www.pwc.com/tax Shifting the balance From direct to indirect taxes Updates from key territories and regions worldwide on the development of indirect taxes and, in particular, VAT/GST regimes. 2 Shifting the balance. PwC Contents Introduction 4 The changing landscape 12 Customs 18 Australia 22 Brazil 26 Canada 30 China 34 India 38 Mexico 42 Russia 46 Singapore 50 South Africa 54 United Kingdom 58 United States 62 The impact of VAT compliance on business 66 Contacts 68 Shifting the balance. PwC 3 Introduction 4 VAT/GST systems now exist in 156 countries around the world, with seven more considering implementation by 2013. Shifting the Balance China and India have both signalled Ine Lejeune In the first edition of Shifting the their intention to move towards a PwC Belgium Balance, published in June 2007 we uniform VAT system to replace current Global Leader, Indirect Taxes highlighted trends that are, if anything, regimes. The countries of the Gulf more pronounced today. At PwC1, we Cooperation Council (GCC) are working see an increasing number of countries towards a VAT system. around the world adopting or reforming their VAT or GST systems in line with As countries reform and implement the demands of a rapidly changing their indirect tax systems, they need to global economy. confront a number of challenges. And we see some significant programmes VAT systems (including GST) have now of reform arising in response to been implemented in 156 countries these. Notably, the European around the world, with seven more Union has embarked on a ‘once in a considering implementation by 2013. lifetime’ consultation on reform of The trend away from direct forms of the VAT system, in order to develop taxation and towards indirect taxes recommendations for a simpler and continues inexorably. easier to administer value added tax system within what are now 27 Member States of the EU. The issues that this programme of consultation seeks to address are relevant to all countries that are looking to create efficient, balanced and effective indirect tax systems. 1 ‘PwC’ refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Shifting the balance. PwC 5 ‘Soaringbudgetdeficitshaveput pressure on many governments, particularly in Europe’ Responding to the financial crisis A VAT system past its sell-by date? Since the first edition of this publication, Europe’s challenge in reforming VAT back in 2007, one event has dominated largely stems from the fact that the headlines and captured the attention basis of the system in place today was of all governments around the world, created in the late 1960s. At that point namely the financial crisis. Soaring the EU comprised of six Member States budget deficits have put pressure on compared to the present 27. Global trade many governments, particularly in has exploded in the intervening 40 or Europe, to ensure that they can raise so years. We now operate in economies additional revenues. As a condition of that are increasingly oriented to services receiving loans, Greece was expected rather than simply trade in goods. And to reduce its budget deficit considerably the profound changes introduced by by 2014. Reducing its sizeable VAT gap the Internet are radically reshaping is likely to be an important factor in many aspects of the global economy. achieving this2. And Greece is not alone. All of these significant developments All countries face the need to improve mean that a VAT system, separately their tax receipts, and increasingly administered in 27 Member States, with they are turning to indirect taxes as numerous exemptions and multiple rates the solution. applied according to national priorities, is adding to the burden on taxpayers to comply, embedding inefficiencies in collection and administration and contributing to a VAT gap between theoretical full compliance and the amount that governments are able to collect. 2 See 'Eurozone agrees €110bn Greece loans' by Kerin Hope, Nikki Tait and Quentin Peel, published on FT.com: May 2 2010. 6 Shifting the balance. PwC Figure 1 The objectives for the EU Commission’s consultation: a simpler, more robust and efficient VAT system Technical Reducing Efficiency of Legal Process VAT design ‘red tape’ collection Objectives: Objectives: Objectives: Objectives: • evolution to a ‘broad • reduction of • improving and • consultation with based VAT system administrative simplifying the shareholder; • complexity, burdens; collection of VAT • harmonised uncertainty and • simplification: and administration; implementation; inefficiency of the – one stop shop • reduce the VAT gap • create certainty. current system vs. (B2C); and and combat fraud; ‘best practice’ VAT – intra-group • protect bona fide design that balances cross border; traders against the interests of • synergies with VAT fraud. the government, other legislations businesses and citizens. Member States show significant A holistic approach needed differences in the efficiency with which These issues