Under the Indirect Tax Ax

Tax reform is on the march worldwide. Sixty-five countries have made it easier for companies to pay taxes over the past three years, and total tax rates are in a downward trend, according to PricewaterhouseCoopers' latest report "Paying Taxes 2008: The Global Picture."

That's good news. But hold the cheers. At the same time that governments are scaling down corporate income taxes, they're ratcheting up their efforts to boost revenue from value added tax (VAT), goods and services tax (GST), and sales taxes, according to a July report from KPMG International. The audit firm surveyed 500 finance executives and tax directors at large organizations around the world to get their take on developments in indirect taxation. When asked whether they expect governments to rely more, or less, on indirect taxes for their revenues in the next five years, 75 percent of respondents said more. Among respondents in the United States, an even higher proportion, 80 percent, expected governments to increase their efforts in this area.

Indirect taxes are now the number one tax risk for global finance directors, the report notes. "As global competition for investment puts pressure on national governments to reduce headline corporate income tax rates, they must find alternative sources of tax revenue. VAT/GST is a particularly attractive alternative for governments as it is a very efficient means of collecting revenue without negatively impacting on the attractiveness of the jurisdiction as an investment location."

The challenges posed by indirect taxation are particularly severe for U.S. companies, which must comply with a host of local- and state-level sales and use tax regulations as well as international rules. In particular, many organizations continue to struggle with identifying and managing nexus -- the connection with, or physical presence in, a state which allows that state to impose tax liability and reporting requirements.

A new Business Finance online poll investigated companies' sales and use tax compliance concerns. Forty-eight percent of participants cited the need to understand their organization's liability by state, or nexus, as their top concern. Surprisingly, though, only about 42 percent of respondents said that their business had conducted a nexus determination study to understand its liabilities.

As indirect taxes become more important to governments, regulators are intensifying their scrutiny of companies' tax systems to ensure that their tax revenues are not at risk, notes a 2007 KPMG report. Corporates should take note of the shift, and ensure that their compliance systems and processes are robust.

Here are the complete results of the Business Finance survey:

1. Which of these issues would you rate as the most pressing compliance concern?

1. Which of these issues would you rate as the most pressing compliance concern?

2. Has there been a nexus determination study conducted on your business to understand your liabilities?