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VAT Review

By Editorial
April 17, 2012

With governments increasingly coming to rely on revenue from indirect taxation, managing value-added and sales tax exposure has rapidly become one of the most important tax issues facing companies doing business in several jurisdictions, alongside transfer pricing.

Many studies have shown that indirect tax rates have been on rise since before the financial crisis indicating a general shift away from direct taxation on income and towards the taxation of consumption. However, there is no doubt that the pace of consumption tax rate increases has accelerated in the past three or four years with government finances increasingly under strain.

This trend has been particularly notable in Europe, where the following countries have lifted value-added tax standard rates in the past year:

  • United Kingdom - from 17.5% to 20%
  • Ireland - from 21% to 23%
  • Cyprus - from 15% to 17%
  • France - from 19.6% to 21.2% (from October 2012)
  • Italy - from 21% to 23%
  • Hungary - from 25% to 27%
  • Spain - from 16% to 18%
  • Portugal - from 20% to 23%
  • Greece - from 19% to 23%

This has taken the average VAT rate in the EU to over 21% this year, from around 19.5% just before the crisis. However, this trend is by no means restricted to just Europe. The Thomson Reuters ONESOURCE Indirect Tax report for the third quarter of 2011 shows that, outside of the United States, there were 14 sales tax increases and four news taxes around the world in those three month alone. And in the same period, there were 97 indirect tax increases and 96 new indirect taxes at state and local level in US.

Obviously, such changes are also being felt by individuals as well as businesses. The Tax Foundation (TF) has pointed out that sales taxes in the United States, which are levied not only by state governments but also by city, county, Native American and special district governments, can have a profound impact on the total rate that consumers see at the check-out register.

Governments are also using less visible means to extract more revenue from consumption tax systems, including by increasing concessionary rates of tax which are usually charged on 'essential' or educational goods and services such as children's clothing, books and newspapers. In the UK for example, there has been much controversy over the government's decision in the 2012 Budget to remove a number of anomalies and inconsistencies from VAT legislation by placing a number of goods, mainly certain foodstuffs, that were previously zero-rated on the list of items attracting VAT at the standard rate (a move since dubbed as Chancellor George Osborne's 'pasty tax'). France, Greece, Italy, Norway, Poland, Portugal and the Czech Republic have also raised their reduced rates recently.

This complexity has led many countries to crackdown on VAT and GST fraud in an effort to discourage traders from taking advantage of unintended loopholes in indirect tax legislation or to commit more serious acts of fraud, especially those conducted in more than one state. Again, this has been an increasingly visible trend in Europe, and has led to greater levels of cooperation and information-sharing on taxpayers between national revenue authorities. For example, in January this year, it was announced that a Franco-Austrian partnership agreement designed to strengthen the exchange of information to uncover VAT fraud has proven to be highly effective in practice. Also, much is being done at EU level by the European Commission to eradicate VAT fraud; in November 2010, EUROFISC was established to provide a network of national tax officials with the aim of detecting and preventing fraud before it occurs.

Businesses operating in some countries are facing much more fundamental changes to national indirect tax systems, which in the process can create much uncertainty in terms of planning. India is a prime example, where huge changes to the country's complex patchwork of national and state-level sales tax systems are in their final stages, although nobody is quite sure when the new national regime, under which uniform taxes will be levied by the Central and the State governments through a common system of tax collection, replacing central sales tax, state sales tax, entertainment tax, lottery tax, electricity duty, stamp duty and value-added tax (VAT), will be introduced. Another example is China, where the government is planning to restructure all forms of turnover taxes into VAT over the long-term, promising much upheaval for businesses.

With indirect taxes like VAT now so important to state budgets (a 1% change in the VAT rate in the UK, for example, is worth about GBP6bn per year in revenue), it is a sure thing that governments are going to continue honing their VAT/GST regimes to extract more revenues from taxpayers. Indeed, Ernst and Young's 2011-12 Tax Risk Survey showed that 69% of tax policy makers expect to generate more revenue from indirect taxes in the future, and such taxes are expected to be the leading source of new revenue over the next decade.

Philip Robinson, Global Indirect Tax Leader at Ernst & Young says: "The next 12 months will prove to be extremely challenging as governments around the world continue to use indirect taxes on consumption to balance budgets and fund tax reform in other areas. Taxes on the consumption of specific goods such as energy taxes, air passenger taxes, snack taxes, carbon taxes as well as alcohol or tobacco taxes have also had an impact on consumer behavior. In addition, many tax-policy makers have indicated that they expect indirect taxes to be their leading source of new revenue over the next year, while tax administrators and taxpayers view indirect taxes as a key source of risk."

Despite these warnings, it would appear that businesses are struggling to keep up with the pace of change with regards indirect taxation. According to KPMG International's 2012 Benchmarking Survey on VAT/GST, these taxes continue to be "under-managed and under-measured by the majority of global businesses". This survey of 225 respondents representing businesses headquartered in 24 countries conducted between June and November 2011 showed that 63% of global businesses do not have a Global Head of VAT/GST while 59% only have between one and 10 full-time employees (or equivalents) focused on indirect tax worldwide. One-quarter of respondents have no full-time equivalent VAT /GST specialists at all. Only 32% rate their VAT/GST policies as very good or excellent and just 20% rate their implementation as very good or excellent.

However, the survey indicated that new business models, increased globalization, finance function transformation and rapid legislative change are all putting VAT/GST management "under tremendous pressure".

"Given the rapid pace of change, which is expected to continue through 2012 and beyond, even the more advanced businesses are simply running to stand still while others are falling even more behind," observed Niall Campbell, KPMG's Global Head of Indirect Tax Services. "There is still a very long way to go before the majority of business get the right mix of people, processes and technology in place to are adequately manage the global VAT /GST challenges. In the meantime, CEO's, CFO's and Heads of Tax really need to appreciate the nature and level of risk which is now in the system and the level of opportunity which is being missed."

With the world's economic troubles far from over, and the sort of revenue-producing levels of growth not expected for some time, businesses, therefore, are likely to face on-going change in the area of indirect taxation in many part of the world.


Tags: value added tax (VAT) | United Kingdom | Ireland | Cyprus | France | Italy | Hungary | Spain | Portugal | Greece | business | European Commission | goods and services tax (GST) | European Union (EU)



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