During economic downturns, company bosses search for as many ways as possible to cut business costs and bring in cash. As the possibility of a global recession gets stronger every day, companies are aiming to generate cash and hold on to it.
The sticky economy does raise other issues, which, admittedly, are also valid to address when times are good. What should the relationship be between taxpayers and tax authorities? Are revenue officials simply collectors of the taxes due under the law? Or are they there to facilitate the operation of business? Should they be giving companies every chance to develop and prosper by formulating and implementing tax rules that are easy to comply with? Does this probable down turn is equally important for tax authorities and taxpayers?
Surely the answer to these questions is that the relationship between the two should be the same at all times. Taxpayers should abide by the law and the tax rules should help them do that. In particularly difficult times officials may be able to make tax management easier. This article is an endeavor to highlight the importance of Tax Directors or Managers in the companies during the downturn.
Creating a tax system which encourages taxpayers to contribute to the national purse is the ideal and not the one which unwittingly give incentive to avoid tax. Trust is the ingredient that binds it all together. Officials have to be sure that, after proper consultation on any new or amended rules, taxpayers will pay what's due at the right time. At the same time, taxpayers need to be happy that the tax system won't be subject to sudden changes or make impossible demands of them as to try to comply with their obligations.
TAX DIRECTORS OR MANAGERS
Executives are relying on all departments to be frugal but it is the tax teams that are making a real difference and showing just how valuable they are. Although business managers rely on the ability of their tax department when it comes to compliance and risk but now putting them under pressure more than ever to bring in much needed capital.
Generally speaking management doesn't appreciate how much they get from the tax department in terms of value but it has an important role in this changing environment. For instance, a company in trouble may not put tax at the top of its agenda, but it must realize that everything has a tax implication and tax can help cash flow. Company’s tax departments are under pressure during this economic downturn. Business managers are looking to them to manage their departments as efficiently as possible. Companies are striving to generate cash from anywhere and then to hold on to it while the economy is weak.
Tax department’s may cope this situation in a variety of ways like some are looking to see if they are due any unexpected refunds because of tax litigation, others are paying more attention to how they deal with indirect taxes. More are using external advisers only at the final stages of a matter. At the same time, it's not all fire-fighting. The state of the economy is presenting tax departments of companies with an opportunity to show the business managers what value they can bring to the company following are some obvious examples.
INDIRECT TAXES’ HIDDEN CASH
In unstable economic times it is how much the company owes to tax authorities around the world is paramount and tends to override the usual concern about book rate, or the figure published in the financial statement. Book rates are still important to company bosses, but in times of uncertainty, cash is the immediate driver. And bosses are relying on tax department to manage cash flows and cut costs as far as possible.
Indirect taxes in particular have become a more valued part of the tax function. Value-added taxes such as VAT, GST and FED, particularly, can dramatically affect cash flow. Tax department can delay the time cash needs to be accounted for and accelerate the time at which it is recovered.
Indirect tax is relatively immature and most Tax Directors or Manager will have a direct tax background which is why they may not have considered the value of GST and FED before. But the pendulum is swinging the other way and now there is more investment in indirect taxes management.
GST and FED is among the company's largest cash flow. Some businesses get this, but many don't. Many just see GST and FED as a compliance function. However, this new phenomenon, that is, GST and FED cash flows are becoming increasingly important and taxpayers don't want to have to wait so long for their GST and FED returns.
Companies with foreign operations may be missing a trick if its Indirect Taxes are not properly managed. Another way of liberating cash is to look at structural changes. If you're a company selling goods, it might be 90 days until the customer pays but you may have to submit your tax return 45 days after the sale. There are ways of making the customer account for the GST or FED. This solution can prove to be tricky, but in difficult times people are prepared to do more difficult things. Maximizing GST and FED recovery is gaining a lot of attention.
DIRECT TAXES’ HIDDEN CASH
Tax Directors or Manager are also trying to save on a day-to-day basis by considering any allowances which offer relief. This includes R&D, training and other allowances. These relieves have always been there but they are being revisited and more people are looking at their benefits now.
People are looking at past initiatives if they can come up with half a dozen ideas that save a few million rupees it soon adds up. Tax Directors or Manager should “go after the smaller tax saving opportunities”.
