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Reduce Risk and Increase Cash Flow with Good Indirect Tax Management - by John Bain 

Global Tax Adviser

 

June 15, 2012

 

John Bain
Toronto, Indirect Tax

 

GST/HST and VAT can be the third or fourth largest cash flow item for a company. Yet compared to other large cash items, this item tends to receive little attention from most heads of tax or chief financial officers. It doesn't usually form a key metric on which these senior finance executives are measured and compensated. They are often focused instead on income tax key performance indicators, such as an effective rate and cash rate (which are measures that have very little sensitivity to GST/HST) when assessing the efficiency and effectiveness of the tax department.

For those at the front lines of indirect tax, the managers, always playing second fiddle can be frustrating. And, more seriously perhaps for the businesses themselves, failing to measure the performance and effectiveness of GST/HST management systems leaves them exposed to potential operational risks and possibly missing a big upside opportunity to improve cash flow through better management of GST/HST inflows and outflows.

 

So how bad is the problem? KPMG's 2012 Benchmarking Survey on VAT/GST looked at 224 companies globally, including some of the world's biggest businesses. Less than a quarter (23%) of tax departments had VAT/GST metrics in their performance goals and those that did have them ranked them as the least important. The situation isn't any better in terms of senior VAT/GST management: only around a third of respondents had a global head of VAT, albeit the position was a little better among larger businesses.

 

A valid question is whether enough thought is going into indirect tax, in policy terms, in these businesses. Our survey showed only 32% of businesses rated the design of their VAT/GST policies as either very good or excellent, and only 20% rated the implementation of these policies in the same way.

 

Why does this matter? It's important because there is a clear global shift towards indirect tax. Corporate tax rates have been falling steadily as a means to attract inward investment, and governments are looking more towards consumption taxes as revenue sources. Indirect taxes are "real-time" taxes -incurred when transactions happen - which are easier to collect, harder to avoid and not dependent on profits. These features are attractive from a government's revenue perspective.

 

But this shift, coupled with increased globalization, new business models, evolving finance functions and rapid legislative change, puts GST/HST management under ever more pressure. All this is also happening against a backdrop of increased scrutiny as the CRA and tax authorities globally seek to maximize revenues through ever more progressive and, in some cases, aggressive auditing of taxpayers.

 

Following the old adage of "what gets measured gets done," it seems clear the first step to improving this situation should be to understand the key financial, operational and reputational risks of failing to manage GST/HST effectively and the upside cost saving opportunities available from better GST/HST management. Then, having done that, to develop appropriate metrics to ensure the necessary improvements to the way in which risk is managed and opportunities realized happen.

 

It's worth noting our survey showed that among financial services companies, where VAT/GST is a real bottom line cost, it's much more firmly on the CFO's radar, with the result that the tax function is held more accountable and key performance indicators incorporate VAT/GST metrics. Companies in other sectors have some catching up to do.

 

For details, see KPMG's 2012 Benchmark Survey on VAT/GST.