In 2012, taxes on consumption continue to be a focus for many governments.
At a time when many countries are still deeply affected by the financial crisis and are trying to recover from it, big tax reforms and discussions on the ideal tax mix may not seem a top priority on governments' agendas.
However, this cannot be said for indirect taxes. This focus on indirect taxation is for two main reasons:
- The need to increase overall tax revenues
- To steer consumers' behavior through tax policy and incentives
The increase of the indirect tax share in the economy has a number of important implications, including an increasing impact on businesses: higher tax rates cause more severe consequences in the case of non-compliance and mistakes.
Non-recoverable indirect taxes raise the costs of doing business, make production more expensive and call for increased efficiency to make up for the increased costs. For governments, as indirect tax income becomes more important, so does effective enforcement.
The fight against fraud and the monitoring of taxpayers becomes more pressing. Also there is greater need to address the distortions in indirect tax systems because their detrimental effects weigh more profoundly.
Six global indirect tax trends
Six common trends are likely to be significant in 2012 and beyond:
1. Increasing VAT/GST rates
The average standard VAT rate across the 27 member countries of the European Union (EU) oscillated for many years around 19.5% before it started to increase steadily after 2008. At the start of 2012, the average EU VAT rate has now passed 21%.
VAT rates EU and OECD (without EU member states)
Source: OECD and EU-Commission, own calculations; the data for 2012 is still subject to change.
It is not just the standard VAT rate that is on the rise. One recent development is that countries are also starting to raise their reduced VAT rates. France, Greece, Italy, Norway, Poland, Portugal and the Czech Republic have all recently increased their reduced rates or removed goods and services from the scope of the lower rate.
Interestingly, this trend could eventually lead to more countries charging a single tax rate. Traditionally, European countries have applied a range of VAT rates and used reduced rates for basic needs such as foodstuffs or to favor local industries, such as tourism.
In other parts of the world, reduced rates are less common. In addition to raising revenue, adopting a single VAT rate could help to simplify VAT compliance for VAT taxpayers and enforcement for tax administrations.
2. Broadening of the VAT/GST tax base
The range of goods and services that are subject to indirect taxes is being extended.
Often, when a country decides to introduce a VAT or GST, the new tax is applied with a restricted tax base as a first step. The tax is then extended at a later stage once the system has proved to be functioning and businesses and authorities have gained the necessary experience.
Sometimes the first step is to levy a sales tax (which is usually levied on supplies of goods only) and to change to a VAT/GST system with a much broader tax base at a later stage. This trend is especially strong in Africa.
Once VAT/GST is in place, additional goods and services may been included in the tax base to tax consumption as broadly as possible. This is usually achieved by restricting or abolishing tax exemptions and reduced rates.
3. Refinement of consumption tax systems
Many countries are currently in the process of refining their indirect tax systems. Broadening the tax base is one aspect of this development, but there are more fundamental reforms as well.
Especially in emerging markets, which are experiencing rapid economic developments, indirect tax systems need to keep pace. Doing so generally requires a reform of the system.
Adjustments and refinements are happening all over the world as VAT/GST seeks to keep pace with globalization and advances technology. An example is the alignment of the VAT treatment of electronic media and print media in several countries such as Iceland and Luxembourg.
This reduces distortions caused by VAT because, for example, a printed newspaper is taxed at a reduced rate whereas buying the same newspaper as an internet download is taxed at the standard rate.
4. Increased focus by tax administrations on compliance and tax avoidance, using advanced technology
The increasing importance of indirect taxes exposes them to a greater risk of fraud and tax avoidance. Our recent survey on tax risk and controversy shows tax administrators and taxpayers view indirect taxes as a key source of risk.
Tax administrations in all parts of the world therefore are putting a greater focus on indirect tax compliance and enforcing compliance. As a result, many countries are broadening the scope of indirect tax penalties as well as imposing higher penalties.
At the same time, tax authorities are intensifying their audit activities. Increasingly, they are using precisely tailored methods and strategies to detect tax abuse and avoidance. Many tax administrations are undergoing important structural reorganizations and technology is being used more widely for tax collection and enforcement.
5. A continuing rise in excise duties
As with VAT/GST, a clear trend in rate increases may be seen for the other class of consumption taxes, excise duties mainly because they are seen as a good tool for steering consumption.
There are still many products that are subject to excise duties in a number of countries (such as chocolate, coffee and orange juice), but the three principal product groups that are globally liable to excise duties are alcoholic beverages, mineral oils and tobacco products. All three groups have seen a constant rise of the tax burden and this development is likely to continue.
In addition to increased excise duties, new taxes are being introduced that seek to influence social behavior, such as taxes on "unhealthy" food or carbon taxes aimed at reducing climate change and air pollution. In the longer term, new taxes may continue to be introduced or existing taxes will be broadened in the public health and energy sectors as more countries adopt these strategies.
6. Decreasing customs duties from increasing free trade
Customs duties were once a primary source of revenue for most countries. But continuously growing global trade and the efforts of organizations such as the World Trade Organization (WTO) have led to a constant reduction in customs duties.
This trend continues around the world as countries conclude a growing network of free trade agreements (FTAs) and preferential trade agreements (PTAs). A number of new FTAs will enter into force in 2012, further reducing the amount of customs duties levied. We also see countries such as Israel unilaterally reducing customs duties.
However, at the same time, the absolute amount of revenue derived from customs duties is on the rise in many countries. This increase is not surprising if one considers that the quantity and value of imported goods is steeply rising again after a short reduction in 2009.
Imports of goods in selected countries
Active management is an imperative
Few of these trends are completely new.
Although they have been in evidence for several years, their continuing importance indicates that they are now long-term developments and need to be taken seriously. Above all, there is a need for businesses to keep abreast of the constant changes in the rules in VAT/GST and other indirect taxes around the world — a major, ongoing responsibility that requires specific attention from corporate tax functions.
For businesses that have not yet addressed indirect tax management as a corporate priority, now is the time to do so. As indirect tax revenues rise as a percentage of overall budgets, tax administrations are turning increased attention to enforcement — including joint audits with other taxes and even other countries.
These activities may disrupt business activity, and large assessments for underpaid tax or penalties for late filings not only have an impact on profitability, they may draw unwanted adverse publicity, even for compliant businesses.
Active management of indirect tax is no longer an option, it is an imperative.