According to a White Paper from KPMG International, the new economic realities faced by governments around the world mean that significant reforms are about to take place. These reforms are expected to accelerate the shift away from direct taxes towards indirect taxes like VAT, presenting many new risks, challenges and opportunities for businesses operating globally.
Gary Harley, head of indirect tax at KPMG in the UK, commented: "At a time when none of the political parties have ruled out turning to the VAT system to help tackle the deficit, this paper looks at the evolution of indirect taxes and examines why they appeal to fiscal authorities.”
The KPMG report includes global VAT rates for the past seven years. The data shows that, as of 1 January this year, the UK had the 4th lowest rate in the EU at 17.5 percent, less than the EU average of 20 percent.
| EU countries |
Country |
01-Jan-10 |
| Ranking |
|
Indirect Tax rate |
| |
|
(%) |
| |
|
|
| =1 |
Cyprus |
15.0 |
| =1 |
Luxembourg |
15.0 |
| 3 |
Spain |
16.0 |
| 4 |
United Kingdom |
17.5 |
| 5 |
Malta |
18.0 |
| =6 |
Germany |
19.0 |
| =6 |
Greece |
19.0 |
| =6 |
Netherlands |
19.0 |
| =6 |
Romania |
19.0 |
| =6 |
Slovak Republic |
19.0 |
| 11 |
France |
19.6 |
| =12 |
Austria |
20.0 |
| =12 |
Bulgaria |
20.0 |
| =12 |
Czech Republic |
20.0 |
| =12 |
Estonia |
20.0 |
| =12 |
Italy |
20.0 |
| =12 |
Portugal |
20.0 |
| =12 |
Slovenia |
20.0 |
| =19 |
Belgium |
21.0 |
| =19 |
Ireland |
21.0 |
| =19 |
Latvia |
21.0 |
| =19 |
Lithuania |
21.0 |
| =23 |
Finland |
22.0 |
| =23 |
Poland |
22.0 |
| =25 |
Denmark |
25.0 |
| =25 |
Hungary |
25.0 |
| =25 |
Sweden |
25.0 |
| Average |
|
20.0 |
Since its beginnings in post-World War II France, over 140 countries around the globe now rely on a VAT-type tax as a significant source of revenue, according to the KPMG white paper. VAT is now a key part of the tax system of all major developed economies, apart from the US, evidenced by the fact that it now accounts for approximately 19 percent of tax revenues of OECD members.
"Driven by a sluggish economy on the one hand and falling direct tax rates on the other, all around the world governments are reassessing their long-term tax policies,” Gary Harley continued. "The result is that many governments are tightening their existing indirect tax regimes or preparing to introduce new ones.”
The white paper, the second in KPMG International's Driving Indirect Tax Performance series, titled Driving Indirect Tax Performance Managing the Global Reform Challenge, explains why the importance of VAT to governments globally is unlikely to diminish any time soon as more countries come to rely on it as a significant, stable source of tax revenue.
A number of developing countries, including major economies such as China and India, are looking at the introduction of national VAT systems for the first time to address the combination of demand to generate revenue and modernize historical local tax systems. The whitepaper also notes that VAT reform is not just a subject for developing countries.
Major changes are also likely in developed countries which have had VAT systems for many years, such as the EU, as they look to their VAT systems to raise more revenue in the future and to meet other policy objectives. Experience of VAT systems globally has shown up certain weaknesses, such as susceptibility to fraud, which is causing governments to fundamentally assess how their systems can be improved.
The shift towards indirect taxes is likely to continue globally in three ways:
- New VAT / GST regimes being introduced
- Maintaining high VAT /GST rates
- Broadening and protecting the base on which VAT /GST is levied
Providing further useful insight to global businesses, the KPMG International whitepaper also predicts that future reforms are likely to focus on certain key areas such as:
- The battle against fraud and evasion
- Supporting the Green / Sustainability Agenda
- Limiting of VAT exemptions and other reliefs
- Modernization and simplification
- A new tax audit environment
The KPMG International whitepaper outlines a series of practical steps which global businesses should consider in their efforts to effectively and efficiently manage the emerging risks and opportunities which these new reforms are likely to present. Practical issues discussed include using modeling techniques to assess the impact of local VAT changes, using emerging technologies to increase automation of the indirect tax process, deciding whether to in-source or outsource new compliance obligations and understanding the audit environment in new jurisdictions.
According to Gary Harley, "Finance and Tax Directors must be pro-active in considering how their organization is responding to the global VAT changes which are affecting their markets, operations and internal systems. The cost of getting this wrong is potentially enormous. Getting it right, however, can provide real competitive advantage. Also, by getting actively involved in the reform process, global businesses can genuinely help shape the changes that will have an impact on them for many years to come. The time to act is now”.
