Shifting the balance from direct to indirect taxes: bringing new challenges
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Tax policy and administration – Global perspectives
June 2013: The trend for governments to raise more revenues
through indirect taxes seems set to continue. The resulting
shift from direct to indirect taxes will give multinationals
fresh challenges. Your company may need to take a different
approach to tax management in the future.
Shifting the
balance from
direct to indirect
taxes: bringing
new challenges
www.pwc.com/taxpolicy
Contents What are the challenges for business on the horizon? . 3 Snapshot of the current global landscape .................. 4 Forward looking insights by country: Brazil .................................................................... 16 Canada .................................................................... 17 China .................................................................... 18 Germany ................................................................. 19 India .................................................................... 20 Russia .................................................................... 21 Singapore ................................................................ 22 South Africa ............................................................ 23 United Kingdom ...................................................... 24 United States ........................................................... 25 Pivotal challenges on the horizon .............................. 26 Contacts .................................................................... 35
The shift from direct to indirect
taxes: What are the challenges for
business on the horizon?
I am pleased to share with you the second publication in our series of themed global
perspectives on tax policy which also doubles as the third publication in our series
on ‘Shifting the Balance’. We’re making the distinction between direct and indirect
taxes for the purpose of this report in a very straightforward manner. Businesses act
as unpaid tax collectors for indirect taxes and we’re focusing on those businesses,
with only limited comments on the impacts for consumers who ultimately bear
the tax.
Wherever you stand on the definitional arguments, we want to focus on the
characteristics that affect business. We’re looking ostensibly at the ratio of taxes
levied directly on profit/income, wealth and property to those levied indirectly
on the expenditures that the income and wealth finance (the main consumption
taxes, including some taxes often described as environmental taxes although
others are more direct in nature). It may be more difficult to tell whether some of
the more marginal taxes fall on one side of the line or the other but the challenges
for business of indirect taxes arising from these taxes are broadly similar to those
for indirect taxes generally. Some of the formal metrics depend on the specific
definitions used but the trends are useful for our purposes.
The spread of Value Added Tax (VAT) or Goods and Services Tax (GST) across the
world is continuing at a rapid pace. From this point onwards in this report, we shall
use only the term VAT for simplicity. The design of these taxes is constantly under
review too for those who already have them. There are fundamental reforms being
contemplated by India and China, with China moving rapidly to the transition from
business tax to full VAT. The US is still considering VAT, but no major change is
expected in the near future.
Customs and excise duties and other trade charges/ levies are also gaining profile.
Typically these costs are not identified as taxes in the traditional sense and are
buried in the cost of goods.
Until now, the impact of environmentally-based taxes and charges on business has
been relatively small. While these impacts are still not comparable with those of
traditional indirect taxes such as VAT, they’re surely set to rise.
One thing is clear: unless you consider the make-up of your tax bills in future,
you won’t be geared up with the right systems and resources to manage them
effectively. It might require some fundamental rethinking of the structure of your
tax function as well as your broader finance and procurement departments to make
sure you actually identify the costs which need to be controlled.
John Preston
PwC UK
Global Leader, Tax Policy and Administration Network
+44 20 780 42645
john.preston@uk.pwc.com
Shifting the balance from direct to indirect taxes: bringing new challenges 3
Snapshot of the
current global
landscape
Ine Lejeune, PwC Belgium
Indirect Tax Policy Leader
+32 9 2688300
ine.lejeune@pwc.be
Stephen Dale,
Landwell & Associés
Indirect Tax Partner
+33 1 56 57 41 61
4 Tax policy and administration: Global perspectives stephen.dale@fr.landwellglobal.com
Design of tax systems and the The spread of VAT systems around
expectations of stakeholders the world has continued, whether as a
The financial crisis has made countries new tax or as a replacement for other
look very carefully at the composition narrower forms of consumption tax.
of their tax revenues. Governments Our 2013 Paying Taxes study with the
have also argued about the best way World Bank showed that it was used
of introducing austerity measures. in 154 (84%) of the 184 countries
In particular, should rates of taxes surveyed2. The number of countries
tied to consumption be reduced with only a sales tax (like the US’ sales
to help taxpayers by increasing and use taxes), a unique consumption
disposable income or increased to tax (like Japan) or no real substitute
garner much-needed tax revenues? for a VAT (like Greenland) is shrinking.
The International Monetary Fund The members of the EU VAT system
(IMF), the Organisation of Economic and the 127 or more other countries
Cooperation and Development (OECD) with a VAT system already are being
and the European Commission all joined by those (like Malaysia) fairly
promote the shift from direct to committed to a VAT system and those
indirect taxes to help solve the crisis, (like the Gulf Cooperation Council
by reducing costs on business to make states3) actively considering VAT
them more competitive. plans. These changes pose particular
challenges for business operating
In his opening address to the OECD’s in those countries, as we discuss
first Global Forum on VAT, Pascal Saint- further later.
Amans (head of the OECD’s Centre for
Tax Policy and Administration) noted It’s arguable whether the Financial
that VAT in the OECD countries now Transactions Tax proposed for the
accounts for around 20% of total tax EU as a whole, but now to be taken
revenue, a 70% greater share than in forward only by a number of Member
the mid-eighties. With excise duties States under an enhanced cooperation
at 11% and other taxes contributing procedure, is an indirect or a direct
smaller sums, revenues from taxes tax. It will have a substantial impact
on goods and services are now very on financial institutions that have to
close to revenues raised from personal collect it and those who ultimately bear
income tax (25%), corporate income the burden (whether that is pension
tax (8%) and other direct taxes such funds or others may differ depending
as those on capital gains. This trend on the final design of the tax and other
has clearly had an impact on business, factors). It may also have a wider
as we’ve previously noted in our impact on policy makers.
2007 paper Shifting the balance – the
evolution of indirect taxes and our
2011 update Shifting the balance – the Taxes as percentage of total tax revenue for the OECD countries
changing landscape1.
