Peter Boerhof, Senior Director VAT
In today’s interconnected world, businesses are embracing cross-border trade like never before.
Advancements in global commerce and social media have unlocked exciting opportunities for businesses, enabling them to market their goods and services to new audiences, sell to more customers worldwide, and achieve international growth.
However, as with any great opportunity, there are some challenges that go hand in hand with it. The indirect tax rules and regulations that businesses must navigate are complex and, for many, can feel overwhelming.
More than 80 tax authorities worldwide apply destination-based consumption taxes, meaning businesses in pursuit of new consumers overseas must charge the tax rate of each customer’s country when making a sale – not to mention accounting for that tax with the relevant authority of that country.
Although this typically has a bigger impact on the business-to-consumer (B2C) market than it does on the business-to-business (B2B), due to factors such as reverse charge and import regulations, most companies trading globally today will have to grapple with these indirect tax challenges in one way or another.
Risky behaviour from businesses
To understand the impact these rules and regulations are having on businesses, we recently commissioned a survey of 580 individuals with an influence on indirect tax decisions within their organisation.
According to our findings – which are available in our Compliance’s Complexity report here –74% of respondents, all within companies with an annual turnover of at least US$50 million, claimed their businesses are tolerant to risks when it comes to indirect tax compliance.
In stark contrast, only 16% claimed they opt for a risk-averse approach to their indirect tax compliance strategy, with the remaining 10% occupying a middle ground, claiming to be neither accepting nor averse to indirect tax risks.
This tolerance to risks surrounding indirect tax compliance is interesting, given the consequences if found to be publicly non-compliant –from hefty tax claims and fines to damaged brand reputation. In Europe, for example, where indirect tax rates can be as high as 27%, companies that fail to account for and pay these taxes correctly can expect back payments and fines to be quite significant. Ultimately, these back payments with additional fines on top result in more money leaving the business than necessary, which could negatively impact profits and even the viability of the business in the long run.
Tax authorities usually manage to identify businesses that have made errors, and the ramifications can be even worse for those who deliberately try to take shortcuts.
Why the Risky Business?
Clearly, the risks associated with indirect tax non-compliance are not conducive to a successful, and sustainable, international expansion.
So, why is it that an overwhelming majority of businesses are tolerant to these risks potentially resulting in non-compliance – even when a staggering 62% of those that we surveyed had previously been found publicly guilty of this?
One explanation is the challenges these businesses have in trying to keep up with the ever-evolving landscape of tax regulations. Over two-fifths (42%) of indirect tax decision-makers agree that this is making it progressively more complicated to manage indirect tax compliance efficiently and effectively.
When we look at regional differences, this becomes even more apparent. Respondents from the U.S. – where there are over 10,000 taxing jurisdictions and sales and use tax rates – 90% of respondents said they believe their business is risk-prone regarding indirect tax compliance. In Southern Europe (France, Italy and Spain), where there are fewer tax variations and the landscape is generally more straightforward, just 56% said the same.
A myriad of other factors may also be at play here when it comes to regional differences, such as the frequency at which audits are carried out from country to country, and how thorough they are. Furthermore, in countries such as Italy and Spain – where e-invoicing and real-time reporting have become mandatory and the likelihood of being identified as non-compliant has increased – companies are likely to exercise more caution when it comes to their indirect tax.
An indirect tax management solution
With these challenges in mind, it’s important to note that solutions do exist to help businesses stay on top of their indirect tax compliance amidst this ever-changing landscape. The people angle of global indirect tax processes nowadays can be effectively supported by technology, making these processes more efficient and less prone to errors.
For example, implementing an end-to-end indirect tax management solution, containing global up-to-date content, can help handle all types of indirect tax requirements across numerous territories – from indirect tax determination to reporting.
And the impact of embracing this technology is significant, with 41% of indirect tax decision-makers attesting that specialist tax technology has made managing compliance easier.
As businesses continue to operate in today’s global business arena, having the right tax technology in place helps with determining and reporting indirect tax accurately, which is key to healthy, sustainable growth.
At Vertex, we offer a suite of solutions that can help your tax team navigate indirect tax management and help reduce the risk of non-compliance, with software that is built to scale, tax content that covers global regulations and updates, and partnerships with the most respected tax and technology companies around the globe.