For instance, in the Netherlands, a lot of people are converting debt into equity thanks to a change in legislation that has helped the taxpayer. Previously if the debtor swapped debt for equity, the company had to pay corporate tax for the debt that had disappeared from the balance sheet. This provision was abolished in 2005. “Restructurings are no longer suffering from this archaic provision and this is facilitating debt for equity swaps and people are expecting to see a lot more.
RELIANCE OVER EXTERNAL ADVISORS
When it comes to cost cutting, one easy method is to reduce reliance on external advisers. Company bosses normally made a determined effort to ensure that we only bring external advisers in where absolutely essential and rely more heavily now on company’s Tax Directors or Managers’ judgment and assessment of the risks.
But this may not be the answer as advisers can contribute real value. On the other hand, in-house directors are looking at what they can do to make a real difference to their company. They are hungry for ideas and proven solutions. Consequently, they are hungry for the advices they can get from advisory firms as Advisers have accumulated experience and knowledge from working with different clients. They know what does and doesn't work from a tax authority perspective.
This is also the time when trusted, longstanding relationships are crucial. And advisers need to be accommodating. Advisers should offer to do things on a more flexible basis but people aren't going to change habits of a lifetime. And spending money on external advisers could prevent costly mistakes. Risks are so acute that you need advice to move forward with a project has cut back in external advice. However, the some managers only take the advice where the amounts are material or where precedent is being set.
Some tax departments are squeezing transfer pricing arrangements which are quite a dangerous way to cut costs, because unless there is an economically justifiable reason to do it, you're asking for trouble from the tax authorities.
There are ways to manage the tax charge more efficiently. Some people will disagree – those that view transfer pricing as a pure compliance issue. Tax audit offices are currently reacting to this reduction in tax revenues by accusing companies of making aggressive use of tax credits and tax allowances to better survive the crisis.
Globally, Companies are facing situations where they are asking for tax refunds, but getting refunds is more difficult so managing refunds is difficult. Globally, the tax audit offices has started to improve its effectiveness and in the past year many companies have been called on for a tax audit and 100% corporate tax audit in Pakistan during the Tax Year 2008.
Tax Directors or Manager have less time now to focus on each matter as decisions need to be made quickly. Time pressurized decisions have to be taken quickly and tax implications have to be assessed quickly in this scenario. The level of activity for the tax function has increased significantly with the passage of time especially in the current scenario.
If there's more work, that can mean more people are needed, but there are mixed views about headcounts in tax departments. Some tax professionals have witnessed a freeze in recruitment and have noticed people that leave are not being replaced. Others have observed the opposite. Tax departments are not being forced to make cuts. Instead they are recruiting as management sees that tax can add value and contribute to the business.
Tax Directors or Manager are about to be busier than ever and where their workload is heavier, they are recruiting. Whether tax departments have sufficient capacity or not, efficiency is an important concern more than ever, notably how to get the most out of resources. The four key areas of reporting, compliance, planning and business support, and administration all require equal focus in uncertain economic times.
Tax Directors or Manager are either reactive to changing external factors or they get their house in order before turbulent times hit. There's no room for excuses like as there was no one in finance to give the right information to do the tax return. It's not as though this situation has come out of nowhere.
There are also increased expectations on accounting and reporting. People are less forgiving about surprises in the current environment. Tax Directors or Managers are focusing on forecasts because they are often managing market expectations and they have to make sure all the numbers are right. Efforts must be focused on working smarter and finding process improvements, for example to simplify the work around compliance and financial reporting.
MNC’s are considering establishing shared service centres. This is when different parts of a company's financial operations across various territories are standardised in one central location. The problem with the initiative is that processes are done differently between jurisdictions and there needs to be consistency for a shared service centre to work successfully. Companies are now considering this method to improve efficiency and cut costs. The efficiency you get from a shared service centre means tax people can focus on tax and leave other people, not necessarily tax-specific people, to deal with other work while the tax team can just do the high-end work.
Tax professionals across the board are unanimous that the tax function can play a key role in helping companies through difficult economic times. Changes at short notice to strategy and planning mean that Tax Directors or Manager needs to be flexible and prepared. And the changes imposed can also improve the company's position during periods of economic boom.
The credit crunch gives companies the incentive to make changes. So even though the economic situation is uncertain and economists battle it out to be right about whether or not the world is already in recession one thing is certain – the tax function can make a real impact to balance sheets and company bosses can't afford to ignore its value.