VAT/GST rates have plateaued – but their impact remains high
Value-added tax (VAT) and goods and services tax (GST) rates rose rapidly in the period from 2009 to 2016. However, since 2017, that trend has slowed considerably and only a few jurisdictions have implemented increases or have announced that they plan to do so.
- Consumption tax increase in Japan effective October 1 2019 (from 8% to 10%);
- Singapore announced a planned rate increase to occur during the period 2022-2025 (from 7% to 9%); and
- Conversely, China reduced its standard VAT rate from 17% to 13% with effect from April 1 2019.
The small number of VAT/GST rate changes in the past 12 months, compared with previous years, is further evidence that consumption tax rates are generally stabilising. This is a welcome outcome for businesses as numerous or rapid changes can create significant administrative challenges for pricing, invoicing and reporting.
However, it is perhaps worth noting that the average VAT/GST rate in APAC is far higher than it was before the financial crisis in 2008, as governments have come to rely increasingly on consumption taxes as a source of revenue. There is increasingly far greater VAT/GST fields in accounting systems and compliance processes.
It is also worthwhile to pause and consider the extent of government assistance provided in economies as relief measures in relation to COVID-19. While it is accurate to note that the VAT/GST rates have plateaued, it would not be unreasonable to conclude that increasing these rates in the future would assist in repaying these significant debts. Hence, businesses should watch this space.
Reduced rates and exemptions carry tax and social policies
From a worldwide perspective, governments continue to use reduced VAT/GST rates and exemptions to further their tax and social policies, such as stimulating certain industry sectors or influencing behaviour to improve health or the environment. In APAC, where most jurisdictions have a single taxable VAT/GST rate, there is less use of VAT/GST to drive outcomes in specific sectors or influence consumer spending. However, certain trends still emerge.
Reduced rates and exemptions
China is the key APAC market that has implemented a range of VAT rates. The VAT rate charged on transportation, postal, basic telecommunication and construction services, as well as lease or sales of real properties, transfer of land is 9% (down from the previous reduced rate of 11%). Certain goods such as agriculture, water, natural gas, books, newspapers, electronic publication are taxed at 9% (down from the previous reduced rate of 13%).
With the exception of China where financial services are taxable (e.g. VAT is charged on loan interest and is not recoverable), VAT/GST exemptions continue to apply in many APAC markets to activities such as financial services, insurance and healthcare.
VAT/GST continues to spread in APAC, but with some reversals
There are only a few jurisdictions that have not introduced a broad-based VAT/GST or consumption tax.
In APAC, both China and India are notable markets that have more recently introduced federal VAT/GST systems.
However, Malaysia abolished its GST system and reintroduced a single-stage sales and service tax with effect from September 1 2018, just over three years after GST was first introduced. This is a significant change in tax policy. At this stage, Malaysia seems to be an isolated case in returning to a single-stage tax, with no indications that other APAC jurisdictions are considering moving in this direction.
Indirect taxes are catching up with digital activity
Applying VAT/GST and sales taxes to cross-border sales of goods and services has always been a challenge for tax administrations around the world. But e-commerce greatly complicates, expands and accelerates such challenges.
We have seen a proliferation in e-commerce-focused tax legislation across APAC.
For digitised services, the trend continues toward applying indirect taxation in the country of consumption, especially for supplies made to final consumers. Jurisdictions adopting measures aimed at taxing e-services include Australia, Malaysia, Singapore, South Korea and Thailand.
For goods, the trend is toward removing import exemptions and imposing obligations on online marketplaces to account for VAT/GST on goods sold through their platforms. Jurisdictions introducing measures for sales of e-commerce goods include Australia, India, New Zealand and Taiwan.
These digital tax measures apply not only to traditional online retailers or to technology companies but also to any business using online sales or service platforms. As such, the number of companies responsible for VAT/GST compliance because of digital activity is on the rise. Essentially, any business supplying cross border goods and services online must pay attention.
Digital services and digital advertising
In 2018, certain jurisdictions began making proposals to take further action on taxing the digital economy, with some proposing to adopt taxes on digital activity such as a digital services tax (DST) or digital advertising tax (DAT).
Most of the digital taxes that are likely to enter effect in the short-term are designed as indirect taxes, with a percentage of tax levied on revenue not on profits. The aim of the proposed measures is to ensure that certain digital businesses pay tax that reflects the value they derive from users in jurisdictions where they may have a significant online presence but little or no physical infrastructure. However, the impact of each country's measures may affect a wide variety of companies. We see a trend emerging that DSTs, or variations thereof, may not only affect those that are traditionally considered to be 'digital companies'.
