Indirect Tax Continues to be a Top Compliance Burden for Businesses

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The average business will devote 125 hours to GST/VAT/indirect tax compliance, with this number going up significantly the more complex the business.

According to the United States Census Bureau, general sales tax revenue rose 5.2 percent in the first quarter of 2013 to $76.1 billion, from $72.4 billion in the first quarter of 2012. The Census Bureau has yet to release the Q2 2013 numbers, but based on the most recent Thomson Reuters quarterly ONESOURCE Indirect Tax rate report, sales tax revenue is onthe rise with the average state sales tax at 5.603 percent, up slightly from 5.48 percent in Q1 2012.

As evident by the numbers, government continues to heavily rely on sales tax as a critical source of revenue, which is ranked as the second largest category of state tax revenue. While the government appears to be taking a conservative approach in terms of how quickly they are raising sales tax rates, the sheer number of tax law changes remains on the rise. As an example, in the U.S., businesses had to comply with over 580 indirect tax rate changes in 2012; outside of the U.S. there were over 2,000 tax rate and product taxability changes. This year is on track to be equally taxing, with over 586 U.S. and global indirect tax changes for Q1-Q2 2013 alone.

With such a dynamic landscape, it’s not surprising that, according to PricewaterhouseCoopers, the averagebusiness will devote 125 hours to GST/VAT/indirect tax compliance, with this number going up significantly the more complex the business.

Beyond the number of tax changes, complexity is another hurdle that business must face as the calculation and determination of taxes is not as simple as it might sound. Each transaction has unique characteristics that affect and change the specific tax rates applied depending on who, what, where, when, why and how the exchange was made. A business can face multiple, overlapping tax-collecting jurisdictions — countries, states, counties and cities — and tangled rules in the various tax authorities based on the type of business, location, nexus, or where the products and services will ultimately be used. Even for a small company, this can equate to countless hours updating tax rates tables, calculating tax, filing returns, reporting and auditing.

During a recession when tax rates are down or during an upswing economy when rates are on the rise, for businesses the operational hassles of indirect tax compliance remains the same. The bottom line is that compliance with indirect tax is a huge business burden and all indications are that this trend will continue.

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A blog from Thomson Reuters, a source of intelligent information for businesses and professionals.

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Carla Yrjanson

Carla Yrjanson is the Vice President of Tax Research & Content for Indirect Tax within Thomson Reuters. She leads the Tax Research & Content Team which is responsible for delivering Sales/Use...

J. Harold McClure

Dr. James Harold McClure, senior manager of transfer pricing at Thomson Reuters, has over 18 years of transfer pricing and valuation experience and has authored a number of papers on the subject....
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