40
Much has been spoken about taxes, Taxes on income, profits
charges and fees aimed at controlling 35 and capital gains
or influencing eco-friendly behaviour Taxes on goods
and services
(we call them ‘environmental 30
taxes’ here) but little has yet been Social security
raised in revenues relative to other contributions
25
indirect taxes.
20
15
10
Taxes on property
5
Other taxes
0
2006 2007 2008 2009 2010
1
http://www.pwc.com/gx/en/tax/indirect-taxes/ Data extracted on 28 May 2013 15:13 UTC (GMT) from OECD.Stat
shifting-balance.jhtml
2
http://www.pwc.com/payingtaxes
3
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and
United Arab Emirates (Jordan and Morocco have
been invited to join the council) Shifting the balance from direct to indirect taxes: bringing new challenges 5
Growth-friendly approach Apart from the influence of this kind
primary driver for ratio changes of thinking put forward by academics,
Apart from the general economic economists and the supranational
crisis giving governments the desire bodies like the OECD, the UN, the
to explore just where more revenue World Bank and the IMF that promote
can most easily be identified, there them, an additional factor is the
are perhaps some underlying theories increasing influence of multi-territory
that explain why they chose various indirect tax systems.
indirect taxes.
The application of the EU VAT regime
One of a number of OECD studies is a requirement for EU membership,
Corporate income entitled Economic Policy Reforms: so existing Member States are tied
Going for Growth (the 2006, 2009 in and new accession states must
tax is least growth and more recently the 2012 study4) comply if they wish to join. Joint
friendly, while VAT indicate that corporate income VAT action is also envisaged by,
and real property tax is least growth friendly, while for example, the Gulf Cooperation
VAT and real property tax are most Council (as mentioned above), and
tax are most growth friendly: the Commonwealth of Independent
growth friendly states made up of Russia, Kazakhstan,
“... several policies may entail a trade- Ukraine and other neighbouring states.
off between reducing income inequality These types of bi-lateral and multi-
and raising GDP per capita ... Shifting lateral agreements add complexity to
the tax mix to less-distorting taxes an already complex set of rules.
– in particular away from labour
and corporate income taxes towards
consumption and real estate taxes –
would improve incentives to work, save
and invest, but could undermine equity.”
Further, globalisation has brought
with it increased mobility of capital
and income. The OECD 2012 report
mentioned above also states that
VAT is neutral as to where economic
activity is located (which is generally
true but there can be exceptions
if VAT recoveries take too long or
are impossible to achieve) whereas
high rates of corporate income tax
discourage investment. It continues
that VAT is also neutral as to where
income is located whereas the higher
the corporate tax rate, the bigger the
incentive to shift income to lower
tax jurisdictions.
4
http://www.oecd.org/eco/labourmarketshumancapitalandinequality/49421421.pdf
6 Tax policy and administration: Global perspectives
Countries vary considerably as to how Implicit tax rates on consumption
much they see the potential in taxing
consumption. For the EU, the report of Denmark
June 20125 by the Directorate General
Sweden
for Taxation and Customs Union (DG
TAXUD) and the Directorate General Luxembourg
for Economics and Fiscal Affairs (DG
ECFIN) highlights that implicit tax Hungary
rates (ITRs) on consumption as a whole Netherlands
vary from less than 15% (Spain) to
more than 31% (Denmark). The table, Estonia
reproduced here, also allows you to
Finland
compare the relative shares of that
ratio for each of the taxes comprised Slovenia
in it. Analysis of those ITRs shows that
Bulgaria
VAT still accounts for more than half
of the overall indirect tax revenues Ireland
in every Member State but its share is
Austria
much higher in some Member States
than others. For example, non-VAT Belgium
taxes account for only about a quarter
of indirect taxes in Sweden but is EU average
moving toward one half in the United
Czech Republic
Kingdom, essentially due to the UK’s
high use of zero rates. The study also Poland
points out that:
Germany
“Taxes on energy (typically, excise duties France
on mineral oils), tobacco and alcohol
Malta
make up, on average, around one
quarter of the revenue from consumption Romania
taxes. The differences in consumption
of excisable goods are such that their Cyprus
revenue effects go well beyond the spread United Kingdom
in tax rates: in percent of GDP, Bulgaria
raises from alcohol and tobacco excise Lithuania
duties about five times as much revenue
Slovakia
as the Netherlands.”
Portugal
Latvia
Italy
Greece
Spain
EU average
0% 5% 10% 15% 20% 25% 30% 35%
VAT component
Energy component
Tobacco and alcohol component
Residual
Source: European Commission Taxation Papers – Working Paper N.34 2012
http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/tax_papers/taxation_paper_34_en.pdf
5
Shifting the balance from direct to indirect taxes: bringing new challenges 7
Maximising revenues and the The impact of VAT compliance on Factors contributing to a high or low
increased burden on the unpaid business7. The time our case study compliance burden
tax collector company took to comply increased by
High revenues/Low costs
While tax authorities will sometimes an average 54% in economies where
• Single VAT rate/few exemptions
point to the use of indirect taxes to monthly VAT returns are required,
• Neutral
reduce their compliance burden, what compared to those whose returns
• Simple obligations
they’re often doing is displacing that are less frequent, either bimonthly
• Effective collection/enforcement
burden from the tax authorities to or quarterly. And the time needed
• Fast refunds
businesses. Business, by definition, for each return increased by over
• Proportional penalties
operates as an unpaid tax collector in 100% where there were more than 20
• Few disputes
relation to indirect taxes. boxes to complete on the return. The
compliance burden also increased
High VAT revenues
The complexity of the legislative where invoices have to be submitted
Low costs of compliance/
regime has to be absorbed by business. with VAT returns: there was an average collection
It’s often cost pressures on the tax increase of 70% in the time needed
authorities that determine how much where invoices have to be submitted. New Zealand
business must do to comply. The way in
Singapore
which tax authorities then enforce the In the EU, where the content, filing
regime is similarly affected. Business mechanisms, payment methods and
has to shoulder its share of checking deadlines, are left to the discretion
the status etc of its customers to of Member States, the European
determine liability, place of supply and Commission has identified the need Australia
even who has to pay the tax due. to reduce the differences. Estimates
suggest that a 10% reduction in
The burden varies hugely from one differences in VAT procedures could
country to another. For example, in EU boost intra-EU trade by up to 3.7%
countries, where there is a common and EU GDP by up to 0.4%. We
Mexico
legal framework for the VAT system, have completed a study which was
the time needed annually to comply published on 8 March 2013 on the
with consumption-type taxes still feasibility of a common VAT return for
Chile
varies, being the least in Finland and use in all Member States for the EU
Luxembourg, around one sixth of the Commission8. The cost saving could be
highest, in Bulgaria, according to our €9.5 billion if the common EU standard
latest Paying Taxes studies carried out VAT return is mandatory for Member
with the World Bank6. Comparatively, States and optional for businesses
Norway
the time our case study company (a that are registered for VAT in multiple
plant pot manufacturer) took to comply Member States; potentially increasing
with consumption taxes compared to to €17.2 billion if the common EU
other taxes varied between the EU and standard VAT return is mandatory for
other regions, but on a world average all taxpayers; and up to €20.6 billion, if Brazil
marginally exceeds the time devoted companies can freely choose between
to labour taxes and substantially their national VAT return and the EU
outweighed the time spent on common EU standard VAT return.
