The world of value-added tax (VAT) or goods and services tax (GST) may be on the verge of big changes. The first "VAT revolution" began during the second half of the 20th century when a joint director of the French tax authority put into practice the concept—developed earlier in the century by a German businessman and an American economist—that would become the VAT. Today, more than 140 countries have adopted a form of VAT or GST (see, e.g., Charlet and Owens, "An International Perspective on VAT," 59 Tax Notes Int'l 943 (Sept. 20, 2010)).
Early on, businesses and tax authorities paid scant attention to the consumption tax, which should be neutral for businesses and relatively inexpensive for governments to administer. However, following the global financial crisis in 2008, tax authorities began focusing more attention on VAT compliance, and businesses started examining ways to reduce the cash flow impact of the tax and to limit potential liabilities. At the same time, technological developments have disrupted traditional economic models and created new challenges for taxing consumption; these developments have also created new opportunities to improve VAT compliance. Thus, the world is entering a new "VAT revolution" marked by the role of technology in the way people consume goods and services and how tax authorities administer the tax.
Trend 1: Continuity of VAT Reforms
Many jurisdictions in the world now have a VAT or GST, and the general success of this consumption tax may persuade jurisdictions that have previously resisted it to adopt one. In 2015, Malaysia replaced its sales and services taxes with a single, broad-based GST of 6%. When considering fundamental tax reform in January 2015, the Bahamas introduced a 7.5% broad-based VAT rather than an income tax. Similarly, Puerto Rico is replacing its sales and use tax with a new 10.5% VAT effective June 1, 2016, as a means of increasing revenues and improving its economy. Last but not least, the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) are working toward introducing by 2018 a harmonized GCC VAT based on the European Union (EU) model as they see oil-related revenues continue to decline. If this trend continues, the United States could be the only country in the world that does not use a VAT.
Several countries with less than comprehensive VAT or GST systems are in the process of reforming their VAT legislation. In July 2015, Tanzania introduced a new VAT act that is broader than the previous VAT and clarifies the treatment of certain transactions. Egypt is examining replacement of its current "sales tax," which is a VAT-like tax on the sale of goods and selected services, with a broad-based VAT. Similarly, in August 2015, the government of Costa Rica proposed draft legislation that, if adopted, would replace the country's sales tax, which applies only to goods, with a VAT applying to sales of goods and to all sales of services, with very few exemptions.
Some of the most important reforms are occurring in the world's most populous countries. In 2012, China began a process of reforming its dual indirect tax system (VAT for goods and a turnover tax on gross receipts on most services) into a single VAT system. The country first expanded the VAT to modern services (e.g., consulting, information technology (IT), and research and development services) in a specific geographic area before expanding it nationwide in August 2013. The following year, China broadened the scope of its VAT to the entertainment, railway, postal, and telecommunication industries and, according to official statements, will transition remaining industries (i.e., life science, financial, and real estate) to the VAT system in May 2016. In India, discussions have been ongoing since at least 2006 to replace the country's complex multilevel, multitax indirect tax system with a streamlined dual state and federal GST. The Indian government, led by Prime Minister Narendra Modi, will try this year to obtain the needed constitutional amendment to introduce the biggest tax reform the subcontinent has seen in years.
Trend 2: Enhanced International Cooperation
Unlike income taxes, there are currently no international double-tax agreements for VAT and GST. Except for the required cooperation among member states of the EU, international discussions have only just begun. In 2006, the Committee on Fiscal Affairs of the Organisation for Economic Co-operation and Development (OECD) adopted fiscal neutrality (i.e., VAT should not unduly burden businesses, and tax legislation should not distort conditions of competition or hinder the free movement of goods and services) and destination principles (i.e., taxation at the place of consumption rather than at the place of production) as core concepts that any VAT or GST law should contain (see, e.g., OECD, OECD International VAT/GST Guidelines—Draft Consolidated Version (February 2013)). The committee adopted the principles as a cornerstone for future guidelines later developed by the OECD.
