This week in tax: Will the EU VAT gap get worse?
The EU VAT gap was slightly better before COVID-19 than it was in previous years, however, the impact of the pandemic may have set back governments trying to tackle the problems of VAT collection.
EU countries lost an estimated €134 billion ($152 billion) in VAT revenue in 2019, according to the EU VAT gap report published on December 2. The EU VAT gap decreased by around €7 billion between 2018 and 2019.
So there was a positive shift before COVID-19 due to governments improving reporting and collection processes. Yet 2019 saw EU member states lose out on a combined total of €134 billion in VAT revenues, representing 10.3% of the VAT total tax liability (VTTL).
“Despite the positive trend registered in the last few years, the VAT gap remains a major concern,” said Paolo Gentiloni, EU commissioner for the economy.
“This year's figures correspond to a loss of more than €4,000 per second. These are unacceptable losses for national budgets,” he stressed.
Back in 2020, the European Commission was making predictions about the impact of the COVID-19 pandemic on VAT revenue across the EU. The Commission expected the VAT gap to exceed €164 billion as a result of falling consumption and a decline in GDP growth across the EU.
The EU analysis of VAT revenue in 2020 will not be available yet. The full picture may well show that the pandemic created a fiscal black hole, but EU member states could already be on their way to overcoming this loss of revenue as economies bounce back.
In other news, this week ITR launched its digital tax hub to compile its best coverage of the OECD’s work to reform the international tax system.
US Tax Court denies Coca-Cola’s request to reconsider 2020 decision
Coca-Cola is stuck with a hefty tax bill after the US Tax Court rejected its bid to file an out of time motion. The company hoped the Tax Court would reconsider its 2020 decision.
The US Tax Court denied the company’s request to file an out of time motion because it did so outside the 30-day timeframe. As a result, the November 18 2020 decision will not be up for reconsideration.
“Under Rule 61, a party shall file a motion for reconsideration of an opinion or findings of act within 30 days after the opinion is served ‘unless the court shall otherwise permit’,” said Judge Albert Lauber in the court order.
Coca-Cola put forward the motion on June 2 2021. This was 196 days after the 2020 decision was made. The soft drinks company claimed its replacement of counsel post-trial as the reason for issuing the motion outside the 30-day time limit.
The Coca-Cola Company hired J Michael Luttig, a former US federal judge, to serve as counsel and special advisor as part of the case. The Tax Court dismissed this claim because the counsel had put forward the case for reconsideration in January 2021. This was five months before the motion was actually filed.
The company’s legal team argued that the transfer pricing (TP) methodology it had used was protected by the due process clause of the Fifth Amendment. However, the court was not persuaded by this argument.
Tax teams are changing their structures to address environmental taxes
Multinational enterprises (MNEs) are upskilling employees and centralising tax functions to manage the rise of environmental tax reforms around the world.
Tax directors are considering how best to prepare for reforms including carbon taxes, carbon borders, and plastic taxes. MNE tax teams are increasingly considering environmental taxes when hiring, but tax professionals specialising in environmental policy are few and far between.
“It’s extremely hard to find people with specialism in this area. People need to be educated internally or educate themselves,” said one head of policy and controversy at a multinational toy retailer.
Environmental taxes are a relatively recent concern for most businesses. Yet as awareness of climate change grows, action from governments and economic blocs will place greater demands on MNE tax teams.
Domestic carbon taxes are in place in more than 40 countries, and countries such as Spain and the UK are moving forward on plastic taxes. Meanwhile, the EU has proposed a carbon border adjustment mechanism (CBAM) to be effective from 2026. These are just some of the legislative changes affecting businesses.
The degree to which MNEs will need to adapt depends on the sector. As Michael Ludlow, group head of tax at Swiss Re, pointed out, the insurance industry will be less affected than extractive or fossil fuel energy companies.
“I wouldn’t have thought it was a big administrative issue,” said Ludlow, of the impact environmental taxes will have on Swiss Re.
Next week in ITR
Next week ITR will be looking at what European businesses want from BEPS 2.0. Meanwhile, the OECD is due to release its statistics on tax revenue in 2021. ITR will be providing its analysis of the figures compared to last year.
Readers can expect these stories and plenty more next week. Don’t miss out on the key developments. Sign up for a free trial to ITR.