Indirect tax in 2018

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VAT, GST and sales tax trends in 2018

When we launched our Worldwide Indirect Tax Developments Map in 2017, we identified five key trends in VAT/GST. Since its first launch, we have added more than 400 records for VAT/GST and sales taxes around the world — an average of 30 to 40 changes every month. As a result of these changes, how have the trends we identified last year developed and what do we anticipate for the future?

  • Standard VAT/GST rates have peaked

    Following the global financial crisis in 2008, VAT/GST rates rose rapidly in many jurisdictions, particularly in Europe, reaching an average of 21.5% in the European Union (EU). With a far more stable global economy, the upward rate trend has largely ended. VAT/GST rates have effectively plateaued, and they look likely to remain stable in 2018 with some small rises anticipated in 2019. While a few countries have implemented increases or are still planning to do so, others have actually reduced their rates or have postponed planned changes.

    Jurisdictions with rate increases include: Saskatchewan in Canada (Provincial Sales Tax increased to 6% from 5%), Lebanon (to 11% from 10%), South Africa (to 15% from 14%), Sri Lanka (to 15% from 11%); and increases are planned in 2019 in Russia (to 22% from 18%) and Vietnam (to 12% from 10%). The VAT rate increase proposed for Italy for 2018 (to 24.2% from 22%) has been postponed to 1 January 2019; similarly, the increase in Japan’s consumption tax (to 10% from 8%), which was originally planned for 2017, has been postponed to 1 October 2019.

    Jurisdictions that have reduced their consumption tax rates include: Croatia (to 24% from 25%); Ecuador (to 12% from 14%); Switzerland (to 7.7% from 8%). Greece has also extended until 30 June 2018 the application of the reduced standard rate in islands affected by the migrant crisis (Lesvos, Chios, Samos, Kos and Leros).

    Businesses are likely to welcome this more stable standard rate environment, as numerous or rapid changes can create significant administrative burdens for pricing, invoicing and reporting. However, despite some decreases, the average global VAT/GST rate remains far higher than a decade ago.
    This means that global businesses are now handling large volumes of throughput tax (i.e., VAT/GST charged on sales plus VAT/GST paid on purchases and imports). Managing these volumes effectively requires a robust tax control framework as mistakes and inefficient processes can increase the risk of incurring tax penalties and have a negative impact on cash flow and working capital.

     

  • Reduced rates and exemptions are instruments of tax policy

    Governments around the world continue to use reduced VAT/GST rates and exemptions to further their tax and social policies, for example, to stimulate certain industry sectors or to influence behavior to improve health or the environment.

    As with the standard rate, reduced rate percentages are now largely stable. The reduced VAT rate has slightly increased in Norway (to 12% from 10%) and increases are planned for 2019 in Italy (to 11.5% from 10%) and in the Netherlands (to 9% from 6%). China and Croatia have streamlined the number of reduced rates that apply; however, India, and Jordan have introduced new or additional reduced rates, resulting in multiple rate bands.

    Most of the recent rate changes relate to specific goods and services, and these changes mostly apply in Europe. For example, the Czech Republic has reduced the VAT rate on newspapers and magazines to 10% from 15%; in Latvia the 5% reduced VAT rate now applies to qualifying vegetables, fruits and berries (previously taxed at 21%); and Malta has proposed reducing the VAT rate for bicycle for hire to 7% (from 18%). The importance and prevalence of the digital economy is reflected in the decrease in the VAT rate in Hungary for internet access to 5% (from 18%) and in Switzerland, the 2.5% reduced VAT rate now applies to electronic books and publications.

    In recent years, many countries broadened the tax base by restricting VAT/GST exemptions. Some countries are still taking measures in this area (e.g., Jordan and Sri Lanka), but in general, this is no longer a strong trend. In fact, a number of countries are now introducing exemptions for specific goods and services that were previously taxed.