On Nov. 6, 2015, at the OECD's Global Forum on VAT/GST, representatives of more than 100 countries and jurisdictions endorsed the new consolidated OECD International VAT/GST Guidelines (the OECD guidelines) as the preferred international standard for coherent and efficient application of the tax. Although the OECD guidelines are nonbinding, the hope is that they will have the same influence as the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The OECD guidelines aim to address issues of double-taxation and unintended nontaxation resulting from inconsistencies in the application of VAT and GST to international trade. The final package of OECD guidelines includes recommended rules for the collection of VAT on cross-border services to private consumers. The guidelines recommend (1) requiring foreign vendors to register and remit tax on sales of services where the final consumer is located (this should not apply to on-the-spot services, which are taxable where they are performed), and (2) using a mechanism for the effective collection by tax authorities from foreign vendors.
Further, the Group of 20 (G-20) leaders included the guidelines in the OECD Base Erosion and Profit Shifting (BEPS) package adopted at the November 2015 G-20 Summit. Although the BEPS package is heavily focused on direct taxes and especially transfer pricing, BEPS may have an impact on VAT and GST with respect to the definition of "permanent establishment," new supply chain models, transfer-pricing adjustments, and tax information exchange among jurisdictions. The EU has already started negotiating a VAT information-sharing agreement with Norway and is considering agreements with its other major trading partners, including Canada, China, Russia, Turkey, and the United States. Such an information-sharing agreement in the realm of VAT could be considered a model for other jurisdictions.
Finally, during the Global Forum, participants urged the OECD to develop implementation packages to support the effective and consistent implementation of the guidelines. The implementation packages would assist in the following areas: (1) research and analysis of approaches to improve neutrality and overall performance of VAT systems; (2) development of a possible framework for the exchange of information and enhanced administrative cooperation; (3) application of VAT to cross-border trade in goods (including low-value imports); (4) practices to address compliance issues; and (5) the interaction between VAT and the international direct tax framework.
Trend 3: Updating VAT Rules to Reflect the Economy of the 21st Century
The majority of VAT and GST laws were written before the emergence of many digital technology advances and the rise of certain new, potentially disruptive business models. In this context, those laws are showing signs of age, as the rules tend not to track consumption of goods and services as well as they used to. Jurisdictions have thus started to amend their rules, focusing especially on telecommunications, broadcasting, and electronically supplied services (TBE services). The EU, as usual in the realm of VAT, appears to have led the way long before the OECD guidelines were adopted. In 2003, the EU started requiring non-EU businesses providing TBE services to final consumers in the EU to register for and charge VAT on these sales in the country of the recipient. Last year, the EU extended these rules to EU businesses providing services to EU consumers, creating an almost level playing field between EU and non-EU businesses. In the meantime, Switzerland, Iceland, and Norway have also adopted rules similar to the EU's.
Interest in the new rules did not stop in Europe, as Kenya in 2013 and Ghana in 2014 adopted rules inspired by the EU rules for remotely provided TBE services. South Africa also joined the club of select countries in 2014 when it started requiring nonresident vendors selling electronically supplied services to customers (businesses and nonbusinesses, and not only nonbusiness customers, as in other jurisdictions) to register for and collect VAT. Since 2015, several variations of these new provisions aimed at the digital economy have been adopted (e.g., in Albania, the Bahamas, Japan, South Korea, and Tanzania) or are under consideration (e.g., in Australia, Israel, and Russia).
