Indirect taxes, such as value-added tax (VAT) and customs duties, are the types of tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties, or services. Indirect taxes are levied on goods and services (or consumption), whereas direct taxes are imposed on income and profits. Governments are now turning to indirect taxes to fill their revenue gaps as a result of the pandemic’s severe budgetary pressures.
In a challenging year for the global economy, trade, transformation, and sustainability are three megatrends influencing indirect tax policy. While these megatrends are pressuring indirect tax teams to be flexible, use technology to adapt, and do more with less, these trends also provide opportunities for indirect tax and customs functions to help their organizations succeed.
Indirect tax is receiving more attention as a result of global economic and geopolitical challenges. VAT/sales tax, excise and customs duty, and environmental taxes are becoming more demanding on a global scale. Governments are also leveraging tax and customs policies to advance political objectives and promote change in fields like sustainability.
This has resulted in significant legislative change, additional obligations, and an increased emphasis on technology to support tax and customs compliance processes. Effective indirect tax management is more important than ever to control cash flow, costs, and the risk of audits and legal action from tax and customs authorities.
TRADE DISRUPTION
Global trade and supply chain activities are inextricably linked to indirect taxes, which are significantly impacted by changes in the way businesses conduct their operations. Changes in these taxes could also significantly impact the supply chains of businesses.
The disruption of trade has been a recurring trend in the last year; contributing factors include the war in Ukraine, the ongoing consequences of the pandemic, trade conflicts, new trade agreements and alliances, and a quickly changing regulatory environment. However, the trade function has never had such a strong opportunity to improve the performance of the company or been in such a strong focus than now.
Indirect tax and customs functions can take action in the face of geopolitical uncertainty to remain agile while navigating disruptions, including driving out unnecessary duty costs, concentrating on cash flow, delivering cost-efficient tax processes, and using data analytics to compare indirect tax costs and opportunities from new supply chains.
In the Philippines, in addition to the tax authorities’ resumption of audit investigations, there is an additional challenge of simultaneously managing the customs authorities’ intensification of post-clearance audits — which are geared towards sustaining increased revenue collection even after clearance of imported goods at the border.
TRANSFORMATION
Rising complexity, regulation, as well as the competition for talent are contributing to transformation, but technology is the main motivator. Tax and customs authorities all over the world are quickly embracing technology and automating manual procedures. They are demanding real-time transaction data, and several jurisdictions are starting to employ e-invoicing and real-time reporting. In the Philippines, this is consistent with the tax authorities’ adoption of the electronic invoicing and receipting system, which requires certain taxpayers to electronically report their sales data. Upon establishment of a system capable of storing and processing the required data used by electronic point-of-sale systems, certain categories of Philippine taxpayer will be required to use such electronic systems.
In a mid-year report, Philippine customs authorities showed they are not far behind, highlighting programs focusing on digitizing customs processes, revolutionizing operations, and enhancing trade facilitation. Advanced information communication technology projects are lined up for implementation, such as automated export declaration and overstaying container tracking systems, among others.
As a result, tax and customs authorities will have increased visibility on how businesses operate on a day-to-day basis, placing additional responsibility on corporations to enhance their data collecting and management. This frequently necessitates identifying data across the company and even throughout the supply chain as new taxes and reporting requirements are implemented.
These demands are being made at a time when tax departments are under greater pressure to increase efficiency and provide genuine value. Along with effectively utilizing current technology, indirect tax teams must assess the need for extra resources and determine the right balance of in-house and outsourced work for their organizations to satisfy these demands.
In order to help drive transformation within their own organizations, indirect tax and customs functions must become future-proof by implementing a data strategy, harnessing the right technology to support their operating model, creating a tax governance structure that defines responsibilities, considering a centralized approach to VAT management, and using the implementation of tax policies to address long-standing data issues.
SUSTAINABILITY
Governments, businesses, and individuals around the world are prioritizing climate catastrophes and the need to safeguard the environment and human health. Governments are relying more on indirect taxes to support their environmental, social, and governance (ESG) initiatives, and indirect taxes are raising revenue to help fund green policies. New green taxes are also motivating people and companies to make the necessary changes in order to achieve sustainability goals.
The functions of tax and customs are put under pressure by ever-evolving tax and customs regulations. They need to be aware of the taxes that are applicable to their companies, how to comply with their commitments, and how to account for them in costing and supply chain choices. As an example, they can assist in lowering expenses, reducing compliance risks, and finding opportunities for grants and incentives to finance green investments.
Indirect tax and customs functions should consider understanding their organization’s plans to achieve its climate ambitions and get involved, as well as measure the impact of sustainability taxes and related policy measures on operations. Other key sustainability actions include identifying tax credits, grants, and incentives that will support the organization’s green agenda, assigning clear responsibilities, assessing exposure and liaising with relevant stakeholders within the value chain, and planning and implementing responses to the new measures impacting the business.
THRIVING IN TRYING TIMES
Leaders in indirect tax have never had a better chance to add more value to their organizations. By utilizing their abilities, creating connections within the organization, and utilizing innovative technology, they can bring about positive change and produce significant results.
It is imperative that they take into account the bigger picture and how the megatrends of global trade, transformation, and sustainability affect the indirect tax function. This will allow them to better frame the indirect tax issue inside their organizations, navigate hurdles, and seize opportunities that will benefit the whole organization and allow it to thrive instead of merely surviving in trying times.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Alden C. Labaguis is a tax principal of SGV & Co.