    These measures are most notable in Africa where, for example, Ghana has adopted exemptions for supplies of financial services, domestic passenger air transportation and of immovable property by real estate developers; Kenya has exempted a range of items, including finance products that meet certain requirements; Uganda now applies exemptions to a range of supplies including animal feeds and premixes, irrigation works and tourist arrangement services; and in Zimbabwe, banking services are now exempt.

    Changes in reduced rates and exemptions tend to have an impact on particular industries rather than on the business community as a whole. However, this is a tax policy trend that businesses should follow closely, as the application of a reduced VAT/GST rate or exemption can have a significant impact, especially for businesses that sell directly to final consumers, where the rate has a direct impact on the price. If similar products are taxed differently, distortions in competition may arise. There is also a risk of uncertainty about which goods and services qualify, leading to errors and disputes — and these risks increase with multiple reduced rates.

    Due to these effects, VAT/GST policy “purists” are generally against reduced rates, as they see them as harmful to the smooth administration of the tax. The behavioral and economic effects of reduced rates and exemptions are disputable. The tax advantages may well harm competition. However, reduced rates and exemptions are often popular with consumers and with politicians. Therefore, their use looks likely to continue or even increase in the coming years — especially if the global economy continues to improve and governments feel less pressure to collect revenues from consumption taxes.

    This trend may be likely in Europe. The EU Commission’s previously strict policies on reduced rates are being relaxed, giving far greater autonomy and flexibility to the individual Member States going forward. Businesses operating in a wide range of sectors may see an opportunity to influence governments to obtain more favorable tax treatment for their goods or services, especially in cases where neighboring countries apply lower rates to their products.

  • The worldwide spread of VAT/GST continues

    VAT/GST has been adopted in a large number of countries in recent years, including China, Egypt, Malaysia, India and Tanzania. This trend toward countries adopting multistage consumption taxes continues.

    After several years of debate, India adopted GST on 1 July 2017, replacing around 20 indirect taxes that applied previously. To deal with India’s federal structure, the GST consists of: Central GST (CGST) and State GST (SGST) levied on a common base, with an Integrated GST (IGST) on interstate supplies and imports. Registration and compliance obligations are administered at a state level, with each registration treated as a different taxable person.

    The GST has been introduced with a multiplicity of rates ranging from 5% to 28%, with some goods and services eligible for exemption (including basic foodstuffs, education, health care and residential accommodation).

    The Gulf Cooperation Council (GCC) is another major trading bloc joining the “VAT club.” Two GCC states, Saudi Arabia and United Arab Emirates, adopted the VAT on 1 January 2018. The remaining four (Bahrain, Kuwait, Oman and Qatar) are also expected to introduce VAT in the near future, possibly later in 2018 or in 2019 — although the exact implementation dates are not yet known.

    The GCC Member States Framework Agreement provides overarching VAT legislation that allows for limited national deviations. The broad concept is the adoption of an EU-type VAT model with the GCC as a common economic zone. In all countries, a single 5% VAT rate will apply, with some exemptions in the field of healthcare and financial services.

    Introducing VAT/GST is a significant step, creating major challenges and opportunities for governments and taxpayers. Companies must consider the impact of these new taxes on their operations, customers and suppliers. They must also establish new processes and protocols to meet their obligations. Failing to prepare adequately can increase tax risk and lead to severe business disruption or reputational damage.

    The impact of adjusting to the new regime may be felt for months or even years after implementation, as practical issues arise and teething problems are addressed. A successful transition requires a proactive approach that includes every aspect of the organization.

  • Digital tax measures continue to spread

    Globalization and the digital revolution continue to transform businesses in every sector — resulting in an exponential increase in online trading, much of it cross-border. For many years, VAT/GST legislation struggled to keep up with these developments, but tax provisions are fast catching up. How to apply VAT/GST to cross-border sales of goods and services has become a major consideration for tax administrations around the world. As a result, we have seen a proliferation in legislation in this area, with at least 30 provisions or proposals recorded on our Worldwide Indirect Tax Developments Map in the past year alone.

