In our lifetimes, we see a constant
urge in Businesses to remain dynamic, relevant, efficient and profitable. Thy
very purpose and pursuit is towards creating a ‘differentiation’ or an ‘edge’
over the rest. And obviously we all tend to believe that it lays in effective management,
a classic organizational structure, great leadership, efficient processes, project
execution capabilities etc, which it is surely; however, one must also look closely
at a vital factor viz. ‘taxes’.
World over, ‘taxes’ are a commonest
phenomenon prevalent almost everywhere and it create a significant impact for
any business. The system(s), methodology and dynamics of ‘taxes’ changes over
different place(s) and with different time(s), but it is a rock solid constant
for ages. Globally, ‘taxes’ impacts business in following ways:
(a) it involves a ‘cost’ – there
are ‘direct taxes’ in form of Income / Corporate taxes or wealth taxes where
the tax incidence is directly on the payer; or ‘indirect taxes’ like VAT / GST
wherein a Business recovers tax from clients
(b) it involves ‘compliances’ –
there are a plethora of compliances prescribed almost everywhere such as return
filings, tax withholding on payments, interest on short filings / payments, credit
/ incentives and several others;
(c) ‘litigation’ – the tax
system and provisions often and almost always lead to disputes and commonly
found litigations etc. At international levels, it does involves Advance Pricing,
Mutual Agreement under tax treaties.
The
bigger and more complex a business tends to become, bigger would get its
cost(s) and exposure towards taxes. One must understand and look at taxes at as
important cost element which reflects on our Balance Sheets and also often
absorbed in our (every) business transactions. Thus, the tax cost impact can be
huge and its savings, fatal. Businesses that are able to effectively lower the
tax cost impact (through varied mechanisms such as being able to avail incentives,
better planning and tax-efficient organizational structuring), understand and stay
compliant with the requirements, and manage litigation / disputes for long(er)
times certainly will have an ‘edge’ over anyone. As said, ‘taxes’ are a (lethal)
ever changing and dynamic constant, thus businesses must forecast, plan and
prepare well in advance to deal with uncertainties and future changes.
Businesses that are multi-locational and
spread across different Countries remain subject to varied cross-border laws
and have bigger exposure(s). The issues involving ‘Transfer Pricing’, ‘Treaty
Shopping’, and ‘Thin Capitalization’ are therefor very commonly found. Alongwith
the dispute settlements, new(er) and more complex positions in taxes continue
to emerge. World over, the taxes remain volatile although. One tends to find
introduction of US tax incentives by the present administration, introduction
of VAT regime in the Arab World, the impact of ‘Apple tax’ involving Ireland
and the EU alongwith ‘BREXIT’ and the much talked about ‘Vodafone’ tax in
India. Nothing less, we see ‘taxes’ becoming (alongwith Terrorism and Global
Warming) as a global phenomenon of present times.
With globalization, increasing inter-dependence
of trade and commerce among countries, a common desire emerging would be find a
commonality in doing business internationally (similar to having one currency
world over). Thus in today’s times, every country designs its internal tax laws
and policies as per its requirements, but at a world stage / level, there is a
widespread and extensive tax treaty network which almost country is able to
develop. Also, there is an attempt to create standard policies vide OECD program viz BEPS – Base Erosion
and Profit Shifting. The HSN system or Harmonized System of Nomenclature which classify
the different commodities under standard and globally accepted categories is
another example. And, a lot is in pipeline.
Thus, Taxes require a highly proactive
and not a reactive approach to deal with – to create a business with ‘edge’. It
certainly is complex, but in efficiently handling and management and through a
focused approach lays the vital impact of lowering business costs, becoming
dynamic and above all staying healthy for a business lifetime.