Low VAT revenues
corporate income tax. The absolute High costs of compliance/
number of hours will differ and the How countries compare depends on collection
ratios probably also vary, with the a number of factors contributing to
size of the organisation, but are still a a high or low compliance burden, as
Low revenues/High costs
broad indicator of the relative burdens illustrated in our diagram.
• Multiple VAT rates and exemptions
imposed on businesses in their role as
• Not neutral
tax collectors and payers. In particular, where business is unable
• Complex obligations
to obtain a refund of VAT there is a cost
• Ineffective collection/enforcement
The extent to which administrative to the business, while there is a time
• Late or no refunds
procedures contribute to this was value of money or a missed opportunity
• Burdensome fines
considered in a previous PwC study, cost in not obtaining a refund on a
• Many disputes and litigation
timely basis. Our practical experience
of this is that business will move, stop
Source: PwC Analysis
or change the operations they carry
out in a country where VAT recovery is
potentially a problem.
6
http://www.pwc.com/payingtaxes
7
http://www.pwc.com/gx/en/tax/indirect-taxes/impact-vat-compliance-business.jhtml
8
http://ec.europa.eu/taxation_customs/common/publications/studies/index_en.htm
8 Tax policy and administration: Global perspectives
Where the interpretation of legislation Issues decided in The Court of Justice of the European Union (CJEU) cases from
due to complexity requires court 1974 to 30 April 2013
intervention, the business will incur
significant costs. An indication of the Liability (1%)
number of cases brought before the
Abuse of rights and fraud (2%)
Court of Justice of the European Union
provides an idea of the areas of the EU Special arrangements (4%)
VAT systems that have given rise to
problems in the period from 1974 to VAT rates (4%)
March 2013. Reforms currently being Exemptions (22%)
considered by the EU Commission, Tax similar to
as noted below, should focus on a VAT (6%)
reduction in those areas of difficulty.
Place of
More efficient use of technology can supply (7%)
also lower costs of collection and
compliance. Electronic invoicing
has now become the global norm.
Interest is growing in the concept of Other (8%)
electronic auditing by tax authorities
of a business’s financial records
and systems, with countries such as
France now systematically applying
these techniques. More territories are
adopting tools that can interrogate Taxable Deductions (18%)
such records on the basis that they amount (8%)
must support the standard audit file for
tax (SAF-T) methodology 9. Singapore
is encouraging businesses to adopt the
Taxable person (10%) Taxable supply (10%)
SAF-T standards and is helping to fund
projects in cases where the business
Source: PwC Analysis
has an appropriate internal indirect
tax control framework to manage
GST risks, as noted in our country
profile. Brazil, notably, requires a
business to hand over all its electronic
financial records.
The network of agreements for the
exchange of information between
territories has grown substantially
since the OECD’s publication of a list of
countries not co-operating in applying
its information standards. It’s now
exploring further opportunities for
automatic exchanges of information.
The possible extension of joint audits
including elements of indirect taxes,
with tax authorities in different
countries directly collaborating in
planning and carrying out an audit,
is another interesting potential
development, which is already taking
place within the EU.
http://www.oecd.org/ctp/taxadministration/34910277.zip
9
Shifting the balance from direct to indirect taxes: bringing new challenges 9
VAT revenue ratios within the OECD (2009)
VAT/GST rates increasing and
base broadening Turkey
Over recent years, VAT rates have risen Spain
in a number of countries. It should
Italy
be noted that there is no cap to the
maximum normal VAT rate that can Greece
be applied in the EU and Hungary’s
Portugal
main rate is now 27%. It’s interesting
though that, globally, the normal rate France
of VAT is not synonymous with the Poland
extent to which a country relies on VAT
Ireland
in relation to other taxes as a source
of tax revenues. For example, Chile United Kingdom
and New Zealand have had relatively Iceland
low standard VAT rates of 19% and
Belgium
15% even though, in 2010, revenues
from VAT as a percentage of total Slovak Republic
tax revenue were 38.7% and 30.2% Canada
respectively (compared to an overall
OECD average in recent years Australia
of around 20%). Norway
Netherlands
Only half of theoretical VAT revenues
are collected across all OECD Finland
countries, though. A measure used by Unweighted average
the OECD to determine the efficiency
Germany
of a country’s VAT system is to look
at the actual VAT receipts compared Czech Republic
to the theoretical VAT receipts that Sweden
a certain level of final consumption
Denmark
should produce – the VAT revenue
ratio. The indicator shows that in Chile
2009, exemptions including zero- Austria
rates, reduced VAT rates, avoidance
and fraud/evasion resulted in only a Hungary
little over 50% of the theoretical VAT Slovenia
revenues being collected in the OECD.
Korea
As shown by the OECD Consumption
Tax Trends 2012 report the differences Japan
are substantial. The OECD is, in Israel
particular, concerned as to whether
Switzerland
the generally falling ratios represent
greater difficulties in collecting monies Estonia
rightly owed or Government policy not Luxembourg
to tax certain consumer spending, e.g.
