Commentary

Many countries have sought to maintain demand by reducing the costs of goods and services through temporarily lowering indirect taxes, such as value-added tax (VAT). In all, 15 of the 24 countries we reviewed have taken some action related to indirect taxes. One common action has been to reduce the VAT rate, either overall or for certain products. Another prevalent approach has been to suspend or defer planned VAT increases. Some countries are also looking to improve cash flow by accelerating the refund of VAT credits. Customs duties and excise taxes are also receiving a lot of focus. To date, most actions with respect to customs and duties have supported more open trade between nations, a positive sign in an environment where increased protectionism has been a concern.

Countries taking actions related to indirect taxes

• Australia
• Belgium
• Brazil
• Canada
• China
• The Czech Republic
• France
• Hong Kong
• Hungary
• India
• Ireland
• Netherlands
• Russia
• Switzerland
• United Kingdom

Highlights

• Reducing the VAT rate has been a prevalent approach, either generally — as with the United Kingdom’s temporary cut from 17.5% to 15% — or through more targeted cuts. For example, several countries, such as the Czech Republic, Brazil and China have enacted special VAT reduction measures related to the purchase of automobiles.
• Recognizing the dire circumstances that many companies find themselves in with regard to cash flow and profitability, several countries that had previously scheduled VAT increases chose to postpone their implementation. For example, the Netherlands cancelled a scheduled VAT increase from 19% to 20%, and Switzerland postponed its scheduled increase.
• Further reductions in VAT rates are now a possibility for European Union (EU) Member States, after the ECOFIN meeting of 10 March 2009, where Ministers agreed to allow reduced VAT rates in certain sectors, such as labor-intensive local services, like restaurant services. This may prompt governments to do more in this area. For example, following from the 10 March ECOFIN meeting the French government has decided to reduce the VAT rate from 19.6% to 5.5% for restaurant services, effective 1 July 2009.
• Some countries have focused on improving cash flow through a more efficient refund of VAT credit. For example, France is now allowing for VAT refund claims to be made monthly (instead of quarterly). Russia has increased the time limit for presenting supporting documents for VAT reimbursements. Belgium is accelerating the refund of VAT credits. China has increased export VAT refund rates and will allow companies to credit VAT on capital expenditures against output VAT.
• Responding to severe budget difficulties and a need to protect their currency, Hungary and Ireland are the only two among the 24 countries we reviewed to have actually proposed or have enacted increases to their VAT rates. In their May parliament session, Hungary proposed measures to increase VAT from 20% to 25%, effective 1 July 2009. This exceeds earlier estimates that it would only rise to 23% and is the highest rate allowed under EU legislation. Hungary is also assessing additional special VAT rate (excise tax) increases for fuel, tobacco and alcohol. In response to the economic crisis, both of these countries have adopted contractionary, not stimulus, policies.
• Other indirect-tax-related actions have also targeted demand. For example, India cut export duty on iron ore, as well as reduced its customs duties. One interesting approach comes from Hong Kong, which in 2008 abolished the 40% duty rate on alcohol and followed up with an increase of 50% in tobacco duties in its recent 2009-10 budget.
• Some countries are proposing to reduce tariffs on targeted imported items, an encouraging sign amidst concerns that economic challenges may lead to protectionist behavior. For example, Australia has submitted a proposal to reduce tariffs on imported cars, and Canada has eliminated tariffs on a range of machinery and equipment imported to Canada on or after 28 January 2009.

Next section: Personal income tax measures