The trend for governments globally to raise more taxes through indirect taxes is set to continue, according to a report issued by PwC.
The resulting shift from direct to indirect taxes will present multinational companies with significant challenges. “Companies may need to a take a different approach to tax management in the future,” says Charles de Wet, Head of Indirect Tax for PwC Africa.
PwC’s report ‘Shifting the balance from direct to indirect taxes: bringing new challenges’ provides a global perspective on the shift from direct to indirect taxes. The report also looks at the current indirect tax and VAT challenges facing businesses globally, as well as how indirect tax regimes compare across major territories and regions.
The financial crisis has made countries look carefully at the composition of their tax revenues. The spread of Value Added Tax (VAT) and GST (in some countries known as Goods and Services Tax) across the world is continuing at a rapid pace. Consumption taxes such as VAT and GST are increasing in prominence and now exist in more than 150 countries, with other jurisdictions planning to introduce consumption tax regimes over the coming months. The number of countries with only a sales tax (such as the US) is shrinking. In Africa, 42 of the 51 economies have a VAT system but only three (South Africa, Mauritius and Tunisia) have implemented the tax with an electronic filing and payment capability, which is commonly used.
De Wet says: “South Africa is no exception to the rule with businesses facing a number of VAT challenges. For instance, the number of VAT audits conducted by the tax authorities has increased over the last few years, and the information requested and questions raised during these audits have become increasingly complex and specific.”
Over recent years VAT rates have risen in a number of countries. South Africa’s VAT rate of 14% has remained unchanged since 1993 and is far less than many countries around the world. In South Africa VAT still accounts for more than half of the overall indirect tax revenues. Total VAT collections for the 2012/13 fiscal year were R215.5 billion and grew by 12.8%. “But there are two clouds on the horizon,” warns De Wet. The healthcare system, which the Government is set to introduce will need to be funded: one of the suggestions has been to increase the take from VAT, possibly through higher VAT rates. The country has also proposed the introduction of a carbon tax during 2015: lessening the burden on poorer households could involve playing around with VAT exemptions to target typical spending patterns.
Business operates as an unpaid collector for the tax authorities regarding indirect taxes. The compliance burden for companies can vary from country-to-country. VAT takes the most time on the African continent for businesses to comply with (133 hours), according to PwC research. “How countries compare depends on a number of factors contributing to a high or low compliance burden,” he adds. For instance, multiple VAT rates, complex obligations, ineffective collections and late or no refunds can lead to hefty costs for businesses and a high compliance rate.
“More efficient use of technology can reduce the costs of collection and compliance. Electronic invoicing has now become the global norm.” South Africa’s tax authorities have been focusing on improving tax administration. The Tax Administration Act, which took effect on 1 October 2012, does away with some outdated procedures. The introduction of e-filing for VAT is effectively complete. “As a result we have seen some real benchmarks established in the way that taxpayers have been selected for enquiries.”
Interest is also growing in the concept of electronic auditing by tax authorities of a business’s financial records and systems. However, the trials of wider e-audits have been less successful in South Africa. It appears that the tax authorities have set themselves far-reaching goals but progress is slow. The IT14SD, which requires taxpayers to reconcile across different tax types is a prime example of an initiative which has failed to deliver the expected benefits.
The world of international trade has expanded immensely and become more complex. The tax authorities have started to look at customs values more closely. In South Africa, more focus is being paid to the legal requirements for valuation in the Customs and Excise Act and whether they are being correctly observed and adhered to by business in respect of transfer pricing adjustments.
“The continued modernisation of the customs regime, including a full e-clearing system, is a positive step. This should see an end to the lengthy delays some taxpayers have experienced through the stoppage of some shipments while paperwork is reviewed and business checks are carried out.”
With organisations under increased pressure from regulation and compliance requirements, it is essential that organisational processes become more transparent and effective. Companies need to adopt a more streamlined and efficient approach to tax management. PwC has a number of technology solutions in place to enable organisations to gain greater efficiency and control in the tax process, he adds.
“Unless companies consider the make-up of their tax bills in future, they won’t be geared up with the right systems and resources to manage them effectively. It may require some fundamental rethinking of the structure of the tax function as well as broader finance and procurement departments to ensure they identify the costs which need to be controlled,” concludes De Wet.