New Zealand
the UK with its extensive application
of zero-rates. Governments will also 0 0.2 0.4 0.6 0.8 1.0
be looking at these ratios to determine
their country’s capacity to raise more Source: OECD’s Consumption Tax Trends 2012
Note: The most recently available figures from the OECD, available in the Consumption Tax Trends 2012
VAT revenue. publication, still use 2009 national account figures.
10 Tax policy and administration: Global perspectivesThe size of the problem over fraud and Complex patchwork of
evasion and its impact on VAT revenue environmental taxes has
ratios is uncertain. This efficiency materialised
ratio needs to be considered carefully The issues of sustainable development,
though as there are policy differences climate change, resource scarcity and
between Member States which help energy security have not escalated
explain the position. For example, the up the corporate agenda perhaps
high New Zealand ratio is probably as quickly as expected. No doubt
caused largely by the policy of using a the global financial crisis has had a
broad base with few exemptions, the huge role to play in this. But these
apparent regressivity in the VAT system environmental challenges are still
being addressed through the benefit widely recognised from a social,
system and personal taxation. At the economic and political perspective
other end of the scale, Mexico employs and governments, and businesses
zero or reduced rates on a wide range alike, are aware of the need to respond
of supplies and, the OECD suggests, and are beginning to take action Best practice
experiences a low compliance rate. even though the policy landscape
remains unsettled.
in determining
Best practice in determining the the ‘base’ which
‘base’ which attracts VAT/ GST is Over the past 12 months we’ve seen attracts VAT/
being scrutinised in many countries. more governments – at a national
Those introducing new regimes are and sub-national level – introduce
GST is being
keen to start out with the best model new environmentally-based taxes scrutinised in
for growth and efficiency. The major and other pricing mechanisms, many countries.
reform of the EU’s VAT system will be regulations and a host of incentives.
the result of a new strategy, following At present, countries are employing
substantial consultation seeking in part different approaches with some opting
to broaden the tax base. More widely, to tax ‘bad’ behaviours and others to
the OECD has been looking to see incentivise ‘good’ behaviours. Any form
whether greater strides can be made of international harmonisation is still
towards aligning global best practice. a long way away though, as progress
Some countries are looking towards towards a global approach proves to be
a more harmonised approach – see painfully slow.
for example, our profiles on Canada
and China. Indirect taxes are not just In the meantime, governments
about VAT/ GST. More governments are attempting to address these
are using indirect environmental sustainability and environmental
taxation to achieve objectives, beyond challenges in their own backyards,
just raising tax revenue. meaning layer upon layer of
environmental taxes and charges
are appearing, leaving businesses to
operate under a complex patchwork
of taxes and regulations. Policies are
being introduced at an unprecedented
pace and sometimes changed even
before they’re implemented, as was the
case with the UK’s Energy Efficiency
scheme replacing the original Carbon
Reduction Commitment and France’s
carbon tax, with work underway
on a replacement. Staying on top of
these changes and managing their
impact can be an overwhelming task
for business.
Environmental taxation is not only a
way for governments to drive taxpayers
away from environmentally harmful
behaviours, but is increasingly seen as
an easy way to raise tax revenues.
Shifting the balance from direct to indirect taxes: bringing new challenges 11processing of imports and exports;
One could say that environmental taxes • increased use and availability
are relatively unusual in that they are of new information and
in fact designed specifically to change communication technologies
behaviour. This does though rely on moving towards a real-time or ‘just-
taxpayers/consumers recognising that in-time’ regime;
they’re suffering these taxes. If that • greater policy and procedural
is the case and the taxes are then set requirements directly associated
at the right level, they should create with international commitments
the economic incentive for taxpayers/ (such as accession to the World
consumers to reduce their negative Trade Organization);
behaviours – for example, emitting • increased international competition
carbon dioxide, disposing of waste for foreign investment;
to landfill, etc – and in doing so, • proliferation of regional trade
erode the environmental tax base. It agreements that significantly
does of course beg the question: “are increase the complexity of
governments treating environmental administering border formalities
taxes as non-sustainable revenue?” and controls;
It’s arguable that environmental • increased awareness of the
taxes could be set at rates that raise importance of good governance
predictable amounts of revenue, and sound integrity within
much like other taxes on vices or fuel Customs services;
excise taxes. But those rates are not • a significantly heightened
likely to be the same rates required to awareness of the need for Customs
drive the changes governments want administrations to play a more
to see to, for example, decarbonise meaningful role in protecting
their economies. Indirect taxation, in society from a range of threats
the field of customs duties and levies, to national security (the Port of
is also changing. Although tax rates Rotterdam is a particularly good
are falling, the role of the customs example of an administration
administrations is rapidly evolving. that has developed high levels
of pre-screening and evaluation
A changing landscape in of shipments).
international trade
While the main roles and As a result of these changes, many
responsibilities of customs authorities countries, especially developing ones
around the globe have remained have come to realise that effective
largely the same for the past decade customs administrations can bring
or so, the manner in which such roles significant benefits in the form of
and responsibilities are executed has social and economic progress and
changed significantly in recent times, are taking steps to achieve that goal.
mainly due to the following factors: Drivers for such a transformation
include the desire to increase country
• heightened international awareness competitiveness (e.g. more efficient
(and quantification) of the costs customs clearance processes and
associated with complying with procedures may attract greater foreign
inefficient and outdated border direct investment) and attain effective
formalities; revenue collection.