    As in recent years, a large number of these changes are aimed at taxing digital services in the country of consumption, especially when they are supplied to final consumers (B2C). Jurisdictions adopting measures aimed at taxing e-services include Argentina, Australia, Ghana, Puerto Rico, Thailand, Turkey, Ukraine and Uruguay.

    E-commerce in goods is also coming under the spotlight. Australia, Austria, Belarus, the EU, Switzerland and the United Kingdom (UK) have all introduced or announced measures related to taxing cross-border sales of goods more effectively. Again, the thrust is toward ensuring sales are taxed in the country of consumption. Measures include removing exemptions for low-value imports of goods and extending responsibility for accounting for VAT/GST on sales to online marketplaces.

    Some countries are looking at taking these measures even further, by introducing new taxes on internet activity (e.g., in Italy) or by seeking to extend the definition of “permanent establishment” or “nexus” to include having an online presence (e.g., Austria). In the United States, a number of states (such as Alabama, Colorado, Louisiana, Rhode Island and Vermont) have introduced new reporting rules that may encourage the registration of remote sellers for sales-and-use tax.

    As a result of these measures, applying VAT/GST in the country of consumption is gradually becoming the international norm, and remote sellers and online platforms are increasingly responsible for charging VAT/GST on these sales. At the same time, tax administrations are increasing their compliance focus on these sales.

    Increasingly, these digital tax measures do not just apply to traditional online retailers or to technology companies. All businesses that supply goods and services online must pay keen attention to these rapid developments and their impact on their activities, in order to comply with their VAT/GST obligations, wherever they arise.

  • Tax administrations are also embracing technology

    Tax administrations are also embracing the digital revolution to administer indirect taxes more effectively. Our Worldwide Indirect Tax Developments Map has recorded almost 30 changes related to digital tax administration in the past year.

    Most authorities now require the electronic submission of VAT/GST declarations, and many are mandating the use of electronic-invoicing. Countries that have introduced e-invoicing or e-filing for VAT/GST declarations include: Azerbaijan, Costa Rica, Cyprus, the Czech Republic, Ghana and Romania.

    One of the key trends is in countries demanding more detailed, structured data from taxpayers, often in real time or near real time. Perhaps the most significant digital tax administration measures belong to India, where the new GST is being administered by a state-of-the-art IT infrastructure that includes the submission of real-time data and data matching.

    In Europe, an increasing number of countries are also taking action or plan to introduce measures in this area. For example: Austria has issued proposals to oblige digital businesses to submit additional data, to assist in tax collection for e-commerce sales; the Czech Republic is phasing in electronic reporting of sales, starting with retail and wholesale suppliers; Hungary plans to implement real-time invoice data reporting on 1 July 2018; Spain adopted rules in July 2017 requiring VAT books and records to be submitted electronically; and the UK is planning to mandate electronic preparation of VAT data effective 1 April 2019; Poland has introduced the standard audit file for tax (SAF-T) effective 1 January 2018 and Norway plans to do so in 2020.

    The advantages of using technology are clear for tax administrations. By collecting more accurate taxpayer data and analyzing it more effectively, they can narrow the “tax gap” by reducing both careless errors and deliberate tax fraud.

    For taxpayers, these measures can impose substantial additional burdens — especially for global companies that need to comply with a wide range of different requirements around the world. It is vital that VAT/GST taxpayers adopt policies and processes that allow them to track developments in digital tax administration to comply with their increased data obligations.

    As more countries adopt measures in this area, businesses should consider adopting an enterprise-wide strategy for indirect tax data, rather than dealing with point solutions on a country-by-country basis. In doing so, businesses can also use these measures to improve their own tax control frameworks, not just to report their taxes accurately on time but also to identify opportunities, for example, by accelerating refunds or bad debt relief claims to reduce the cash flow impact of indirect taxes.

 

 

EY - Gijsbert Bulk

Gijsbert Bulk
Global Director of Indirect Tax
Tel: +31 88 40 71175

EY - Ros Barr

Ros Barr
Associate Director of Indirect Tax
Tel: +44 20 7980 0259