales wherever they operate.

Dynamic global trade environment

The environment for global trade is changing rapidly, with many countries seeking to negotiate or renegotiate bilateral and multilateral trade agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership signed by 11 countries in January 2018. Countering this trend is a move by some countries to take a more nationalist approach to trade, as shown by Brexit and the United States’ stance in current talks to reform the North American Free Trade Agreement

Finance function transformation

Many of the world’s global companies are continuing to centralize indirect tax and other finance activities based on outsourcing, co-sourcing or shared service center models. Centralization permits greater automation and standardization, which can reduce costs and improve processes. But as the ability to tap the local knowledge and tax authority relationships has become more remote, indirect tax and trade compliance leaders are now investing in regional leadership models to establish confidence that their compliance obligations are well managed in all locations.

Tax authorities’ focus on collections

As part of the global shift toward indirect taxes, tax authorities are putting more priority on ensuring indirect tax collections are thorough and complete, and they are investing heavily in electronic processes for collecting, analyzing and benchmarking taxpayers’ indirect tax accounts and transactional data. Tax authorities are looking not only for accurate, timely filings but also for indications that organizations have effective management and governance in place.

Authorities’ focus on digitalization and controls

As tax authorities adopt increasingly sophisticated data-driven techniques to assess risk and target audits, companies are expected to provide digital tax filings and documentation in a rising number of tax jurisdictions.

Around the world, the past 5 years have seen the introduction or rapid expansion of electronic invoicing and the online filing of VAT and GST returns. Brazil has led the way with perhaps the most advanced e-invoicing system in the world, requiring a digital stamp from the tax authority and real-time reporting of transactions.

Other developments include:

  • the introduction of ‘split payment’ mechanisms in several European countries, whereby the VAT on a transaction is remitted directly by the recipient to a separate bank account held for the benefit of the tax authorities
  • Italy is now taking steps to implement a regulated invoice clearing system such as those in use in Brazil, China, India and Taiwan
  • the pre-populating of information in VAT and GST returns (e.g. in India, with sales declared by suppliers being automatically populated in their customer’s purchase returns)
  • the development of real-time tax reporting not only in Brazil, but also in Spain with its SII system, in Hungary, and in Poland, Norway, Lithuania and France with standard audit files for tax (SAF-T) reporting
  • a shift in thinking by governments (e.g. Singapore) toward rewarding taxpayers who engage in preventative risk controls.

Do today’s indirect tax and trade compliance functions have the people, processes and technology they need to meet these demands? As the rest of this report explains, these functions show signs of maturing, but most of them will need to invest in improving their performance measurement, risk management, technology and processes to withstand the challenges ahead. Planning for these investments offers these functions an opportunity to go farther, transforming from cost centers focused on compliance to strategic business partners that generate value.