Shifting the Balance

A GLOBAL EVOLUTION FOR INDIRECT TAXES, SAYS PRICEWATERHOUSECOOPERS

VAT (value added tax) and GST (goods and service tax) are two of the fastest growing taxes globally, a new report launched today by PricewaterhouseCoopers demonstrates. The report, Shifting the balance –the evolution of indirect taxes , offers an insight into the growth of indirect taxes and focuses on a number of key themes such as the shift from direct to indirect taxes, barriers to business and the need for reform, litigation, and the use of technology in indirect tax compliance.

In separate articles, Jeffrey P Owens, director of the Centre for Tax Policy and Administration of the Organisation for Economic Cooperation and Development (OECD), and the Minister of Finance for Belgium, Didier Reynders, share their viewpoints about the global shift from direct to indirect taxation.

Issues such as safety and security and the facilitation of international trade are global challenges at the forefront of the customs arena. The report suggests that there has been a global shift from the tax planning arena towards compliance and trade facilitation, whereby the emphasis is on moving goods across borders without delay and in the most efficient way.

Environmental tax and regulation is playing an increasingly prominent part in policy making. However, while environmental influences have been seen, the report indicates that few countries have successfully introduced environmental taxes as a fiscal lever to influence behaviour and achieve environmental goals.

The report draws on data gathered from across the PricewaterhouseCoopers global indirect taxes network, and shows how over 141 countries worldwide now operate VAT or GST systems and that those yet to adopt such a system are moving towards one.

It suggests that this could reflect a global trend by governments to focus on the certainty of revenues from VAT/GST and a desire to shift compliance costs from tax authorities to businesses. The report describes how, in light of the evolution of indirect taxation, there is a further challenge not to be forgotten. VAT systems can be regressive in nature and also potentially inflationary. It recommends that governments considering the introduction of such systems to enhance global tax competitiveness, need to bear in mind measures that will ensure a level of welfare for the lower paid individual taxpayers, including the potential for applying reduced tax rates or even zero tax rates for basic goods and services or those supporting other social aims, such as relieving the burden on the elderly or disabled.

Reviewing and comparing systems on an international basis demonstrates that no system is without its flaws. There is a clear tension between the need to eliminate the possibility of non-compliance and fraud with the necessity of ensuring that the burden of administration falling on taxpayers does not encroach their ability to compete. When compared to established VAT systems such as in the European Union, VAT/GST systems that have been introduced in the past decade (e.g. Australia and Singapore) appear to have far fewer opportunities for fraud and higher levels of compliance. The report recommends that the European Commission’s response must include an inclusive debate to address the problems associated with missing trader intra-community fraud (or carousel fraud) which is in context with the need to respond to a highly competitive global business environment.

The report refers to progress being made by the European Commission and the OECD in addressing the current lack of synchronisation and convergence in VAT/GST legislation. The report suggests that a firm consensus and movement towards agreements on standards that can operate internationally will be fundamental to ensuring that a significant compliance burden is not imposed on business and no barriers to global trade are created.

Ine Lejeune, global indirect tax leader, PricewaterhouseCoopers, said:

• To date, few countries have introduced environmental taxes as a fiscal lever to influence behaviour and achieve environmental goals;
• The facilitation of mutually advantageous trade agreements is a customs priority fro many countries in the developing world;
• While countries are at different stages of development, it is evident that most base their VAT/GST models around the traditional EU example;
• There is a general global trend towards broadening the base of goods and services to which VAT/GST applies;
• Most countries have a high level of voluntary compliance, particularly among larger companies. In some countries, it is evident that smaller companies are struggling with the compliance burden for indirect taxes;
• There is a general global trend for tax authorities to take a more aggressive approach to compliance and penalties are reflecting this;
• There is a general increase overall in indirect tax litigation, often in relation to the collection and recovery of tax rather than points of principle for less established regimes. The notable exceptions to this trend are China, where the cultural preference is for negotiation instead of litigation, and Australia, where a test case funding programme operates. Where VAT regimes are relatively new, courts are struggling with the lack of precedent;
• All countries with a VAT/GST regime are now using automation to some degree, with the exception of Mexico which appears to be the only remaining paper-based system.

1. Shifting the balance – the evolution of indirect taxes is being launched at the PricewaterhouseCoopers Global Indirect Tax Conference which is being held in Vienna on 4 and 5 June 2007.
2. PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 140,000 people in 149 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.
   
   "PricewaterhouseCoopers" refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.