are of course inter-related. VAT is collected. Interpretations in Addressing them separately will not individual Member States are subject deliver the overall improvements that to costly and lengthy legal challenges. the fundamental questions asked in As a taxpayer it is difficult to achieve the Green Paper are seeking to deliver. certainty and to have access to the What the EU arguably needs in order to European Court of Justice. The VAT do this is a long-term strategic plan – Gap is substantial in some EU Member a vision for the development of a best States. Businesses are taking on ever practice EU VAT system against which more complex burdens to administer the current system can be benchmarked. the tax. The EU Green Paper’s broad Based on that, a plan to deliver on the remit therefore asks questions in four vision of achieving greater efficiency, key dimensions around the whole range less leakage, simpler compliance should of issues associated with VAT. There are be articulated and implemented. So questions about: what would such a vision look like? • The technical development of the First of all, in developing its vision, the VAT, e.g. should the tax be EU should take inspiration from best broader based? practice VAT/GST systems from non-EU • Considerations of the cost countries, as well as good practices that of compliance have been developed to administer the • The efficiency of collection models tax efficiently within the EU. and the need to improve and harmonise auditing methodologies; Any vision of a modern, efficient and VAT system for the EU would have • The related legal process and system. to acknowledge that Europe needs to operate with a single legal system relating to VAT. This would be framed in a Regulation rather than a Directive, so that it doesn’t need to be implemented in the laws of 27 separate Member States, and to provide direct access to the European Court of Justice for taxpayers. Shifting the balance. PwC 7 There would be a European VAT Registration, one set of compliance rules and a single EU VAT return, to drive efficiency. This is in marked contrast with today, where we see significant variations in compliance processes. There would be a single EU VAT Administration, with a single audit methodology, using e-auditing techniques, assessing business controls and systems in place. Therefore efforts would be focused more effectively on businesses that may not be willing to comply voluntarily. These efficiencies are only possible as a single system rather than if they were to be implemented and managed separately in 27 countries. This vision meets the requirements of businesses in its simplicity and ease of compliance. Through automation it reduces the cost of administration and focuses on systems, controls and processes for more targeted and risk-based approaches to audit and compliance, to help reduce the VAT GAP. Of course this vision cannot become a reality overnight, but broadly accepting Environmental Taxes its conclusions should allow all stakeholders responding to the Green As countries of the world continue to work Paper to begin to see that along the way out how to tackle the problems of climate to its realisation, there are undoubtedly change, reducing natural resources, and energy ‘quick wins’ that could be implemented security, the role of economic instruments is sooner. For example, in 2013 VAT becoming of increasing inportance to fiscal invoicing rules will come into force that authorities, both as a means of changing will harmonise requirements across the behaviour, but also as a means of raising EU, with real benefits for taxpayers and substantial revenues from a broad group of tax authorities alike. As an immediate taxpayers. Recent developments have seen action the definition of the ‘business the introduction or suggestion of carbon taxes control’ requirement should be defined in a number of countries including the UK, at an EU level prior to 1 January 2013. Ireland and China. Meanwhile, a draft revision of the EU Energy Tax Directive is expected imminently. This pricing of externalities represents a real cost, which business either has to pass on or bear, effectively making it a cost of their shareholders. Whilst the main focus, currently, is on carbon, there is no doubt that further taxes on other environmental resources will appear, with water, no doubt, high on everyone's list. 8 Shifting the balance. PwC A fair tax Figure 2 Administration is, of course, only one VAT/GST systems as ‘Win-Win Taxation Model’ element of reform. Developing a best practice VAT requires a number of other more contentious changes. The first Governments Tax authorities of these is a broadening of the taxable base. Today, in Europe, VAT revenues Business attraction Sustainable Total risk Revenues represent only 55 percent, on average, and employment global profit management of the revenues that would, in theory, be collected if all final consumption was taxed at the standard rate3.