More than 160 countries impose indirect taxes, with new countries following suit each year.
In the midst of such trend, KPMG’s Global Indirect Tax Services practice has been, since 2011, carrying out regular benchmark surveys on indirect tax. The most recent survey, titled ‘KPMG 2015 Benchmark Survey on Indirect Tax and Trade Compliance’ went a step further by including the views of trade compliance professionals, in a bid to evaluate how companies around the world are approaching these two critical areas.
The respondents come from a wide variety of industries in over 23 countries across every continent, including Malta.The survey clearly depicts that, despite the mantra “what gets measured gets done,” most businesses have no metrics in place to measure the effectiveness of their indirect tax function. The minority that do have such measures, generally constituting the larger organisations, tend to focus on the accurate submission of VAT returns and minimisation of interest and penalties. Although necessary, these factors are essentially ‘hygiene’ factors unlikely to have much impact upon a company’s cash position. Metrics that link strategy to action could be more value-adding, such as VAT under management, transaction error rates in receivables/payables and average VAT funding delays - especially considering that 58% of businesses (up from 51% in 2013) perceive VAT as negatively impacting their cash position.
From the survey it emerges that more companies are acknowledging that indirect tax is too important to be left to generalists. 38% of respondents now have a Global Head of Indirect Tax – rising to 68% for the larger organisations. Indeed, the majority of businesses employ between 1 and 10 full time VAT/GST specialists and have passed accountability for VAT/GST from the Finance/Accounting function to the Tax function. Nevertheless, such specialists still dedicate 30% of their ‘VAT/GST’ time to return preparation rather than strategic activities such as advisory, processes, systems and technologies. Such focus is even more prevalent among smaller organisations, possibly due to the absence of effective performance measures.
Overall, the preparation of VAT/GST returns in-house, on a local country-by-country basis, remains the most common method adopted by businesses. In situations where there has been as inclination to develop a more standardized approach to compliance, outsourcing is proving to be a more popular strategy than centralization into shared services or the creation of a tax centre of excellence.
Anthony Pace, Tax Partner at KPMG in Malta commented that “it is quite common for us as tax professionals to deal with VAT or at least with tax specialists of multinational groups having operations in Malta or having cross border operations with/from Malta. However, this is not the norm in the local context and it is probably true that the focus of the finance functions of Maltese organisations vis á vis VAT still remains the filing of the VAT return on time. Having said that, we are experiencing increased awareness of VAT complexities and that has to be acknowledged.” Respondents from Europe, Middle East and Africa and Asia Pacific appear to be far more confident in their organisations’ ability to identify key indirect tax risks that could impact cash flow, compared to their respective peers in North and Latin America. The most popular method of ensuring tax controls are in place, practiced by 52% of respondents, is internal control self-assessment. It transpires, that only 43% of respondents with indirect tax controls in place carry out some form of independent reviews, whether through their internal or external auditors or through tax departments.
Technology is the number one investment area for companies striving to optimize their indirect tax management, surpassing investment in processes and people and with data reporting and analytics rising in importance. The planned use of technology varies - 62% for VAT reporting, 51% for data analytics, 43% as a tax engine, 31% for e-learning and 38% as a workflow/visibility tool. Potentially, the tax authorities’ moves toward electronic submissions and the use of data mining and analytics to improve audits, e-invoicing and the willingness to reduce instances of fraud could be some of the drivers behind technology in indirect tax.
Some of the trends and statistics on VAT/GST are in parallel with those emerging from the survey questions on Trade compliance. Limited performance metrics and high focus on compliance and accuracy of declarations are also prevalent in Trade compliance. The US is home to two-thirds of the global heads of trade compliance in the survey. The Finance/Accounting function remains the most common function which is ultimately accountable for trade compliance. As trade compliance functions mature, there is a move towards greater centralization. Future investment in technology scores high among respondents although the most widely used solutions today are home-grown technologies having been developed in-house over time.
On the subject, Tim Gillis remarked that “smart planning can bring a number of valuable benefits, such as lowering duty costs by utilizing regional and bilateral free trade agreements, and making use of free trade zones that allow businesses to bring merchandise into a country without paying immediate duties”.
In conclusion, from the survey, it is evident that albeit the high focus on compliance, the Indirect Tax functions of some companies are being transformed into units that add real economic value. Indeed, these companies should be the benchmark for other organisations - irrespective of their size of industry – so that VAT truly remains a neutral tax. It also emerges that an effective trade and customs team must be an integral part of the global supply chain for it to truly generate benefit.
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