• increased investment by the
private sector in modern logistics,
inventory control, manufacturing
and information systems, leading to
increased expectations for Customs
to provide prompt and predictable
12 Tax policy and administration: Global perspectivesThis effectively will result in With either fewer or more advanced
two things. controls at the border, faster customs
clearance times should offer greater
• Border controls will become stricter flexibility and the potential for
for any trade that has not passed 24/7 operations without Customs
pre-inspection tests or does not interference. Yet this will come with
comply with the conditions of trade greater accountability for importers
facilitation programs. The focus of and exporters, even if the border
such controls will be on security operations of those importers and
and illegal trade, and its impact on exporters are outsourced to customs
supply chain movement is likely to brokers, freight forwarders or
be severe. other intermediaries. In countries
• Revenue related controls will where post-importation behaviour
continue to be delinked from by the authorities is commercial
border clearance, with an and predictable, this will be a great
increased focus on post-import boon; in other countries, it will carry
examinations, e.g. periodic audits greater risks.
at company sites, to enforce
compliance. Customs authorities The world of international trade has
around the world are increasing expanded immensely and become
their commercial and legal ever more complex. Managing cross-
knowledge and post-importation border compliance effectively and
audits will become much harder efficiently will require businesses to be
to deal with for those companies better prepared.
that are not well prepared. On
the flipside, knowledgeable
and prepared importers should
find more professional Customs
administrations easier to deal with.
Shifting the balance from direct to indirect taxes: bringing new challenges 13Greater cooperation between tax • VAT-neutrality: what does it mean The on-going redesign of the EU VAT
authorities on indirect taxes and how to ensure it in practice? regime involves investigation of a
There are probably three main areas • applying the destination principle range of proposals to see that they
for further cooperation in indirect on cross-border supplies of provide the necessary safeguards for
taxes between tax authorities in the services and intangibles between business and tax authorities in all
near future: businesses (B2B) – a main rule and these respects to substantially reduce
specific rules; the significant VAT gap.
• transfer pricing and customs • applying the destination principle
valuation; on cross-border supplies of
• compliance and enforcement, services and intangibles to final
including information exchange consumers (B2C);
and risk management; and • anti-abuse provisions; and
• capacity building, i.e. developing • mutual cooperation and
a team of civil servants with the dispute resolution.
right knowledge, skills and tools to
administer a viable tax system. Insofar as the Forum’s mission was
to organise a structured dialogue
Apart from individual territories, with non-OECD economies and other
and the EU which operates a relevant stakeholders on VAT design
Customs Union, the World Customs and operation based on the OECD
Organization (WCO), which now has standards, it was largely successful.
179 members, continues its partnership
approach to promote its global customs Within the EU, the EUROFISC
standards as essential measures to mechanism for Member States to
facilitate regional integration and enhance administrative cooperation
cooperation. in combating organised fraud also
covers many of the repetitive situations
The first meeting of the OECD’s Global and joint EU audits would encompass
Forum on VAT in November 2012 aspects of indirect taxes, including
(attended by tax authorities from customs duties. Collection can be
both OECD member and non-member improved significantly in the EU if
countries plus a delegation from BIAC, studies are correct: an estimate of the
the business and industry advisory VAT gap by Reckon LLP in 200910 of
committee) identified that strategies to euro 107bn annually is commensurate
address VAT fraud need to be aligned with an International VAT Association
and operated in conjunction if they’re estimate in 2007 of euro 60-100bn,
to have the desired success. That was though the Commission believes
also part of a wider recognition that it may be considerably higher. Not
countries could (and probably should) all of that is due to fraud, the VAT
collaborate more, both on specific gap which represents the difference
issues and in establishing best practice between accrued VAT receipts and
in VAT administration and compliance. the theoretical net VAT receipts for
There are particular challenges to the economy as a whole is estimated
address, it was agreed, on applying VAT by identifying data from national
in international trade. There was also accounts which may be subject to error.
discussion of the OECD International The gap does not exclude insolvencies
VAT/GST Guidelines to develop and and legitimate VAT planning. It does
broaden consensus and a chance for though help to explain why audits have
non-OECD economies to input before become more aggressive and e-auditing
the work is finalised by the end of and data-mining look increasingly
2013. Those guidelines, being finalised attractive to tax authorities.
after the recent consultation, will deal
with the following:
10
http://go.reckon.co.uk/a29587
14 Tax policy and administration: Global perspectivesTimeline for the redesign of the EU VAT regime
EU Presidency: EU Presidency: EU Presidency: EU Presidency: EU Presidency: EU Presidency: EU Presidency: EU Presidency:
Ireland & Greece & Italy Latvia & Netherlands Malta & UK Estonia Austria & Finland
Lithuania Luxembourg & Slovakia & Bulgaria Romania
2013 2014 2015 2016 2017 2018 2019 2020
Proposal on Report back Introduction Broadening the one-stop-shop arrangement
new VAT rate on anti-fraud of mini one-
structure measures stop-shop
arrangement
Review and Proposal for ‘Art.12 report’
analysis of definitive regime
destination
principle for
goods
Proposals for broadening the tax base – including proposal on public bodies
Proposal for Standardisation of other VAT obligations, such as registration and invoicing
standardised
VAT return
Further investigation of new tax collection methods and SAF-T
Feasibility of cross-border audit team and broadening of automated access to information
Publication of VAT Committee guidelines and explanatory notes on new legislation before the new rules enter into force
Continued creation of an EU VAT web portal
Simpler VAT system
Destination principle
Efficient VAT system
Robust and fraud proof
Source: PwC Analysis from Commission Communication of December 2011.
Shifting the balance from direct to indirect taxes: bringing new challenges 15Forward looking insights
Brazil
Celso Grazioli
+ 55 11 3674 3701
celso.grazioli@br.pwc.com
States will compete for There is a very high compliance cost Growth in indirect taxes not a
investment differently in future for business in dealing with these shift from direct taxes
Traditional state-by-state goods and taxes. Legislative interpretation is Revenues from ICMS and the federal
services tax (ICMS) incentives have difficult and disputes are common. VAT/excise tax and two different social
finally been ruled out by Brazil’s The Brazilian Revenue Authority contributions have continued to grow.
