Majority of companies worldwide admit to material mistakes on indirect tax and seem ok with it

The vast majority of companies have made materially significant mistakes with regard to indirect tax, according to a survey that found only a minority of companies identify as risk averse in this area.

Tax software company Vertex surveyed 580 professionals worldwide who had at least some influence on direct tax compliance at their companies. The report found that 75% of these professionals say their companies have, at some time or another, made mistakes with regard to indirect tax that were caught and corrected internally. Meanwhile, 62% said their companies have, at some time or another, been made aware of mistakes via government audit.

Breaking these stats down further, of the 75% who reported internal mistakes, 33% said this happens often. Of the 62% whose mistakes were spotted by auditors, 30% said it happens often.

When asked whether these mistakes were financially material, 75% said they were.

This materiality, though, does not appear to be affecting risk appetite. The survey asked respondents what their organizations’ attitudes toward indirect tax compliance, and what they found was a large majority were willing to take on risk. Specifically, 31% said they were very willing to take on risks, and 43% said they were somewhat willing. In contrast, only 11% said they were somewhat risk averse, and a mere 5% said they were very risk averse.

This was despite there being plenty of worry about the consequences of noncompliance, with large numbers of respondents expressing fears about government audits (32% were somewhat worried, while 19% were very worried), impacts on business performance (same), criminal proceedings (30% and 20%), brand reputation damage (31% and 18%) or fines (30% and 18%).

Furthermore, respondents believe many of these fears are well-founded. Data found that 28% believe it’s very likely their organization will be audited or investigated by the government and 32% believe it’s somewhat likely. Similarly, when asked whether business performance will be impacted, 23% of the respondents think it’s very likely and 32% think it’s somewhat likely. Similar stats were found for being unable to operate in certain territories or jurisdictions (26% and 29%), brand reputation damage (25% and 30%), fines (21% and 31%), criminal proceedings (23% and 28%), personal impacts on employment records (same), and director bans (23% and 27%).

“It is intriguing why so many businesses seem to have accepted a certain level of risk when it comes to indirect tax compliance,” said VAT director for Vertex Peter Boerhof. “Principally, the survival or commercial expansion of the business may be its top priority ahead of its indirect tax compliance strategy. The business may also have a high-risk tolerance and take the materiality view, believing that the worst outcome is fines and penalties while lacking the resources to tackle compliance at present. Similarly, there are reasons to be risk averse. Tax authorities always catch up with a business via audits and look at how on top of its accounts it was, so the business will have to defend the position it took at the time.”

Despite all this, companies had a high degree of confidence in their indirect tax compliance. When asked to rate their levels of indirect tax compliance on a scale of 1 to 5, almost half of respondents, 49%, rated themselves a 4 and 29% rated themselves a 5. Similarly, when asked if they think their organization will be less compliant, more compliant or about the same with regard to indirect tax by 2030, 49% said they’d be more compliant and only 4% said less.