Tax authorities worldwide view indirect tax as a major source of revenue to balance books
London 29 March 2012 - As governments across the world try to plug an increasing gap between tax and spending without stifling economic growth indirect tax is becoming more and more central to their tax planning and revenue raising. Whether it is higher VAT rates or the extension of the VAT base to include items that were formerly exempt or a general increase in excise duties authorities are becoming far more innovative in the ways they look at indirect taxes. Businesses too are becoming nervous of what additional indirect taxes will be levied on them in the future
Philip Robinson, Global Indirect Tax Leader at EY 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. We have identified six key trends which will provide insight into the implications of these indirect tax policies for global businesses.”
Increasing VAT/GST rates
The shift from direct to indirect taxes has been happening in recent years on a global basis. In Europe, where a number of countries have been struggling with the aftermath of the financial crisis, there has been the greatest increases in VAT rates, with the highest rate worldwide, at 27%, in Hungary. Another development is that many countries are starting to raise their reduced VAT rates, or remove goods and services from the scope of the lower rate. Rate rises also greatly increase costs for businesses that do not recover VAT/ GST in full such as banks and insurance companies. Countries that increased their VAT rate this year (as of 1 January 2012) include Ireland to 23% from 21% and Cyprus to 17% from 15%.
Broadening of the VAT/GST base
The range of goods and services that are subject to indirect taxes is being extended, particularly in emerging economies such as Africa and India. This is usually achieved by restricting or abolishing tax exemptions and reduced rates. Items such as staple foods, newspapers and the supply of water are often zero-rated or VAT-exempt. However, there have been considerable changes to tax policy in certain countries and many of these items are being brought into the tax net. Together, with the abolition reduced rates, the impact of taxation on these items will certainly be felt at a consumer level and in key sectors such as food processing, pharmaceuticals and tourism.
Refinement of consumption tax systems
Many countries are in the process of refining their indirect tax systems and this is particularly evident in emerging markets, including India and China. System reform is constant, even in developed economies such as the European Union, as countries seek to simplify systems and crack down on fraud.
Increased focus on compliance and tax avoidance
Tax administrations across the globe are putting a greater focus on indirect tax compliance and on enforcing compliance. As a result, many countries are broadening the scope of indirect tax penalties as well as introducing higher penalties. In the Netherlands, Romania, Slovakia and the United Kingdom new penalty regimes and harsher penalties for late filing of VAT returns, late payment of VAT and VAT errors have been implemented. Simultaneously, tax authorities are intensifying their audit activities to detect tax abuse and avoidance, and thus may be perceived as more aggressive.
As Robinson explains, “Technology is playing a significant role in assisting tax authorities to collect taxes more efficiently and effectively, with an increasing number of jurisdictions imposing electronic filing of VAT returns and the collection of data, as well as using advanced technology to assist in auditing taxpayers.”
Continuing rise in excise duties
Excise rates have continued to rise, and new duties have been introduced in many parts of the world; primarily as these taxes are seen as a good tool to steer consumption and influence consumers' behavior. New taxes such as snack and carbon taxes may continue to be introduced or existing taxes may be broadened in the public health and energy sectors. Three product groups that are most globally liable to excise duties are alcoholic beverages, mineral oils and tobacco products.
Decreasing customs duties from increasing free trade
Customs duties were once a primary source of revenue for most countries, however growing global trade and the efforts of organizations such as the World Trade Organization has led to a constant reduction in customs duty rates. The trend continues around the world as countries conclude a growing network of free trade agreements and preferential trade agreements. However, at the same time, the absolute amount of revenue derived from customs duties is on the rise due to the overall increase in the volume of cross-border trade. In China, revenues from customs duties jumped 29%, compared to 2010, to more than 1.61 trillion yuan (approximately US$256 billion) in 2011.
“While many of these developments in indirect taxes have been in evidence for several years, their impact is being felt more keenly. Businesses must keep abreast of the constant changes in the rules in VAT/GST and other indirect taxes around the world, or they risk incurring penalties, additional costs and even business disruption. Corporate reputation may be at stake too as corporates come under greater regulatory pressure and public scrutiny for how they manage taxation. Active management of indirect tax is not longer an option, it is an imperative,” concludes Robinson.
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