Royal Malaysian Customs Department Director General Dato’ Sri Subromaniam Tholasy says that it’s critical for businesses to start preparing for new VAT and GST systems far in advance.
“One of the biggest issues we had was businesses that did not prepare early enough in terms of systems testing and training,” says Subromaniam Tholasy.
“Some companies left the implementation to the finance and accounting staff, but it requires much broader involvement. People from the sales and marketing sides also need to be involved since, for example, agreements may need to be renegotiated. It was also our experience that many small- and medium-sized businesses waited until the last minute, then had issues when it came to filing.”
VAT and GST systems should be broad-based. They should take a long-term view rather than short-term to be effective. Many jurisdictions have learned the hard way that if their initial VAT and GST systems exempted too many items or entire economic sectors, it is hard to eliminate those exemptions later.
The task is made even more difficult when multiple jurisdictions require consensus to alter what is subject to tax, as is the case with the EU.
“In the EU, making changes is particularly difficult because all the countries need to agree unanimously on the change,” says Christopher Heady, Professor of Economics at the University of Kent in the UK and former Head of the OECD’s Tax Policy and Statistics division.
“Many people think there are things wrong with it, but there’s not a great deal of optimism that much can be done about them.”
Nevertheless, the EU’s VAT system is moving forward in other ways. “There are multiple ongoing EU discussions regarding VAT issues, including certain VAT obligations for supplies of services and distance sales of goods, administrative cooperation, and a system for intra-community supplies of goods between taxpayers,” says Jenny Netterström, Business Developer at the Swedish Tax Agency (Skatteverket).
Since eliminating exemptions often proves difficult or impossible, jurisdictions often turn instead to raising rates. Since the start of the financial crisis in 2008, worldwide VAT and GST rates have risen rapidly, with the standard rate hitting a high of 27% in Hungary. The trend has now slowed down, however, and as economic conditions improve, some jurisdictions are lowering their standard rates.
Heady says that the lesson for countries launching a new VAT and GST system is to start with as few exceptions and reduced rates as they can possibly manage.
Some countries have managed to implement this type of broad-based tax, generally referred to as a modern VAT, says Schenk. “This approach started in New Zealand (1986), then was picked up by Canada (1991) and in a number of the new VATs around the world,” Schenk says.
Another lesson a number of countries have learned is to avoid lists of specific items to be taxed, according to Heady. Similarly, single rates are preferable. Otherwise, tax administrations may be forced to debate how new products or services should be taxed.
“In the UK, most food and many beverages are zero-rated but soft drinks are subject to the standard VAT rate,” says Heady. “In one dispute, smoothies were an issue. Are they a food or a soft drink? How much fruit does there have to be in a smoothie for it to be a food and not a soft drink?”
VAT and GST compliance and administration is rapidly becoming digital — from the collection of taxpayer data to the process of audits and inspections. Most tax authorities now require electronic filing of periodic VAT and GST returns, and increasing numbers of tax authorities allow or require the use of e-invoicing for VAT and GST accounting.
This is a useful tool for businesses, as e-invoices generally cost significantly less to produce and process than printed documents. E-invoices can also provide a useful source of data for tax administrations and a more transparent audit trail.
In 2015, Sweden and other EU member states introduced a new program for the reporting and payment of VAT, called the VAT Mini One Stop Shop (VAT MOSS). The VAT MOSS regime is a program that has provided administrative relief from the compliance burden.
It allows suppliers to register online, file VAT returns and pay the VAT to a single member state. “This is one of the first tax systems in Sweden in which officers are working in a fully digital environment using email as the only method of communication,” says Netterström.
In increasing numbers of countries, such as Brazil and China, taxpayers now submit detailed transactional information directly to the tax administration. Tax authorities are also beginning to demand the transmission of information on a real-time or near-real-time basis.
Spain’s pioneering near-real-time reporting regime came into effect in July 2017. Rufino de la Rosa, Director of Spain’s Department of Tax Management, reports that the process is going well.
The Immediate Submission of Information [ISI] program gives us immediate information on the companies’ invoicing, providing a control system for the actual development of the transactions performed, which in turn will undoubtedly allow us to provide better service to businesses as well as reinforce control actions,” de la Rosa explains.
De la Rosa says that despite initial concerns, all business sectors have shown a commitment to comply with the new rules, although some entities had some difficulty, such as nonestablished operators or international groups, in which decision-making takes place at the group level.
Even in these cases, however, “companies have been able to meet the requirements and count on the support provided by the tax agency, both to clear any implementing doubts and facilitate the supply of information,” de la Rosa says.
Going forward, de la Rosa mentions that the next milestone is allowing businesses to know what their customers and suppliers have reported about their operations. “And in 2018, as a preliminary step to the eventual preparation of a draft VAT return, we are designing a taxpayer-friendly environment that will allow companies to see, in an aggregated manner, the information in the VAT register book that was submitted to the ISI.”