Creating businesses with an ‘edge’ | Taxes

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.