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I am Tim Gillis. I am the Global Head of Indirect Tax Services for KPMG.
To say that indirect tax is sweeping the globe is probably at this point a misstatement. It’s already swept the globe. There are only a very few countries left where VAT has not become a part of their revenue raising structure. And those countries we believe will fill in during the next decade. So one of the biggest trends I think we’ll see now is base expansion. We already have the coverage of the globe. Now we’ll look to see if governments actually use the opportunity to raise even additional funds through expanding the base to cover other things that haven’t heretofore been taxed.
A few reasons. One, it’s a relatively easy a revenue raiser, it’s easy to modify, depending on economic conditions, so it can be dialed up or dialed down, depending upon what the legislature needs to accomplish in the economy at that point in time. We also see that with the growth of spending around the world, what we’ve seen is the need to, is actually fund that spending, so it’s an extra revenue source which is helpful for helping governments to deliver the services that they now provide to their citizens.
The first place I’d start is the Middle East. For years they’ve been dependent upon an oil economy. As they begin to think about what their economy might look like in a post oil dependent society, they’re beginning to think about what the structure of their revenue system should look like. And so we are seeing some movement in the Saudi Arabian Peninsula, as they look to expand and modernize their tax base. I also think you’re gonna see some interesting things develop in the United States over the next probably three to four years. Depending on what happens in the upcoming elections in the United States you could well see the US have to consider other options as they modernize and reform their income tax code, they also may need to add a consumption tax on top.
There is a growing cacophony of voices suggesting that the financial transactions area is an area ripe for taxation. So you see it throughout Latin America. In many of the countries in Latin America you’ll see some form of financial transactions tax now. You’re seeing Europe consider that now. Hungary has not only enacted one, but Hungary has actually has legislation that is aimed at even taxing the central bank, the Hungarian Central Bank, which is a relatively radical reform. So, I think the jury is still out on where financial taxes will go from here.
We already have VAT which has swept the globe, but now we’re seeing VAT complicated, both by sub-national governments enacting their own conflicting sometimes with the national government. What we see in Brazil for example is a very interesting example of a complex indirect taxing system. And I was recently with a company who said they now have over 30 people in their compliance function for indirect taxes in Brazil alone. Only a very few years ago, a decade or two ago, you wouldn’t have seen anything like that in terms of investment in a compliance function. Yet now it’s necessary to either invest in people, process, or technology to ensure that you get the compliance function right. So companies now are establishing a real governance process around their indirect tax function, making sure they get it right, making sure they comply timely, making sure they don’t have open ends that could subject them to certain risks that they don’t want to address.
Think about performance, management and measurement of the indirect tax function. It’s not enough just to comply; you also need to move into that next level of ensuring that you are actually getting performance out of the function. Sometimes that will require you to take a fresh look at your supply chain to make sure that it’s optimized for indirect taxes as well as for direct taxes.
It’s the tax of choice by legislators today. It’s not going away. It will only continue to become a bigger part, I think, of the percentage of revenues that are raised by governments. And so, o you can look for continued use of indirect taxes and continued expansion of those indirect taxes. Where you see indirect taxes that have not been modernized, for example if you see a high rate imposed on goods but a lower rate imposed on services, or in the US case at the sub-national level, taxes are on goods but very few taxes on services, I think you will see the equalization of the taxation of services, intangibles as well as goods.
Tim Gillis, KPMG’s Head of Global Indirect Tax take a close look at the world of indirect tax and the changes that are happening all over the world.
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