Despite this risk, the 2012 Benchmark Survey on VAT/GST conducted by KPMG shows that indirect tax functions are under-resourced, under-measured and under-managed in most organizations worldwide. In this complex and changing environment, it is critical for businesses to objectively assess how efficiently and effectively they are managing what is rapidly becoming one of the most important and riskiest of the global tax obligations.
In Iberoamerica, a number of factors are driving the shift toward lower corporate income tax rates and higher VAT/GST rates. Many countries in the region are emerging economies that need foreign investment to grow. In order to attract investors, many countries have opted to impose lower direct income taxes and make up the reduced revenues through higher indirect taxes or VAT/GSTs. Further, as their tax systems mature, many countries prefer to streamline them by administering fewer, more significant taxes, eliminating anti-technical or nonneutral, low taxes, and replacing them with increases in consumer tax rates.
Despite rising indirect tax challenges, most businesses have not yet put in place systems and resources to effectively managing their VAT/GST risks and obligations. Results of KPMG’s 2012 Benchmark Survey on VAT/GST, which surveyed 225 respondents in 24 countries, show:
- a lack of VAT/GST performance benchmarks visible to the CFO and wider business
- a lack of full-time resources allocated to the management of VAT/GST, at local, regional and global levels
- limited embedded processes of sufficient quality to effectively manage VAT/GST from end-to-end, across the business.
Compared to the previous year, the 2012 survey showed more evidence of VAT/GST management in Europe and other regions than in Iberoamerica. Businesses in the region should be more concerned about how their compliance risks are being managed. This is especially true in jurisdictions where the size of VAT/GST throughput is increasing, local rules are becoming more complex, and no specialist local resources are in place who understand local culture, VAT/GST treatments, and tax authority behavior.
Iberomerican companies can guard against the growing financial and reputational risk of indirect tax audits by adopting a company-wide strategy of prevention, planning and management. Companies can start by creating a strategic, centralized framework for indirect tax management, with clear, commonly understood policies that identify the key tax risks throughout the organization and guide their mitigation and management. The next step is to invest in the people, process improvements and technology needed to execute these policies.
The strategy should cover all aspects of VAT/GST planning and compliance, including resources, knowledge and training, quality and costs, and standardization of policies and processes. Among other things, the strategy should set processes for identifying regional VAT/GST differences, including items that local tax authorities are scrutinizing, in order to streamline the company’s VAT/GST management and generate value. The strategy also should have flexibility to allow for quick responses to possible future tax developments, while focusing on the realization of immediate short-term goals.
In designing a global VAT/GST management framework, effective use of technology can play a crucial role in:
- designing standardized processes and making their control viable
- quantifying and measuring the effectiveness of the process and revealing opportunities for optimization
- providing a global platform for managing tax risks across the supply chain in multinational environments.
Given the huge volumes of transactions that must be handled, technology can help the company’s tax function create business value by reducing errors and increasing tax savings, thereby eliminating the cash flow problems that can be caused by VAT/GST mismanagement. Through automation and standardization, the company also stands to gain better control over VAT/GST issues arising in billing procedures, which create VAT/GST obligations, and procurement processes, which create VAT/GST recoveries.
By taking a proactive approach and investing in a centralized VAT/GST management framework, you can gain more certainty that your business’ VAT/GST exposure is controlled and compliance is well managed. Companies that get indirect tax management right stand to reduce their risk, cut compliance costs and gain competitive advantage.
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