KEY INDIRECT TAX CHALLENGES

Corporate tax teams responsible for collecting, managing, and paying indirect taxes face numerous challenges in today’s fractious tax landscape. Not only are governments around the world leaning increasingly on indirect taxes to raise revenue without raising eyebrows, they are also requiring companies to collect and pay these funds while simultaneously boosting penalties for those who fail to comply. And in the U.S., indirect taxes offer individual states a more-or-less trouble-free way to tweak their tax rolls, which means that individual states are constantly experimenting with new taxes and fees, resulting in frequent changes that indirect tax professionals must monitor and respond to or suffer the consequences.

Internally, these and other challenges posed by indirect taxation are often being handled by tax departments that are over-worked, under-staffed, and lacking the indirect tax software that helps make indirect taxation management, well, manageable. For all too many managers, their days are filled with the stress of keeping pace with various changes in the indirect tax space.  Confidence in departmental compliance submittals may suffer due to fewer available resources and the consequences of compliance failures.

Indeed, a recent Thomson Reuters Institute report, “Indirect taxes: Much more than just a process,” found that the No. 1 concern of indirect tax managers was keeping up with the pace and scale of change in indirect tax regulations, followed by the growing reporting burdens being imposed on companies by tax authorities, the legal and logistical puzzle of e-commerce transactions, and the ever-present fear of not knowing where one’s informational blind spots are.

Growing multinational corporations are particularly susceptible to the vagaries of global tax rates and indirect tax compliance. For starters, many multinationals operate in more than a hundred countries, each with its own rules and regulations, which are enforced by equally unique and capricious governmental tax authorities. Compounding the tax complexity for multinationals is the fact that most sell a variety of products in different countries, many of which are taxed at rates that vary from one jurisdiction to another. Furthermore, growing multinationals often find themselves in a race to avoid penalties for late or inaccurate filings in countries and regions where tax authorities are all too happy to fine companies for tax non-compliance, if only to generate more revenue for their local governments.

Indirect taxes such as value-added tax (VAT), goods and services tax (GST), excise duties, fuel taxes, land taxes, environmental taxes, and other forms of indirect taxation are attractive to governments because they prompt less public scrutiny than income or corporate taxes, and they are collected and paid by companies themselves. Furthermore, most companies and government tax agencies are now digitally connected, so tax authorities expect companies to pay indirect taxes in real time, as they are collected and sometimes in advance, which puts pressure on tax compliance teams to automate as much of the process as they can.

Another reason tax authorities are fond of indirect taxes is that they yield a great deal of information about a company’s business activities and operations. Increasingly, tax authorities are using this data to build comprehensive profiles of a company’s tax liabilities, and are even sharing that data with other countries. Consequently, companies that don’t use automated technology to track and analyse their own transactional data may find that tax authorities know more about their business activities than they do themselves. This symbiotic relationship between companies and governments has increased the importance of building a trusting relationship with tax authorities, both to avoid penalties and communicate to governments and the public that the company is acting as a responsible corporate citizen.

Part of being a responsible corporate citizen is, of course, applying and collecting the correct indirect tax amount for each and every transaction. When it comes to e-commerce and digital services, however, it is not always easy to know what tax rates apply in any given jurisdiction. And in the U.S., the 2018 Wayfair case made companies responsible for collecting local sales taxes, a challenge that has only escalated as a result of the public’s increasing reliance on e-commerce during the pandemic.

Complicating matters further is the fact that not every e-commerce transaction involves a physical product. Online classes, computer games, dating sites, and other cloud-based digital services operate in a gray area of indirect taxation where it’s often difficult to know which rates apply in which jurisdiction. In instances where there is no clear consensus, companies are often left to guess the correct rate and, if it turns out to be incorrect, hope that tax authorities are lenient in their assessment of the company’s actions.

 With so many rules in flux, and so much uncertainty surrounding indirect tax rates, tax leaders are naturally concerned that their companies may inadvertently make mistakes that result in government audits, penalties, or some sort of public controversy. Often, this managerial insecurity stems from a lack of confidence in the quality of the data available to indirect tax teams.

Growing multinationals, for example, are often in the process of acquiring multiple companies in different countries at the same time. On the technology side, that means simultaneously assimilating a number of different legacy systems into a centralized enterprise resource planning (ERP) system, including possible errors of which the global tax department is unaware. Tax teams must also rely on other people to enter their department’s tax data correctly, which is never a given. Consequently, many tax managers in such situations spend enormous amounts of time checking spreadsheets and cleansing data in order to build some collective confidence that the organisation’s data can be relied upon for the purposes of tax compliance and strategic decision-making.

These challenges are almost impossible to meet without the right tax engine software to keep up with the pace of change in indirect tax regulations and the mounting expectations from tax authorities around the world. Without the proper tools for the job, tax departments also run the risk of losing credibility within the company, and may never have the opportunity to demonstrate their true value to the enterprise.

With so much at stake, having the right tax software ensures confidence in the foundation of tax compliancy and credibility.