‘Simple indirect tax’ days long gone as ATO focuses on business systems

There was a time when VAT/GST was regarded as the ‘simple tax’. Those days are long gone.

Many indirect tax regimes are becoming increasingly sophisticated – with the result that, incredibly, in the UK, ten times as much litigation concerns VAT, as corporate tax. The complexity of the system is translating into serious headaches for companies forced to deal with the day-to-day realities associated with administering and collecting these indirect taxes.

In Australia, the ATO has increasingly been looking at the integrity of business systems – such as the Enterprise Resource Planning (ERP) systems of a company, many of which were not configured with specialist tax input. The ATO has been demanding answers from companies not dedicating sufficient resources to the proper integration of tax in their ERP system.

Nearly 80 percent of errors are due to the systems issues, not technical tax mistakes – mainly because of poor systems set up; changes in trade flows not configured correctly; non-standard transactions; and errors in extracting the data for the BAS return. Last week’s Budget announced that the ATO plans to collect an additional $2.5bn over the next 3 years, and it is likely that most of it will come in this area.

This is the backdrop to the proposed new shared assurance programme on the integrity of a company’s business systems for GST reporting, which has been ‘socialised’ by the ATO over recent months. The programme will initially apply to ASX-listed companies with a turnover in excess of $250m who will be able to self-certify, at CFO or equivalent level, that the company’s governance and policies around GST management meet the standard required.

Participation in the programme will be for a 3 year period and the benefits of participation will be significant. Firstly, the company will not be subject to an integrity of business systems risk review or audit activity related to business systems. Secondly, penalties will not be applied to any errors discovered and interest will not apply where the revenue position is neutral – and in other cases the interest charge will be reduced to the base rate. Thirdly, participating companies will be assessed as ‘low risk’ in terms of the integrity of their business systems, which may move its rating down in the overall ATO Risk Differentiation Framework (RDF), resulting in overall reduced compliance activity from the ATO.

The ATO is clearly signalling its intention to move away from a negative assurance model, where errors are only reported when they become known, to a positive assurance model where the taxpayer has governance and testing procedures in place to confirm that its systems are working correctly in so far as GST reporting and accounting are concerned.

We would hope that the programme can be extended to Australian subsidiaries of overseas listed entities – and those companies who do not actually join the programme, should take careful note of the detailed expectations around governance and data analytics that the ATO.

I would advise any Head of Tax who is facing impending ERP system upgrades in their company to ensure sufficient resources are deployed to properly integrate tax determination and accounting in their native ERP system to help them to better comply with the continually-changing indirect tax requirements. There are now many bolt on solutions or ‘tax engines’ that can address more complex supply chains, as well as sophisticated data analytic products to assist in earlier identification and rectification of errors.

It should also be pointed out that for all the potential downside, there are also opportunities in this area. Indirect Tax staff can play a critical – and often undervalued – role in terms of understanding and inputting into their companies big data strategies. Indirect tax by its very nature, as a transactional tax, is front and centre on transaction level data, often even before the transaction occurs.

So either way – whether through fear or opportunity – the lesson for Australian companies is to seriously examine their tax systems. A great deal of money could rest on it.

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