Supreme Court. This ‘tax war’ has been has focused on computerisation
a constant feature of the Brazilian of administration and e-invoicing, There are two specific factors which
tax system for decades. Although tax e-forms, digital financial records and have come into play. We expect both
incentives were granted without the electronic payment are already the to continue having an impact in the
necessary approval from the other norm, counteracting the otherwise short term.
states, many companies decided to onerous burden created by the volume
install themselves in, or even move to, of the requirements. Both federal and state administrations
states offering benefits. have been focused on increasing
The digitisation of the indirect tax efficiency in collection of taxes. While
Political agreement is being sought system may well have an increasingly the informal or hidden economy
to alleviate the problems this might positive impact in future. Tax audits remains high, indirect tax compliance
cause. For those on the receiving will become increasingly sophisticated among other taxpayers has improved.
end of special treatment in the past, with the development of cross We expect this trend to continue.
this Supreme Court judgment could checks within the system and the
mean a hefty bill for tax ‘lost’ to the establishment of benchmarks against The global financial crisis has perhaps
administration. which to measure data trends. Once not hit Brazil as badly as it has some
tax authority staff have been trained countries. But companies’ profitability
It will be interesting to see how to a sufficient level, there should be a has been hit with a consequent
innovative states can be in terms of time saving for both business and the reduction in direct taxes. On the other
attracting future investment. administration in focusing effort on hand consumption-based taxes have
where it’s most merited. But there is a not suffered as much. Overall, the
Complexity continues to be a concern that the level of detail at which impact has been to increase indirect
concern for business enquiries are directed could be driven taxes as a share of total taxes.
There are still four different indirect increasingly wider, adding further to
taxes that business has to contend complexity.
with, even though Brazil has not yet
ventured down the road of introducing
environmental taxes (though there
is no shortage of regulations in some
areas). Apart from ICMS levied at
state level, the legislation governing
the federal VAT/excise tax and
two different social contributions
remains complex.
16 Tax policy and administration: Global perspectivesCanada
Mario Seyer
+ 1 514-205-5285
mario.seyer@ca.pwc.com
Combination of federal GST and In addition to carbon, packaging and The ‘black market’ with businesses
provincial sales taxes becoming waste disposal is high on Canadian falling out of the tax net altogether is,
even more confusing provinicial governments’ agenda. though, recognised by tax authorities
Tax payers will be faced with difficult as a major problem. They can’t audit
decisions when locating parts of their Uncertainty in the what they can’t initially identify
supply chains in Canada. Indirect tax financial sector and locate. The extent of evasion,
compliance will be equally difficult The financial sector is certainly particular GST and sales tax frauds,
where the place of supply of goods the area facing the greatest level of will continue to attract attention. The
or services is in Canada, particularly complexity and uncertainty. New focus on particular sectors is likely to
when made from one province to rules for intermediary services have remain the most prolific approach.
another. Attempts to introduce a broadened the tax base while adding
harmonised sales tax (HST) across to the uncertainty of the proper tax A Canadian ‘Foreign Trade Zone’
the ten provinces have so far proved treatment. Pension plan rules are Various provisions in Canadian
extremely difficult. extremely difficult to comply with. law relating to customs duty and
As is the case in several other GST provide companies with
Currently, the federal GST at a rate jurisdictions, Canada is now the opportunity to import goods
of 5% (reduced by 2% during the last performing a conceptual review of its temporarily without customs duty (and
five years) is ‘topped-up’ to a level of set of rules in the financial sector. in some cases GST) being collected
around 12%-15% in the five provinces on these goods. The Canadian
that are running with the HST. Four Tax audits are more government is promoting this bundle
other provinces add a local tax, which sophisticated but fraud of provisions as the equivalent of a
in three provinces is a kind of retail remains a problem ‘free trade zone’, like those which are
sales tax (similar to the US sales and The tax authorities are becoming more found in the United States, but with
use tax) and in the other (Quebec) geared to e-audit systems and results. the added benefit that these provisions
is a form of VAT. The final province An initial download of taxpayer can be used “anywhere in Canada”:
(Alberta) doesn’t have a provincial tax. data is all very well but without the that is, a company does not have to
improvements we’re starting to see in locate within a designated FTZ to use
Environmental taxes on the rise statistical sampling, they wouldn’t be these programs.
A complex patchwork of environmental able to see the wood for the trees. The
taxes, fees and charges now exists advances in the programs being used to
across Canada. They’re typically levied detect potential areas of difficulty are
at a provincial level – designed to being matched by the advances in the
encourage environmentally positive techniques applied.
behaviours – but are also significant
revenue-raisers for governments. The complexity inherent in the indirect
tax system, as noted above, means that
Two provinces, British Columbia and errors are not uncommon. There is
Quebec, have had carbon taxes in place less concern about abuse or avoidance
for some time now. involving these taxes right now.
Shifting the balance from direct to indirect taxes: bringing new challenges 17China
Alan Wu
+ 86 (10) 6533 2889
alan.wu@cn.pwc.com
Expansion of B2V Pilot Program Carbon trading pilot to The main rate of VAT on goods is 17%,
to all of China supplement environmental levies although under the pilot programme
The announcement by the State The Chinese government has wanted the 6% and 11% rate categories were
Council on 10 April 2013 of the for some time to beef up its mixture introduced; Business Tax for services
expansion of the “Business Tax to VAT” of levies and regulations to control is 5-20% on entertainment (but
(“B2V”) Pilot Program nationwide environmentally unfriendly activities. otherwise 3-5%) and Consumption Tax
with effect from 1 August 2013 China has committed to cut carbon on alcohol, jewellery, cars, etc adds
marks another milestone in China’s intensity by 40-45% by 2020, from between 1 and 45%. Payers of these
tax reform. 2005 levels. taxes also contribute an additional
percentage of that combined tax
The B2V Pilot Program is currently In 2010, it was reported that China burden in urban construction and
in place for certain Pilot Industries in intends to replace its current fee- maintenance tax (up to 7%), education
certain Pilot Locations. based pollution levies with an surcharge (3%) and local education
environmental tax. It was reported surcharge (2%).
