Governments around the world are looking to indirect taxes as a way to raise additional revenue. They view indirect tax as a stable comprehensive source of revenue that can be raised in an efficient manner.
The fragile economic recovery means that the balance is likely to swing towards indirect taxes for a little longer yet. New Zealand is not immune to this trend, illustrated by the rise in GST to 15% from 1 October, coupled with cuts in the personal and company tax rate.
This brings a new emphasis to businesses GST systems, payments and returns. And with this emphasis, risk.
Increased scrutiny from IRD?
The Inland Revenue has not yet announced to what extent it intends to conduct audit activity around the increase in GST rate. However, it would be safe to assume that businesses could expect, from 1 October 2010, to be subject to increased scrutiny of systems and procedures.
For those entities in the Risk Review or Cooperative Compliance process, it is likely that IRD will have some searching questions regarding GST changes, and GST systems generally. The GST revenue has to pay for the tax cuts after all.
The recent additional funding given to Inland Revenue shows a strong acknowledgement by Government that IRD, given sufficient resource, is able to do a good job of ensuring that we get it right.
Internationally, revenue authorities are also doing their homework; refocusing resources on perceived risk with an emphasis on disclosure and penalties for non-disclosure and lack of reasonable care.
In New Zealand, compliance is more targeted. GST already counts for over half of all tax penalties imposed in New Zealand. The logical extension of an increase in rate by 20% is that penalties will also increase by 20%. In addition, an increased scrutiny on GST, systems changes and audit activity may see this increase further still.
Traditionally, GST management has been viewed primarily as a compliance function.
A KPMG survey of tax and finance officials from over 500 companies across 22 countries (KPMG Global VAT survey) indicated that 60% of respondents considered GST as a compliance tax rather than a tax to be managed. The same survey showed that compliance with GST regulations was considered a greater risk than compliance with corporate tax regulations.
Adding to the bottom line
However, there is a growing realisation that effectively managing the indirect tax function can add to the bottom line of the enterprise.
Basic measures such as enhancing GST cash flow can contribute to the profitability of a business. Reducing the overall costs of compliance helps deliver a competitive advantage in the marketplace. This requires active management of the business indirect tax compliance.
The change in rate has highlighted many areas where systems do not comply with GST legislation or do not work as well as they should. Automation of the indirect tax process can provide comfort but only where the systems are robust and the data being relied on is correct.
Appropriate staffing and controls within the indirect tax function can assist, as can independent reviews. Active oversight is needed.
At a practical level, this should result in GST being included in tax charter and governance documentation. Post-implementation reviews, including by third parties, will be crucial in mitigating risk in the changing environment and demonstrating to the Inland Revenue that reasonable care has been taken.
Change to the GST landscape has arrived and ongoing GST reform will continue to impact on organisations. Only those businesses that proactively respond to the new landscape can expect to mitigate the new tax risks which will emerge and will be best placed to capitalise on the opportunities that these changes will present. The time to act is now.