With governments increasingly coming to rely on revenue from indirect taxation, managing value-added and sales tax exposure has rapidly become one of the most important tax issues facing companies doing business in several jurisdictions, alongside transfer pricing.
Many studies have shown that indirect tax rates have been on rise since before the financial crisis indicating a general shift away from direct taxation on income and towards the taxation of consumption. However, there is no doubt that the pace of consumption tax rate increases has accelerated in the past three or four years with government finances increasingly under strain.
This trend has been particularly notable in Europe, where the following countries have lifted value-added tax standard rates in the past year:
- United Kingdom – from 17.5% to 20%
- Ireland – from 21% to 23%
- Cyprus – from 15% to 17%
- France – from 19.6% to 21.2% (from October 2012)
- Italy – from 21% to 23%
- Hungary – from 25% to 27%
- Spain – from 16% to 18%
- Portugal – from 20% to 23%
- Greece – from 19% to 23%
This has taken the average VAT rate in the EU to over 21% this year, from around 19.5% just before the crisis. However, this trend is by no means restricted to just Europe. The Thomson Reuters ONESOURCE Indirect Tax report for the third quarter of 2011 shows that, outside of the United States, there were 14 sales tax increases and four news taxes around the world in those three month alone. And in the same period, there were 97 indirect tax increases and 96 new indirect taxes at state and local level in US.
Obviously, such changes are also being felt by individuals as well as businesses. The Tax Foundation (TF) has pointed out that sales taxes in the United States, which are levied not only by state governments but also by city, county, Native American and special district governments, can have a profound impact on the total rate that consumers see at the check-out register.
Governments are also using less visible means to extract more revenue from consumption tax systems, including by increasing concessionary rates of tax which are usually charged on ‘essential’ or educational goods and services such as children’s clothing, books and newspapers. In the UK for example, there has been much controversy over the government’s decision in the 2012 Budget to remove a number of anomalies and inconsistencies from VAT legislation by placing a number of goods, mainly certain foodstuffs, that were previously zero-rated on the list of items attracting VAT at the standard rate (a move since dubbed as Chancellor George Osborne’s ‘pasty tax’). France, Greece, Italy, Norway, Poland, Portugal and the Czech Republic have also raised their reduced rates recently.
This complexity has led many countries to crackdown on VAT and GST fraud in an effort to discourage traders from taking advantage of unintended loopholes in indirect tax legislation or to commit more serious acts of fraud, especially those conducted in more than one state. Again, this has been an increasingly visible trend in Europe, and has led to greater levels of cooperation and information-sharing on taxpayers between national revenue authorities. For example, in January this year, it was announced that a Franco-Austrian partnership agreement designed to strengthen the exchange of information to uncover VAT fraud has proven to be highly effective in practice. Also, much is being done at EU level by the European Commission to eradicate VAT fraud; in November 2010, EUROFISC was established to provide a network of national tax officials with the aim of detecting and preventing fraud before it occurs.
Businesses operating in some countries are facing much more fundamental changes to national indirect tax systems, which in the process can create much uncertainty in terms of planning. India is a prime example, where huge changes to the country’s complex patchwork of national and state-level sales tax systems are in their final stages, although nobody is quite sure when the new national regime, under which uniform taxes will be levied by the Central and the State governments through a common system of tax collection, replacing central sales tax, state sales tax, entertainment tax, lottery tax, electricity duty, stamp duty and value-added tax (VAT), will be introduced. Another example is China, where the government is planning to restructure all forms of turnover taxes into VAT over the long-term, promising much upheaval for businesses.
With indirect taxes like VAT now so important to state budgets (a 1% change in the VAT rate in the UK, for example, is worth about GBP6bn per year in revenue), it is a sure thing that governments are going to continue honing their VAT/GST regimes to extract more revenues from taxpayers. Indeed, Ernst and Young’s 2011-12 Tax Risk Survey showed that 69% of tax policy makers expect to generate more revenue from indirect taxes in the future, and such taxes are expected to be the leading source of new revenue over the next decade.
With the world’s economic troubles far from over, and the sort of revenue-producing levels of growth not expected for some time, businesses, therefore, are likely to face on-going change in the area of indirect taxation in many part of the world.
US VAT Blog by Mark Houtzager
François Hollande is the new président de la République
… so if Mr. Hollande keeps to his campaign promises, it’s unlikely that France will see a VAT increase anytime soon.