Indirect tax systems becoming more efficient, but tax authorities increasing focus on compliance and enforcement.
- Tax “mix” shifting towards taxes on consumption
- Free trade is increasing but is meeting protectionist challenges
The economic crisis has led to more countries than ever before to rely on indirect taxes as a sustainable method to rebalance their budgets and stimulate growth, according to a new Ernst & Young report, Indirect Tax in 2013: With change comes complexity. The report finds the growing prominence of indirect taxes places more pressure on tax administrations to enforce compliance, particularly given that a third of tax revenue is derived from VAT/ GST and taxes on specific goods and services such as excise taxes, customs duties and certain special taxes.
“The sheer number and variety of changes in indirect taxes in recent years — and the challenge of implementing them into accounting and reporting systems — can be overwhelming for businesses,” says Philip Robinson, Global Indirect Tax Leader at Ernst & Young. “This makes it hard to keep sight of the bigger picture.
“The vast number of changes in indirect taxes will cause more severe consequences in the case of non-compliance and mistakes,” Robinson continues. “Non-recoverable indirect taxes will raise the costs of doing business and make production more expensive. That will require efficiency improvements to make up for the increased costs. In addition, it’s important that companies understand and follow rules for indirect tax as they enter new markets, as non-compliance could undermine the opportunities presented by the rapid expansion of international trade.”
Indirect tax systems are becoming more efficient
Applying higher rates is just one way to increase indirect tax revenues; others include broadening the tax base of an existing VAT/GST system, increasing the efficiency of the tax system or improving compliance and enforcement. Increased use of IT tools, creating common interfaces and electronic data transmission and filing have all contributed to this efficiency. Fifty-seven percent of the 39 countries that provided information for the report require VAT/GST returns to be filed electronically, 35% have an optional electronic filing (e-filing) facility and just 8% do not offer or require e-filing. Yannick Zeippen, VAT Partner at Ernst & Young Luxembourg, comments: “A few years ago the Luxembourg VAT authorities implemented a new system allowing taxable persons to file their VAT returns electronically. The use of this system is now mandatory and has been since the 1st of January 2013. This rule applies on all returns and European Sales listings submitted by tax payers who are liable to file returns on a monthly or quarterly basis. This means that only tax payers with limited transactions or with no VAT deduction right might not subject to this rule“.
Robinson adds, “Many indirect tax systems have gone high-tech. Developed markets have adapted to the digital economy, while emerging markets are keeping pace with economic developments. Organizations such as the European Commission, OECD and the Global Forum on VAT have produced guidelines with a view to creating a “best practice” reformed environment.”
Free trade is increasing but is meeting protectionist challenges
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 enter into a growing network of various kinds of trade agreements. A number of new free trade agreements (FTAs) are expected to enter into force in 2013, further reducing the amount of customs duties imposed on global trade, however, customs duties continue to remain a significant source of revenue for countries.
The current economic climate is hampering trade and encouraging protectionist tendencies. Non-tariff barriers have grown substantially in the form of health, safety or environmental requirements. The WTO reported 184 new trade-restrictive measures implemented between October 2010 and April 2011, and a further 182 were implemented between October 2011 and May 2012. In addition, where countries are not bound by FTAs, import duties are still a common and often-used means to steer trade and production.
Excise duties are on the rise again
The percentage of government revenues received from excise duties has been in constant decline over the past few years; however, the survey indicates that trend may soon be reversed. Excise rates are again on the rise and new duties are being introduced. This is particularly true in Europe, but we see also see VAT rates inching up in Asia-Pacific and the Americas. The trend is particularly noticeable with regards to specific consumer products, environmental items and financial transactions.
Tax administrations are focusing on compliance and enforcement
The report indicates the number of tax audits has increased in a large majority of the 39 countries and will likely continue to increase. It should also be noted that the number of tax audits have substantially increased over the last few years in Luxembourg. The number of tax audits also increased substantially these last years in Luxembourg. At the same time, many countries are applying stricter penalty regimes in the case of non-compliance and mistakes. In the report, 72% of the 39 countries indicated that penalties are increasing and only 8% saw a decrease.
VAT/GST rates are increasing
Globally, many countries are relying more and more on indirect taxes to finance their budgets. Coupled with the ongoing economic crisis, VAT/GST rates have increased significantly in recent years as a result; at the same time, the scope of VAT has broadened in many countries. This does impact retail prices causing them to rise and this is coupled with an increase in compliance risk.
Europe has seen significant increase in VAT rates with the average rate increasing from 19.5% to 21%. Japan has recently followed suit increasing their VAT rate from 5 % to 8 % and to 10% in 2015.
In contrast, VAT rates remain relatively stable in the Americas. Michel Lambion, VAT Partner at Ernst & Young Luxembourg comments: “The Luxembourg standard VAT rate has been stable since the 1st of January 1992. This rate currently amounts to 15%, which is the lowest in the European Union. However, on 10 April 2013, the Luxembourg Prime Minister, Mr Juncker, announced, in his "State of the Nation" speech, that Luxembourg will raise its VAT rate starting from 2015 in an effort to help reduce its deficit and to cope with the loss of the VAT receipts which were linked to the changes of rules applicable to the E-commerce services (taxation at the place of the private consumer resident in the EU as from 2015 instead of the place of establishment of the service provider). The Prime Minister has indicated the wish of the government to maintain the lowest standard VAT rate in the EU even after the implementation of this increase. In this respect, the lowest VAT rates, after that of Luxembourg’s are applied by Cyprus and Malta (18%, to be increased to 19% in Cyprus as from 2014). The Prime Minister did not provide any further information on the matter. At this stage, it is difficult to anticipate what will be the rate and whether this increase will be gradual or not. Moreover, the situation could evolve due to the elections which take place in 2014 and the evolution of the economic situation.”
(Source: Ernst & Young, Luxembourg)