At a global level, the EU Council has issued proposals for an EU-wide DST, while at the same time EU and non-EU jurisdictions have enacted or proposed their own unilateral measures – notably the UK, France, Italy and Turkey have implemented a digital services tax. From an APAC perspective, both Australia and New Zealand have issued initial stage consultations to seek feedback on the prospect of introducing a DST. However, to date both markets have stated that they will continue to wait for a global solution. It is yet to be seen what action will be taken if no such global solution is offered in the medium term.
Tax administrations are also going 'digital'
APAC tax administrations are also embracing the digital revolution.
Many APAC authorities require the electronic submission of VAT/GST declarations, and many are introducing or even mandating the use of electronic invoicing or extending its scope.
Australia, Singapore and New Zealand have already developed electronic invoice regimes in place. China is expected to introduce mainstream electronic invoicing during the latter part of 2020. Other jurisdictions, such as the Philippines, have indicated a medium-term plan to move to electronic invoicing.
In general, taxpayers may welcome the increased prevalence of electronic invoicing as being in line with their accounting practices and providing greater flexibility. In addition, electronic invoices tend to be processed faster leading to earlier recognition and processing of input VAT refunds. However, multinational businesses may still struggle with the differences and inconsistencies in different jurisdictions' invoice requirements and administrative procedures.
Another key trend in digital tax administration is that of jurisdictions demanding more detailed, structured data from taxpayers, often in real-time or near real-time. At a global level, this trend has been driven by jurisdictions such as Brazil, Mexico and India, which are administering state-of-the-art IT infrastructures that include the submission of real-time data and data matching.
Australia has a developed digital tax infrastructure where taxpayers can submit business activity statements (BAS) direct to the authorities. In China and Indonesia, transactional level information and tax invoice issuance are managed through government hosted platforms giving tax authorities real-time access to transactional level information.
The advantages of using technology are clear for tax administrations. By collecting more accurate taxpayer data and analysing it more effectively, they can narrow the 'tax gap' by reducing both careless errors and deliberate tax fraud. However, for taxpayers, these measures can impose substantial additional requirements, especially for global companies that need to comply with a wide range of different requirements around the world.
VAT/GST continues to be the 'go to' tax for many tax administrations. As more businesses participate in greater levels of cross-border sales through the rise of internet-enabled business models, tax administrations are adjusting legislation to collect taxes on e-commerce transactions, while some are looking to tax the value generated by digital business models. A growing list of nations are expanding their requirements for taxpayer data and using it to target audit programmes for sales taxes, VAT/GST and related taxes.
In short, the bar is being raised on businesses in APAC in terms of tax efficiency and compliance including a strong focus on process and controls from many revenue authorities. Inefficient processes can have a negative impact on cash flow and working capital. With impacts on both the sales and the purchases side of the transactions, VAT and GST can hit businesses hard. Meanwhile, any mistakes – any compliance failures – can lead to reputational damage as well as tax penalties, and these are often substantial.
Overall, businesses need to devote greater focus and resources to the management of VAT/GST and sales taxes in APAC than they may have done in the past. This may begin with meeting local compliance obligations, but it should include adopting an enterprise-wide strategy. Taking strategic action will result in stronger processes and controls as well as cost efficiencies. There may even be opportunities, such as taking advantage of VAT/GST reliefs and being in a better position to accelerate VAT/GST refunds.
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Tracey Kuuskoski is a partner leading the Asia-Pacific tax centre indirect tax practice in Singapore. She partners with multinational companies to build robust indirect tax business strategies and operating models for profitable growth in the face of vast external change. Prior to her move to Singapore, she worked in Malaysia and the UK.
She also works with companies to implement technology and data supported solutions to efficiently and effectively comply with changing indirect tax compliance obligations while optimising VAT recovery and in-house resource usage.
T: +61 8 9429 2209
Gavin Shanhun is the Oceania indirect tax leader based in Australia. He advises primarily on GST, fuel taxes and excise, customs duties and concessions.
His depth of experience across international and domestic markets has seen him manage indirect tax projects for major clients in the mining and energy sector. He is particularly skilled at taking his industry knowledge and providing commercial solutions, which now includes the use of robotic process automation and analytics.
T: +86 21 2228 2178
Kevin Zhou is a partner in the indirect tax practice in China. He has more than 25 years experience in the tax world and has previously also worked at the firm's New York office.
His practice covers a number of specialised areas related but not limited to VAT planning, VAT management and tax efficient supply chain management. He has served clients in industry sectors including manufacturing, retail, logistics and transportation.
Kevin is a frequent speaker on events for introducing the on-going China VAT reform. He is involved in helping clients go through the transition from business tax to VAT and he liaises closely with authorities regarding the VAT reform development.
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