Going against the increasingly common trend of advocating for the reduction or even elimination of direct taxes, indirect taxes (with VAT at the forefront) are being used more and more by governments in various countries as an effective way of raising revenue. Evidence of this is shown by the fact that, almost every day, suggestions are being made by various international organisations to increase consumption taxes.
Today, 122 countries around the world have a VAT or GST, and this number rises constantly. So, when by the time you are reading this article, this figure will likely have increased. It is worth pointing out that the GCC countries are in the process of deploying a VAT system that is scheduled to come into effect in 2018, something which was inconceivable only a few years ago.
All this means that VAT – in all its forms and aspects – is a fast-moving and constantly changing tax that requires consulting companies and VAT professionals in general to make a major effort to adapt thereto. Therefore, VAT can be said to have an exciting and promising future ahead.
As member states of the European Union, we have a privileged position in this regard. Our common VAT system – despite having room for improvement – is replicated by a large number of countries in the world that aim to have a system for indirect taxation. We have many years' experience and extensive knowledge that we can export to these countries, which undoubtedly generates major business opportunities, not only for expert VAT advisers, but also for countries themselves to encourage a large number of activities such as inter-country institutional relations, trading goods and services between economic operators or expanding upon existing VAT reciprocity agreements. We must be aware of this and take advantage of all these opportunities, which will undoubtedly continue to arise in the future.
It is important to remember that our common VAT system and other similar systems in place in other countries must take account of the current situation of our economy and adapt to the times. The digital economy is a reality. It is already here and is something we cannot ignore.
In my view, there are three areas that we must not lose sight of in the coming years regarding VAT management.
(i) The digital economy and e-commerce
The growth of the digital economy and the internationalisation of small and medium enterprises (SMEs), especially in the past 10 years, have meant that the VAT system is not entirely in keeping with the reality of modern commerce.
We are almost duty-bound to upgrade and modernise VAT regulations, especially those to facilitate cross-border trade and the digital economy.
Measures such as the EU's 'mini one-stop shop' (MOSS, which is already in place for certain types of services and is being proposed to be expanded for other operations as well) seem to be a good starting point and will be of enormous help, especially for SMEs. Nonetheless, authorities should consider why in some cases and countries where these types of measures have recently been rolled out, the response from companies has not been as hoped, even if the official message released by institutions says otherwise.
One-stop-shops alone do not eliminate the typical uncertainties that invariably arise when applying tax, especially when dealing with international transactions. If the goal is for SMEs to manage, submit and pay VAT in its international transactions without the help of a third party, I as an adviser fear that, in practice, this will give rise to insecurity and, in turn, create more problems than solutions.
(ii) Tackling fraud
We must not ignore the fact that the main and most important measure to be taken is tackling fraud. The 'VAT gap' – the difference between expected VAT revenue and the actual amount of VAT collected – is an enormous issue that we must do our utmost to counteract. I am not only referring to tax authorities, but also to companies and consultants. It is everyone's duty to tackle this problem, although we must be aware that it is a challenging task. We must assume that fraudsters are smart, truly multinational organisation whose sole aim is fraud. In many cases, they are several steps ahead of governments and companies.
The anti-fraud measures should not fall (as, unfortunately, is the case) on companies, that every day have to cope with more and more checks and reporting measures, some of which are absurd and unjustified, making it almost impossible for them to concentrate on their real business activities.
Tackling tax fraud not only requires tax measures, but also other types of administrative or even criminal measures, needing the cooperation of various individuals, organisations and institutions. This cooperation must take place at international level since the highest level of fraud occurs in international transactions. If we only take local measures to tackle this problem, we are not doing a good job.
These measures must always respect the essence and workings of tax. Otherwise, we run the risk of turning VAT into a different type of tax. Here I refer, for example, to the proposed, and in my view unjustified, extension of the reverse charge mechanism to virtually all transactions made by companies. That cannot be the right path.
(iii) The disappearance of traditional returns and the modernisation of VAT management
VAT returns as we know them seem to be coming to an end. I predict that within a period of no more than 10 years, they will move on to a better life.
These returns are being replaced by other more modern and sophisticated ones (such as the SAF-T), which makes sense if done in a justified and flexible way that takes into account the companies' situation and is – as far as possible – standardised at international level.
However, there has been a recent and increasingly widespread trend, which is none other than the so-called 'real-time' VAT reporting for transactions carried out by companies.
Hungary and Spain are the last two countries that appear to have joined this trend, although Hungary seems to have postponed its plans due to a failure by companies to adapt. This is an example of flexibility that should be considered by other tax authorities.
The case of Spain could be taken as an example of what cannot and must not be done. To sum up, the measure to be adopted would mean that companies are obliged to report on an almost daily basis. This is clearly unacceptable.
These kinds of measures substantially change the VAT collection mechanism and seem to go against all of the principles of proportionality underpinning EU law. This principle must always be taken into account by authorities and must be present at the time of adopting any formal or administrative measures that affect VAT management. Therefore, I hope that this is not the direction that the tax authorities of the various countries decide to take. And not only that, I trust that European authorities will ensure this does not happen and, where necessary, will seek to rectify the decision of governments that chose the wrong path.
We must accept that the way we interact with public bodies must change. Nevertheless, this change must not become an overly burdensome, unjustified and disproportionate requirement. Otherwise, the supposed efficiency that we hope to achieve will turn into an insurmountable barrier especially for smaller companies which, in actual fact, are the ones that suffer most from this type of abuse.
I would like to finish this article with the same sentence I have used to open it. I strongly believe that VAT and all consumption taxes have a great future ahead.
Spanish VAT Services