By Richard Cornelisse, Big4.com Guest Blogger
My Guest Blog of March 13, 2012 “About US Tax Reform – Larry Lindsey, Former Fed Governor: A Value Added Tax Should Be On The Table” dealt with US VAT introduction as possible option to combat the deficit.
This Guest Blog is about the malfunctions of that “European” VAT systems and proposed improvements. Based on the law of the handicap of a head start if indeed it is decided to implement a national US Value Added Tax, it is better to implement “the remediated” version and improve further of course.
The European Commission – objective statement about future of VAT
“Value added tax (VAT) constitutes a major source of revenue for national budgets of the Member States of the European Union. However, the VAT system, which is based on legislation adopted at European level and applied at national level, suffers from numerous shortcomings which do not make it fully efficient and compatible with the requirements of a true single market.
The aim of this consultation is to launch a broad based debate with all the stakeholders on the evaluation of the current VAT system and the possible ways forward to strengthening its coherence with the single market and its capacity as a revenue raiser whilst reducing the cost of compliance.
The Green Paper covers in particular the treatment of cross border supplies, as well as other key issues addressing tax neutrality, the degree of harmonisation required in the single market and reducing “red tape” whilst ensuring VAT revenues for Member States”
The European Commission published its Final Report Dated December 6, 2011.
VAT future: simpler, more robust and efficient
“To move the current VAT to the future system, the Commission wants to implement the following short-term measures as a first step:
- Setting up an EU VAT web portal that provides information in several languages on basic issues such as registration, invoicing, VAT returns, VAT rates, special obligations and limitations to the right of deduction
- In 2012, publishing the Guidelines agreed by the VAT Committee on EU legislation and explanatory notes on the new legislation before its entry into force, in order to inform businesses
- Setting up a tripartite EU VAT forum (involving the Commission, Member states, and stakeholders) in the course of 2012
- Proposing a standardized VAT declaration (VAT Return) to be available in all languages and optional for businesses across the EU by 2013
- Ensuring the smooth introduction of the mini one-stop shop scheme (registration in a single EU Member State) in 2015 and envisaging a managed broadening of the concept from 2015 onward – Ernst & Young
I have a lot of questions and to be honest hardly any concrete answers. That is not that strange as we need more detail first. It is maybe all too soon, but we know that a small (legislative) change can have a big impact.
Can you imagine the impact when you completely change an entire VAT system, such as abandon the ‘origin principle’ and replace that by ‘destination principle’. I am aware of the VAT jargon used but to simplify, it means that the country that is allowed to tax the transaction changes. All supplies will be taxed for VAT in the country where the supply to the final consumer occurs. Systems, processes and detective and preventive controls will have to be amended.
It is about being well prepared, look at the bigger picture, plan and set already some key priorities where possible.
The EU VAT web portal, Guidelines and tripartite EU VAT forum are good initiatives and fit in the trend of tax authorities having an open dialogue with the tax payer. I refer to OECD ‘Enhanced Relationship’. Such a portal might for many tax authorities be the first baby steps to go in the direction of such an ‘enhanced relationship’. I am the opinion that such a relationship is the right strategically way for the authorities to manage that tax payer’s are in compliance with tax law and reporting requirements.
For every positive, there might be a negative that needs proactive management. Does an open dialogue negatively impact tax risk management? Does it result in an increase of tax risks? That could be if such a dialogue results in for example higher penalties or an increased risk of (joint) liabilities. Will tax payer’s”Good Faith” towards the authorities even more difficult to prove? If you receive ‘how to do it’ instructions (EU VAT portal, Guidelines), can you still take the position that you could not have known? I don’t think so.
- How do you see this?
- What is the impact on company’s processes and controls?
- How do you see the trend of ‘enhanced relationship’ develop?
- What is the impact on Tax service offerings in general’?
- What can we expect more?
“The reform process launched by the Green Paper should ultimately result in a VAT system that has all the following attributes:
Simple’: A taxable person active across the EU should be faced with a single set of clear and simple VAT rules: an EU VAT Code. Such a code would laydown rules adapted to modern business models, and standardised obligations which take full account of the progress made in new technologies. A taxable person should only deal with the tax authorities of a single Member State” – The final report of the European Commission
The above EU VAT Code is a regulation to replace the present VAT Directive. A directive has to be translated in national regulation first and that has as cause effect that Member States might have different views or interpretations. Root cause is delegation of authority. Besides that some ‘directive’ provisions are optional and that means that not in every country the same VAT rules apply.
A VAT code applies directly in all Member States as it becomes national law immediately and would increase harmonization between the Member States. Flexibility in view, interpretation or the optional model does in principle no longer exist. At least that is the aim of such an EU VAT code.
It triggers already the following questions:
- Is the playing field of the future indirect tax professional going to expand from an one country ‘VAT’ expertise to an European Union league perspective?
- How about litigation and national interpretation of the code? Nowadays the national court decides whether questions are raised to European Court of Justice, will that change?
- What is the impact of collaboration among tax administration?
- What about cultural differences from a people perspective?
- What is the impact on tax profession as in-house tax function can use its own indirect tax expertise in 27 countries?
- What is the cost benefit analysis on setting up an own in-house function indirect tax function compared to an outsource model to external advisers?
When is change going to take place?
I am aware that many questions are taking it too far. But if you consider this a brainstorm exercise you need to post first as many ideas as possible. The next phase is about categorizing and selecting.
We don’t have to hurry as this will take a couple of years before this gets into force. It is all about politics and the right timing again. Last but not least at the end the Council of all Ministers have to approve. The real political challenge would be to first agree on and implement the ‘All for One and One for All’ principle. A bottleneck could be the competition for tax revenues and the perception that somebody else wins. When somebody wins, somebody else must lose.
Back to the US introduction
Is the above also a bottleneck for the US?
Maybe everybody could learn something from the Canadian system.
“A benefit of an Canadian HST-styled VAT for the US is that the federal government computes the tax attributable to each province through a formula (based on census data, other economic indicators). There is no need for businesses or the tax authority to separately track the taxes of each province on returns or on invoices. As a result, such a VAT structure can more easily accommodate states wishing to have different rates from each other (which could well be a deal breaker otherwise). That said, it is of course simpler if the individual states all buy in to the same rate — if the rate is the same, and there is an HST-type formula driven revenue allocation to states, there would be less need to develop complex place of supply rules to determine which state’s VAT rate applies.” Brian Wurts, PwC Canada
Richard’s other Big4 publications
- How to Execute A Tax Strategic Plan And Be Successful
- About Market Leadership And Non Traditional Competitors
- Centralized Business Models And ‘Indirect Tax Automation’
- How To Manage The Perception Of C-level And Realize Tax Objectives
- The Conflict Between ‘Actual To Budget’ Controls And ‘Budget-based Compensation Targets’
- Tax Controversy Strategy: ‘Proactively Managing The Changing Landscape’
- About ‘Business Integrity And ‘Being Inspired’
- The Indirect Tax Profession Is Evolving From An Individual To A Team Sport
- Would European Value Added Tax Work For The United States?
Richard Cornelisse is CEO of the KEY Group and worked previously as Big4 Partner in the Tax Performance Advisory and Indirect Tax Practice and blogs on Tax Function Effectiveness and Tax Control Framework developments.