Effective October 2016, New Zealand, a jurisdiction with one of the broadest GSTs, will require nonresident vendors to register for and charge GST when they provide intangibles and services (not only TBE services) to final consumers in the country. With the adoption of the OECD guidelines and the BEPS package, more jurisdictions are likely to adopt these new rules. These changes present new challenges for businesses required to comply with foreign tax laws that vary greatly in scope, application, and compliance requirements. This holds true even for businesses with uniform business models across the globe and those that may not have a taxable presence outside their own jurisdictions. For tax authorities, the challenge consists of enforcing the rules on not only resident but also nonresident companies. In this respect, the European Commission is working on an action plan for a more effective VAT regime, which may result in innovative approaches to the taxation of cross-border transactions that may once again influence the rest of the world.
Trend 4: Modernization of VAT Compliance
Tax authorities and businesses generally view technological improvements as opportunities to improve VAT and GST reporting processes. The expanded use of e-invoicing, the development of real-time reporting for sales transactions, and the adoption of requirements for specific electronic accounting formats are just a few examples of these changes.
The first noticeable change in VAT compliance enabled by advanced technologies is the adoption of requirements to file returns and related reports electronically. Information is available for immediate use by tax authorities to not only verify timely submission of reports, but also to cross-reference information provided by taxpayers. While the use of electronic invoices remains optional in many jurisdictions, many countries require e-invoices to be submitted via specific methods to guarantee authenticity of origin, integrity of content, and legibility of the documents. In the EU, while the use of e-invoices remains optional, there is a push toward requiring digital VAT documents; by 2018, all public procurements will be subject to e-invoicing.
South American countries, in particular, have promoted the mandatory use of e-invoicing. By the end of the decade, nearly all transactions will have to be documented through an e-invoice that includes some level of approval by the tax authorities in these countries. Under the South American approach, the tax authority verifies and certifies e-invoices before the parties may complete the transaction, thus enabling a real-time verification of all transactions. China and other Asian countries have also shown interest in expanding e-invoicing requirements to improve tax compliance.
Many countries are investigating real-time reporting as a possibility for improving VAT and GST compliance. Brazil is arguably leading this movement, as the combined use of mandatory e-invoicing and the development of the public digital accounting system known as SPED (Sistema Publico de Escrituraçao Digital) is used to approve, store, and certify books and documents of commercial and tax bookkeeping. SPED also provides tax authorities a complete assessment of the tax accounting information in almost real time. Next year, Spain will introduce a new real-time reporting system, the Suministro Inmediato de Información, or Immediate Supply of Information, in which large taxpayers will be required to provide certain data elements of invoices issued and received to the tax authorities by electronic means within a specified time frame.
With the increased use of electronic bookkeeping in enterprise resource planning (ERP) systems, several countries, mostly in the EU, have started requiring taxpayers to provide their financial data in a specific format, such as the Standard Audit File for Tax (SAF-T) format. The SAF-T format is based on discussions at the OECD level to facilitate tax audits. In practice, the tax authorities request the files and use special audit data and analytics software to detect errors in the VAT reporting.
Finally, countries are considering other methods to improve VAT and GST compliance, such as requiring the submission of reports (e.g., sales and purchase lists) in addition to tax returns and the implementation of the split-payment method. Under this method, VAT and GST amounts related to purchases made via credit cards or online payments would be directly attributed by the financial institutions to a blocked account to which the tax authorities have direct access. For instance, Italy introduced the split-payment method in 2015 for sales to public bodies, under which a public body purchaser is now required to pay the VAT amount due on the transaction directly to the Italian treasury.
The VAT/GST world is catching up to the deployment of new technologies in a global environment. As a result, businesses will need to comply with both VAT and GST laws in an increasing number of jurisdictions, some of which may be unfamiliar, and with new compliance and administrative requirements in familiar jurisdictions. The future of VAT/GST appears to consist of taxation at the place of consumption by use of new, real-time reporting technologies that allow a direct flow of information to tax authorities. Thus, VAT/GST specialists on both the business and tax authority sides will increasingly need to be multifaceted specialists who are knowledgeable in various laws, business operations, IT systems, and data analytics.
Mary Van Leuven is a director, Washington National Tax, at KPMG LLP in Washington.
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