As inflationary pressure continues to endure and high levels of interest rates persist, almost all businesses have had to turn their attention to working capital management. At the same time, global events are leading to supply chain shocks, meaning that indirect tax functions in the Asia Pacific region are now facing the task of contributing to an organization's bottom line. Focus has now been placed on how indirect taxes can be applied to generate working capital and cashflow benefits.
This article considers how indirect tax is being used to inject cashflow into organizations operating in the Asia Pacific region. Here we share insight on the top four trends we are seeing in the Asia Pacific region and examples of country-specific indirect tax measures that can be adopted to support better working capital and cashflow management.
1. Mitigating Previously “Accepted” Indirect Tax Costs
Many organizations often accept status quo indirect tax positions inherited over time. These positions frequently include, for example, value-added tax (VAT) leakage on cross-border service supplies, or VAT input tax credits in excess of VAT outputs that are not or cannot be applied for as cash refunds. Yet as indirect tax regimes mature in the region, these legacy positions are being challenged. This could be due to changes in legislation, developments in local tax authority approach or organizations simply taking a different viewpoint on a prudent position that was taken in the past.
Indeed, it has been observed in markets such as Indonesia where cross-border services are often accepted as being taxable supplies, but appropriate preparation and documentary support can satisfy zero-rating VAT treatment for cross-border services.
Furthermore, in China, tax authorities have recently broadened the application of the Export VAT Refund scheme and simplified the process of obtaining such refunds.
As a result, opportunities exist to mitigate what was once considered an irrecoverable VAT or goods and services tax (GST) impost as part of operational activity. These cost saving opportunities may also have the effect of alleviating working capital requirements of operations. In this regard, we are observing that in the Asia Pacific region, organizations are giving further attention to managing:
- irrecoverable VAT incurred by foreign providers on international/cross-border services, particularly to service recipients located in Indonesia, Thailand, Philippines and China;
- the timing of compliance obligations and VAT or GST credit entitlements;
- import GST by use of deferment scheme in markets such as Singapore, Australia and New Zealand.
Technology also exists that can assist organizations in conducting analytics on indirect tax data derived from internal accounting records (often starting with an analysis of Accounts Payable and Accounts Receivable data). Such technology can be embedded within an enterprise resource planning (ERP) system or be a standalone service deliverable. This provides the ability to undertake ongoing data-based testing, identifying indirect tax refund opportunities and risk mitigation procedures.
2. Supply Chain Optimization
In the Asia Pacific region, indirect tax is often considered an inherent cost to be absorbed in the supply chain. Indeed, VAT credits arising from expenditure activity are typically required to be offset against VAT liabilities (generated by sales activity) with historically limited ability to cash out credits as refunds. With careful consideration of supply chain activities, however, VAT credit recovery can be converted to a cash refund, thus optimizing working capital and cashflow needs.
Given the Asia Pacific region's status as a global manufacturing hub, opportunities exist to generate VAT refunds through careful planning of supply chain related activities. Across the region, bonded zones and free trade areas provide organisations with the ability to conduct manufacturing and even logistics activities without indirect tax applying to the extent the necessary criteria of operating in such locations are met.
Across the Asia Pacific region, there are bonded and free trade zones in China (across the east and center of the country), Singapore (such as the Changi Airport Cargo Terminal and Jurong Port), Malaysia (including Labuan, Langkawi and Tioman), Indonesia (such as Batam, Bintan and Karimum), Vietnam (which has 18 Special Economic Zones and 290 plus Industrial Parks) and the Philippines (in Philippines Economic Zone Authority zones) each with specific characteristics and criteria that can provide both indirect tax and global trade benefits to production activities.
Further examples of optimizing VAT/GST throughout the supply and value chain include:
- VAT refunds for importing and subsequently exporting goods in Vietnam and China; and
- Usage of the Major Exporters Scheme and Zero GST Warehouse in Singapore.
3. Working Capital Management
Globally, the burden of indirect taxes, may be hidden within cost of goods sold (COGS). Indirect tax under management, however, is often larger than that of direct taxes. As a result, there is a growing commitment to employ greater focus and resources to the management of indirect taxes in the Asia Pacific region.
Given that VAT credit entitlements typically have a cash-based outcome (for instance when refunds are generated), organizations may be able to take advantage of country-specific VAT initiatives that provide for an increase in cash flow that directly assists the management of working capital.
In this regard, regulation in China provides that if general VAT taxpayers sell software products developed and produced internally (i.e. within the company in China) a refund of VAT remitted on the sale is obtainable if specific criteria relating to the entity and the transaction are satisfied. That is, output VAT on the sale of such software can actually be refunded back to the seller even if this has been claimed by the purchaser as a VAT input tax credit.
Optimal results occur when relevant criteria to avail of the VAT refund have been satisfied before supplies of software commence.
Other specific examples of indirect tax initiatives that assist with the management of working capital include:
- Claiming one-off GST input tax credit in New Zealand and Australia;
- Offsetting VAT payables with VAT receivables between branches in China;
- Availing to intro-group SST exemptions in Malaysia; and
- Moving from annual to quarterly or monthly Japanese Consumption Tax reporting in Japan to receive JCT refunds earlier.
4. Optimizing Indirect Tax for Investments and Deals
Many organizations have seen the challenges brought about by supply chain shocks such as COVID-19 as a need to re-evaluate supply chains and operating models in the Asia Pacific region. As a result, supply chains are being made more resilient and operating models more diverse. Yet these changes can also lead to additional (or unplanned) costs, such as VAT or GST being incurred in markets where organizations previously had limited or no activity. However, methods exist in the Asia Pacific region to enhance indirect tax recovery via strategic investment decisions.
One such opportunity is the New Investment Project VAT refund in Vietnam. This scheme provides for cash refunds of VAT inputs on costs incurred as part of a new investment project (which otherwise would be required to be used to offset future VAT liabilities). Conditions are set by local tax authorities and prior preparation and planning is recommended given the process to obtain these refunds can be cumbersome.
Throughout the Asia Pacific region, prior preparation can also assist with the optimization of pre-registration VAT or GST input tax credits where these are possible. This may provide a benefit to those organizations incurring significant costs in a new overseas market before VAT or GST registrations have been finalized by tax authorities in relevant jurisdictions, such as Australia or Singapore.
Takeaway
Overall, by devoting a greater focus on indirect tax management
in the Asia Pacific region, an organisation's indirect tax
profile can shift from a compliance centre to a centre of
excellence. Whether it be due to supply chain restructuring,
operational efficiencies, strategic decision making or
technological advancement, it is possible that positive cash flow
returns are achieved.
Companies which consider indirect tax outcomes as part of their
strategic decisions will contribute to the success of generating
additional working capital and/or cost recovery. Importantly,
however, indirect tax regimes in the Asia Pacific region are as
diverse as the markets themselves. Therefore, prior preparation and
proper planning and considerations of the indirect tax impact are
recommended to generate optimal cash-oriented market-to-market
outcomes.
Originally published 06 May 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.