Unilever’s indirect tax management challengeJune 13, 2012
Effectively managing indirect tax requirements in a global marketplace calls for a deeper consideration of how corporate processes, systems and skills need to change and adapt.
By Phil Davis
Under the designation of indirect taxes, there are a wide variety of taxes levied, including value added tax (VAT), goods and services taxes (GST) and customs duties. In addition, governments are increasingly looking at particular local indirect taxes, such as food and environmental taxes to promote certain preferred behavior.
While indirect taxes are proliferating across the globe, there is little uniformity in how they are implemented, in particular outside Europe. Each country has its own rules about how, when and where tax is charged, and the related documentary and reporting requirements vary.
As companies refocus their sourcing and sales activities toward emerging markets, particularly the BRIC countries, this only serves to increase the challenges. Rishi Gainda, Director Global Indirect Taxation at Unilever, says: “Brazil and India, for instance, have complex indirect tax regimes which are not similar to those in Europe.”
Meanwhile the current indirect tax system in China does not exist in a form recognizable to many European companies, but it is likely to do so during the next few years. “A VAT pilot is being launched in Shanghai as a groundbreaking step to reforming the indirect tax system in China,” Gainda says.
While the challenges are significant, overcoming them does not only ensure compliance, but can enhance the standing of a business, reduce tax penalties and improve cash flow and revenues.
“Managing indirect tax is very challenging, particularly in emerging markets,” says Gainda. “But doing it properly can differentiate your company from competitors.”
Indirect tax models questioned
The indirect tax burden on multinational companies inevitably grows in line with the size of the business and its revenue trajectory. At Unilever, with 171,000 staff and turnover of €46b derived from sales in more than 190 countries, the scale of the challenge is considerable.
In 2009, an internal survey revealed an indirect tax throughput of €12b-13bn. “Given the growth of the business, this figure has increased since then and will do so even more in the next few years,” Gainda adds. “This has considerable impact on working capital and cash flows.”
The growth of international business and the mushrooming of indirect tax regimes are combining to call corporate models of tax management into question. Companies are starting to reexamine whether they have the resources and skills to effectively become tax collectors on behalf of governments.
As Gainda notes: “There is a global trend for governments to increase revenues through indirect taxes by both increasing VAT rates and broadening the VAT taxable base. Governments often tend to think that VAT is relatively easy to levy because companies act as tax collectors.”
There is little reward for efficient tax collection, but stiff penalties for failure. Compliance with indirect tax regimes is critical because taxpayers falling foul of them can incur a penalty, as well as suffer retrospective tax assessments and a loss of reputation.
At the same time, indirect taxes can provide opportunities for companies with vigilant and proactive indirect tax functions. Gainda says the growing trend of levying or increasing indirect taxes on unhealthy foods, for example, could be a stimulus for a company manufacturing food products to revisit its product portfolio.
“If there are taxes on foods with high sugar or salt concentrations, companies in that sector may develop low-sugar or low-salt products that meet the standards at competitive prices.“ The same principle and solution can be applied where green taxes are levied.
Gainda notes that Unilever’s vision is to double the size of its business while reducing its environmental impact. By properly managing green taxes there will not only be a positive financial impact but it could support Unilever’s commitment to reduce its environmental impact.
This demonstrates that indirect tax teams can do considerably more than manage indirect tax risks and VAT compliance. As well as optimizing cash flow, which helps the company’s funding needs, indirect tax specialists can help develop or further strategic aims.
End of the silo?
There is growing recognition that, to manage the risks and take advantage of opportunities, the indirect tax management structure must reflect the impact across all of a company’s activities from sourcing to sales.
Of course, only those indirect tax specialists with experience and relevant skills will be able to ask the right questions and make the leaps of understanding required to create useful links with the key business units. These people are thin on the ground.
“You need to have talented people specialized in indirect tax and you also need to have them in the right place” in order to partner with the business effectively, says Gainda.
“Traditionally, Europe has had a large pool of indirect tax specialists. But this seems less true of Asia and even less so in Latin America. This is where the challenges lie, particularly given the growth of business and the changing indirect tax systems in these regions.”
While communications and human resources are important elements for companies to assess and control their indirect tax risks, technology also has a critical role to play.
Many multinationals have implemented enterprise and resource planning (ERP) systems and are now deciding whether to update them or add costly advanced indirect tax functionality to deal with growing tax complexity.
In addition to dedicated indirect tax resources and advanced indirect tax technology, Gainda cites a third key enabler for optimizing the indirect tax function as a valuable business partner: managing indirect tax via a comprehensive indirect tax control framework.
Unilever is currently working on a project to review its indirect tax compliance processes and build an indirect tax control framework. The framework outlines the processes, including indirect tax risks and controls, and shares information about how indirect taxes can be managed effectively.
In addition to indirect tax compliance processes, there is a link to other business processes that are impacted by indirect tax. “The framework will also address how the indirect tax function should get involved in business change and how it adds value to the business as a whole,” says Gainda.