With the announcement, not only that sulphur dioxide and wastewater
will the Pilot Industries be subject will be the first to be subjected to While the structure of VAT has
to VAT instead of BT in all of China, the new tax, but details of such a tax changed little over the years to date –
the State Council further extends remain unconfirmed. and the main rate remains the same
the scope of “Modern Services” to – incentives are available but are
include the production, broadcasting Attention has now shifted to the carefully targeted. Export VAT refunds
and distribution of media and province of Guangdong and the cities vary for a range of goods (and now
cinematic productions. In addition, of Shanghai and Beijing as they kick-off some services) so that the effective
China has also decided to subject their respective pilot carbon trading rates can come down to zero, though
railroad transportation, postal and programmes. Four more provinces the credit can only be carried forward
telecommunications services to VAT and cities are expected to launch – there are no VAT refunds except
instead of BT at the appropriate time. similar experimental programmes for exports and special concessions.
during 2013, in advance of a planned Qualified offshore outsourcing services
Overall, China still aims to complete nationwide scheme from 2015. are exempt from Business Tax. Help
its B2V transformation within the 12th has also been forthcoming from the
Five-Year Plan (2011 to 2015). Tax rates are generally high but state while the financial crisis has hit
targeted incentives are abound specific businesses, particularly labour
The “balance” in China is clearly in China has historically done quite a lot intensive industry.
the favor of Indirect Taxes, with Direct of research on how other countries
Taxes accounting for less than 30% have approached taxes before deciding
of the nation’s tax revenue. As China what it thinks is the best model. It also
forges ahead with its tax reform, looks regularly at the activities which it
tax compliance will be particularly needs to promote or incentivise.
challenging for doing business in
China. Indirect tax risks are likely
to be higher than direct tax risks,
and this introduces a whole new
paradigm for tax risk management for
many taxpayers.
18 Tax policy and administration: Global perspectivesGermany
Götz Neuhahn
+ 49 30 2636 5445
goetz.neuhahn@de.pwc.com
Serious about environmental Germany is very strict in relation to The greater focus in audits over
considerations but tax is not application of EU VAT Directives. recent years has clearly been on VAT
there yet As a result, it has made use of very as opposed to corporate profits taxes.
Germany regards itself as one of few derogations and there are few That has been the case within the
the ‘best in class’ in relation to exemptions from VAT in the tax system. ‘permanent audits’ carried out for
establishing, and reaching, targets This will influence Germany’s input to companies every three to four years.
for environmental sustainability. a more standardised EU system and its On top of that the number of special
But this is not yet reflected in the tax subsequent application. Germany will VAT audits – both at federal level and
system, either in terms of government continue to hold its position even under in local tax authorities – has grown
objectives or, given the amounts of pressure from competition in other considerably and is likely to continue at
revenue at stake, taxpayer focus. While Member States. those high levels.
it does address a wide range of sources
in energy taxes, there are few other Clear focus on VAT issues in The government is strongly aware of
environmental taxes and they collect Revenue Authority audits the need to tackle VAT fraud. It also
little money. Germany still appears in Germany is unlikely to move believes that collection is hampered in
the lower third of EU Member States significantly toward a data download the case of entrepreneurs struggling
as regards environmental taxes as a from taxpayers to the Revenue with the financial crisis. Customs
proportion of gross domestic product Authorities. Germany supports duties are not seen as causing as much
(GDP) and one of the lowest as regards the OECD’s SAF-T (see earlier) so of a headache and perhaps as little as
the share of total revenues from taxes that it can ‘interrogate’ taxpayers’ 4-5% escapes the fiscal net.
and social contributions. enterprise-wide data systems and
will probably continue to rely on this
Keen on harmonisation but method alongside other techniques.
unresponsive to competition It’s aided by the fact that financial and
Germany considers its position at accounting systems are well developed
the heart of the EU very seriously. It and indirect tax compliance is nearly
will continue to do so and to play a 100% electronic.
significant role in the development
of the current consultation toward
a better EU VAT system. German
taxpayers are keen to ease the
uncertainties and difficulties in
cross-border trade, and many support
the idea of one ‘representative’
tax authority in the EU to achieve
that goal.
Shifting the balance from direct to indirect taxes: bringing new challenges 19India
Vivek Mishra
+91 124 330 6518
vivek.mishra@in.pwc.com
GST needed to resolve goods and It will be interesting to see how the Another area in which business faces
services problems Revenue Authorities interpret this challenge is the payment of taxes in
Proposals for a Goods and Services decision. The narrowest interpretation the last quarter of the financial year.
Tax (GST) were to be implemented in is that all new product launches (which There is clearly nothing in the law
April 2010, then 2011 and then 2012. are typically priced at a level that that provides the authorities with the
It may have been shelved for now, would be profitable when volumes power to require a factory to pay excise
possibly until after the next election in pick up) should be valued at full ‘cost duty on the gross value of production
2014. But pressure for it to return will plus’ rather than the transaction value. and not take CENVAT credit. But
continue to grow. There is a concern though that the this happens each year in order for
Revenue Authorities may argue that the Revenue Authorities to meet
The current system is essentially one every advantage accruing to a business revenue targets.
of Central and state sales taxes on must be valued and excise duty
goods with a separate services tax. charged on such value. We expect the Indian government
That means different rules can apply to address the working of the tax
between states (particularly in terms Need to align law administration machinery. We
of VAT ‘holidays’) and competition with administration anticipate acceleration of the move
for investment is intense. Five or six India has steadily streamlined its to automate periodical compliance
of the 28 states are very aggressive in indirect tax regime over the last 30 procedures like electronic filing of
this regard. Goods or components are years. The law has increasingly become sales tax (and later GST) invoices,
often moved on between states, each simpler and easier to interpret and e-payments, electronic generation of
attracting a separate charge and it’s not administer. But there is a huge gap movement documents etc. Concerted
uncommon for some of that to ‘stick’. between the law and the manner in action ought to be taken to clamp down
GST is seen as a panacea but when? which it’s implemented. on administrative laxity.
Fiat judgment casts uncertainty While the intention has always
on excise values been to free export of services from
The Indian Supreme Court, in a case domestic taxes, it has been a challenge
concerning Fiat, recently restarted to implement this. There are many
arguments concerning the excise value reasons for delays and rejections of
of goods. Once a contentious issue, a refunds, including the nexus between
large number of amendments in Indian inputs/ exports and documentation
excise law and the related rules had requirements.
reduced the scope for ambiguity and
disputes on the issue of valuation.
