Navigating the global VAT, GST and sales tax landscape
Welcome to the fourth edition of our International indirect tax guide.
In the past two years we have seen events that have changed the way we work, and more importantly from an indirect tax point of view, the way we purchase and receive goods and services as consumers. As a result, Value Added Tax (VAT) and Goods and Services Tax (GST) is growing in its complexity and application, as the traditional goods and services model is replaced with digital content; virtual consumption and seamless international trade flows.
We are seeing many changes relating to registration requirements, digital reporting requirements, the approach to audits and compliance by tax authorities and the approaches to taxing the digital economy. There are numerous challenges facing businesses, and below we have set out some of the key international indirect tax trends that we and our clients are seeing and facing. Indirect tax has become a genuine commercial conversation now. Whilst there appears to be a trend for corporate income tax rates being lowered, VAT, GST and sales tax rates are generally increasing.
Tax authorities are realising that taxing revenue and actual transactions can raise more revenue than simply focusing in on profit, which can often be subjective and subject to manipulation. Put simply, it’s easier to tax the transactions that create the outcomes, rather than the outcomes themselves. When the transaction tax base is expanded to move out of the ‘physical’ and into the ‘virtual’, the reach of the indirect tax is extended significantly, and revenue collections grow accordingly. It is no wonder that numerous territories are looking to introduce or re-shape existing VAT/GST systems.
Digitalisation of VAT compliance
The direction of travel for international indirect tax compliance is very clear, it’s digital and near real-time. Historically, tax authorities accepted paper invoicing and adopted a ‘post-audit’ approach, where the taxpayer charged tax on an invoice and this would only be audited after the fact. Often by a tax inspector or auditor physically looking at invoices and records. This would often be based on sampling – a risk based approach to compliance.
Taxpayers themselves may have only needed to physically submit a periodic summary VAT/GST return, often paper. However, the trends seen across the globe include a shift to mandatory electronic invoicing, and providing real-time information direct to the tax authorities through Standard Audit Files for Tax (SAF-T). The problem is that these are not standard or harmonised globally, and the format, contents and filing frequency differs between countries – for example, some are submitted periodically while others are only upon request or during an audit.
Taxpayers are also facing new requirements to submit VAT/GST returns electronically, for example the UK’s ‘Making Tax Digital’ initiative which mandates businesses to submit their VAT returns via an application programming interface (API) direct to the Tax authority, either direct from approved software or via an API-enabled spreadsheet.
Tax authorities are then making use of the tax data they receive by carrying out sophisticated data analytics, reviewing the full data set looking for anomalies and errors to form the basis for assessments of tax and penalties. Tax authorities are also comparing data submitted by different taxpayers, for example matching a customer’s claim for input tax on a purchase against a supplier’s declared output tax on the sale.
This all means that businesses need to make sure they have confidence in the quality and integrity of their data that the tax authorities now have access to. Businesses should not only guarantee the completeness of customer and supplier master data that may drive a tax determination decision, but also run proactive data analytics on historic transactions to highlight any systematic errors. How long is it before VAT and GST are administered every time a credit card or digital payment solution is entered at source and the VAT/GST is automatically populated to a return? Buying a coffee at the local café will never be the same!
The rise of e-commerce and digital services
The development in technology over the last decade has fuelled a boom in e-commerce that has drastically changed the way consumers buy goods and services. Most of today's suppliers can sell to consumers without any local presence. This has led to an increasing number of businesses and online marketplaces, with little to no shop fronts or brick-and-mortar presence serving customers based all over the world.
In 2015 the Organisation for Economic Co-operation and Development (OECD) recommended that indirect tax regimes should be updated to cope with the ever-evolving digital economy to retain their purpose as a consumption tax. Following its initial report in 2015, numerous countries re-examined the scope of their indirect tax regime and extended them to subject digital services and Low-Value Goods supplied by non-resident businesses to tax.
The European Union was one of the first movers but over recent years this has become a genuine trend. It seems that almost every quarter another country announces new legislation targeting non-resident supplies of digital services and / or Low-Value Goods. This is particularly a growing trend we are seeing with emerging countries in the APAC region.
In their report, the OECD also made recommendations on how countries should design and implement the rules to effect the taxation of digital services and Low-Value Goods. Whilst most countries extended the scope of their regime based on these recommendations, the detailed rules and mechanisms implemented differ country-to-country (eg definition of 'digital services', registration thresholds, definition of 'Low-Valued Goods' etc ). These differences amplify the challenges that businesses and marketplaces face when identifying how to manage and mitigate their overseas registrations and compliance obligations.
We hope you enjoy the International Indirect Tax Guide 2022. Please do share any feedback with us and please do join our VAT Club group on LinkedIn to view global VAT/ GST and sales tax news, updates and thought leadership on international indirect tax.