But many businesses are out of step with this shift, skewing their investments and resources toward corporate tax matters leaving attention to indirect tax compliance and planning behind. For governments, the appeal of indirect tax is simple. Indirect tax is far less dependent on corporate profits and offers a much more predictable revenue stream. Accordingly, indirect taxes are increasing in number and complexity. For businesses working in multiple jurisdictions, indirect tax compliance is getting much more difficult.
Few CFOs and tax directors acknowledge the impact of indirect tax on their overall tax liability. Tax directors with corporate tax backgrounds head most global tax teams. Businesses investing in global and regional heads of indirect tax remain the exception.
So how can companies get control of their indirect tax compliance? Effective indirect tax management requires focus on three key areas:
Strategy for indirect tax governance
At the simplest level, a global business should have in place a strategy of how it manages indirect taxes within its business – a strategy that is consistent with the wider tax strategy and the goals of the wider finance function. Ownership of indirect tax within the business should be crystal clear. Leading businesses have clarity over who owns the global process. Ideally, that person would be empowered to drive the execution of the indirect tax strategy across the global business. How accountability for indirect tax cascades through the organisation should also be clear.
While the risk management elements of the strategy are important, companies should also set their sights on creating value: by reducing the cost of indirect tax and by minimising its cash flow impact. For many businesses, indirect tax trails only sales and cost in terms of cash flow, yet little resource is allocating to managing it at the operational and strategic levels.
Strategy for compliance
Working out a strategy for compliance is also critical. As businesses have moved compliance work from local to shared service operations, they face choices as to their optimal sourcing options. These include outsourcing indirect tax compliance to a specialist provider or keeping it in-house and creating a tax centre of excellence alongside the shared service centre. If keeping compliance in-house, the business must then decide whether to staff the centre with tax or finance people and how to ensure the centre’s staff has the right skills. When centralising compliance, businesses also need to plan to stay current with local indirect tax rules in all of the countries where they operate. There is no single solution – tax departments need to determine the best answers within the context of their broader tax and business objectives.
Strategy for technology
The development of technology for use in effective indirect tax management has progressed rapidly in the past 5 years. Technology is now available for businesses that can:
- provide oversight of indirect tax data prepared worldwide and act as a central repository for possible tax audit support
- automate indirect tax return processing in a tax centre of excellence across multiple jurisdictions
- automate the indirect tax determination on sales and purchases. Technology is likely to have the biggest impact on indirect tax management in the years to come.
Businesses should establish clear measures to gauge their indirect tax management. Those businesses who balance the risks versus the rewards can add value and gain competitive advantage.