20 Tax policy and administration: Global perspectivesRussia
Vladimir Konstantinov
+7 (495) 967-6236
vladimir.konstantinov@ru.pwc.com
WTO accession to add to We expect further increases in Audits are starting to focus on transfer
changing composition of future years. pricing and this could have a major
indirect taxes impact on customs duties from as early
With customs duty representing such a • Alcoholic products – increases of as June 2013.
large share of tax and related revenues, between 40% and 70%.
Russia’s accession to the World Trade • Tobacco products – increase of 60% The burden of compliance is still
Organisation in July 2012 will have for pipe tobacco, cigarillos and regarded as unreasonable in many
a significant impact in future. Rates cigars and 90% for cigarettes. cases but business is hopeful for
will have to come down from 10% • Motor fuel – increases of between the future.
to around 7.8% with significant cuts 75% and 170%.
in some strategic sectors. Duties on • Diesel fuel – increases of between VAT system needs greater
electrical equipment, drill pipes and 150% and 260%. harmonisation
bulldozers will have to be cut by as The Russian VAT regime is fairly
much as half by 2015/16. Compliance and enforcement are similar to that within the EU but with
having an impact some notable exceptions. Although fine
Alongside that, increased takings from There is a focus on narrowing the tax tuning is likely, business would like to
the mineral resources tax and excise gap, particularly within indirect taxes. see more fundamental reform.
tax were designed to represent a 3% But at the same time the tax authority
change in the composition of other is becoming less aggressive and more The lack of VAT grouping is a
tax revenues during 2012. But only reasonable about compliance in substantial detriment to business.
one third of that represents a shift many respects.
from direct tax, reducing corporate Another feature of the Russian VAT
income tax. The mineral resources Wider use is starting to be made of system is that there is no support for
tax accounts for nearly half of those technology, including the introduction the export of services. Many services
other revenues. Russia has abundant of electronic VAT invoices. This was are out of scope and supplies lead to
supplies of oil, gas and other natural introduced in May 2012 on a voluntary input VAT cost.
deposits and reliance on these is high basis. It’s either good or neutral for
in tax terms. Increases in rates are businesses in Russia and has largely
though, to an extent, matched by a been welcomed. The tax authorities
new mechanism to help the work on also see it’s a win-win situation. This
new fields and provide tax breaks for is symptomatic of attempts to remove
them. This trend is set to continue. previous delays (e.g. delays in VAT
The dynamics of the growth in rates of refund) and formality in the system.
excise taxes in 2012 compared to 2010
show how targeted they have been. There is a stated intention to employ
more analytics to the tax audits too.
Nothing concrete has yet emerged
though and business is not convinced
how long it will be before there are firm
proposals. There are discussions about
the feasibility of interrogating financial
systems but so far activity is limited
to requesting electronic versions of
key documents.
Shifting the balance from direct to indirect taxes: bringing new challenges 21Singapore
Soo How Koh
+65 6236 3600
soo.how.koh@sg.pwc.com
Risk-based approach to This risk-based approach serves to While Singapore monitors what other
compliance and audit enhance other voluntary programmes countries are doing in this area, the
The recently-introduced GST Assisted which taxpayers can also consider. The government will probably seek to
Compliance Assurance Programme Revenue Authorities offer taxpayers maintain what it sees as a competitive
(ACAP) is intended to bring savings the opportunity to have e-audit advantage, tackling only those areas
in time and money for well-organised techniques used to try to reduce the where it needs to influence social
businesses as subsequent tax audits level of manual investigation work. behaviour – petrol, liquor and tobacco
will be reduced for these businesses. Tools are then used to interrogate being paramount.
On a voluntary basis, MNCs and other financial systems using the OECD’s
businesses can conduct their own standard audit file for tax (SAF-T) National climate change strategy
holistic risk-based review to endorse methodology. There is also a voluntary driving environmental change
the effectiveness of their GST systems, disclosure programme (partial Businesses are as focused on social
processes and controls. Accredited GST amnesty) under which there is a responsibility in relation to the
specialists, like PwC, will test these reduction in the substantial penalties environment as the government and
controls and report their compliance which could otherwise be charged in the public. While 86% of Singaporeans
with agreed standards. relation to GST errors. feel that they play a part in taking
action on climate change, and 74% are
The benefits of being part of ACAP First class trade controls for a concerned about climate change, the
could be substantial in the period small range of goods question the government has struggled
to April 2016. A business receiving There is scope for the government to with is how this awareness can be
‘premium status’ will be less likely to consider the range of customs and translated into positive action.
have to undergo an extensive Revenue excise taxes. But Singapore prides itself The National Climate Change Strategy
Authority GST audit. The business on being a very open economy and a 2012 (NCCS-2012) suggests some
can also benefit from the waiver of substantial increase in trade controls answers and provides an insight into
penalties if it does have to disclose GST is unlikely. It also has good trade the future direction of tax and other
errors which don’t arise as a result of relations with other countries. policy in this area. Singapore’s policies
fraudulent behaviour. Since 50% of the and measures aim to reduce emissions
costs of achieving the ACAP status will Controls are applied to an extent by 7% to 11% below 2020 business as
be funded by the state up to S$50,000, through the fact that TradeNet, usual (BAU) level, a projection without
there is a major monetary incentive Singapore Customs’ nationwide policy intervention. Singapore has
for taxpayers to participate in this electronic data interchange (EDI) also pledged to reduce emissions by
cooperative compliance initiative. system for import, export and 16% below 2020 BAU level if there is a
transhipment documentation legally binding global agreement.
processing, handles virtually all
affected transactions. Its recent In his National Day Rally address on
upgrade was aimed at helping the 26 August 2012, the Prime Minister
trading community and, in particular, made clear that Singapore’s taxes
aligning it with international standards will have to increase “sooner or later”
for processing. as social spending increases. But he
didn’t indicate which areas of taxation
would be impacted. Besides raising
the current GST rate of 7% which
is considered low by international
standards, could environmental
taxes have an important role to play
in achieving the objectives set out in
Singapore’s NCCS-2012, and at the
same time close this fiscal gap?
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