Episode 1 – Global Challenges of Indirect Tax

TBI Expert View is our focused look into the evolving world of global VAT and what changes companies should be making for 2022.

Our series will feature discussions from industry experts on emerging trends such as increasing digitalisation of global tax processes, advisory information, as well as a look into our development of the world’s first end-to-end VAT compliance platform – Comply.

Watch our Senior Global Director, Lisa Dowling discuss an overview of Global Challenges of Indirect Tax

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Read what our Senior Global Director, Lisa Dowling has to say about Global Challenges of Indirect Tax

In our second instalment of TBI Expert View, Lisa Dowling, our Senior Global Director – Head of Indirect Tax, Advisory and Compliance looked at a number of challenges and trends across the VAT industry. Her overview included:

  • Digital tax measures
  • SAF-T
  • Control lists
  • Making Tax Digital (MTD) in the UK
  • Electronic invoicing
  • Real time reporting
  • Plus, a look at the worldwide spread of VAT & GST

Digital Tax Measures

As Lisa points out, there are a lot of great ideas coming from tax offices and there have been many great technological advances over the last few years. However, the greatest difficulty in these new measures is that there are no standardisations. As we shall,  a lack of standardisation is a common problem in the wake of digitalised tax processes.

More importantly this lack of standardisation causes a significant challenge for global businesses. The many differences across jurisdictions makes it difficult to understand what VAT is collected, what data is collected, how it’s reported, and when it is reported. Yet despite these difficulties, businesses must understand all these reports.

What are the recent digitalisation and advanced reporting requirements?

  • SAF-T
  • Control lists
  • MTD – Making Tax Digital (MTD) in the UK
  • Electronic invoicing
  • Real Time Reporting (Spain and Hungary)

Overall, it seems these digitalised processes are contributing towards the ‘death of the VAT return’.

However, it remains to be seen what the VAT Return of the future will look like or if e-invoicing will take over completely. Alternatively still, there could be a complete shift towards real time reporting. At this point it’s too early to tell.

What is SAF-T?

Standard Audit File for Tax (SAF-T) was developed by the Organisation for Economic Cooperation and Development (OECD). This is an electronic format which enables the transfer of data from organisations to tax authorities in a standardised, electronic format.​ In essence, SAF-T enables tax authorities to conduct more efficient and effective inspections.​

A number of countries have already introduced their own SAF-T requirements, including: Austria, France, Luxembourg, Portugal, Lithuania, Norway, and Poland.

However, non-standardisation continues to be a problem. No international standard list of data elements for SAF-T yet exits. As mentioned above, it’s not always clear how data will be used. For example, some member states will require VAT data and other states require businesses to hold the information.

Control Lists

Control lists are another way of providing information to the tax office. Domestic VAT listings have two main goals:​

  1. Fighting VAT fraud by giving a tax administration a tool that allows easier and faster detection of fraudsters and fraudulent chains. ​
  2. Increasing compliance by introducing a form of third-party reporting where each trader identifies its clients and/or suppliers as well as the amount of the transactions.​

Ultimately, this allows tax offices to cross match information, raise questions, and ultimately streamline their processes

Currently, there are at least 12 member states in the European Union which collect data on domestic transactions.​ VAT listing is a domestic measure so again there are no international standards on data collected and the format. But once more, global businesses must overcome the obstacle of meeting differing obligations.

Common Themes with Advanced Reporting

Once more when it comes to advanced reporting we again and again that there is no standardisation. There are though a number of benefits to advanced reporting, such as:

  • Protection against VAT fraud. ​
  • Improved risk analysis for tax offices.
  • Improved auditing techniques.
  • Increased compliance.

But, once again, advanced reporting can become incredibly burdensome to clients. SII, for example, is so challenging that many businesses have chosen their own way to comply. It begs the question, is the administrative cost of such reporting requirements too much?

Digitalisation – Making Tax Digital (MTD)

In our next instalment of TBI Expert View, Teodora Vallone will discuss digitalisation in in greater detail.

Making Taking Digital (MTD) was introduced to make HMRC ​“one of the most digitally advanced tax administrations in the world”​. It began with a first step of MTD for VAT on the 1st April 2019.​ Eventually, this will move onto to incorporate corporation tax, too.

MTD is not real time reporting, however, this is the same VAT return process through digitised reporting.​ From April 2019, most organisations had to submit VAT returns in a digital format via and Application Programming Interface (API). As expected, the transition from manual to digital records was challenging. Spreadsheet users, for example, needed bridging software or API-enabled spreadsheet to digitally submit the VAT return data to HMRC.​

At Taxback International, we spent significant time in developing out our own API – which was tested with the HMRC – so we could continue to submit clients VAT returns. For businesses without additional help of third-party agent it necessitated the involvement of IT and a lot of time. Now that MTD is up and running, there is extremely low risk of error because of the process of lifting and shifting data.

Soft-landing Period

A soft landing on digital links for MTD lasted until 31 March 2020. During this time, the use of cut/copy and paste or manual transposition was acceptable. ​Since the soft landing period ended, digital links were required to be used to move data through the VAT return preparation process.

There were many challenges for clients, right down to understanding what a digital link was. This caused an issue for many businesses trying to stay compliant. What we now know is that a digital link can be as simple an Excel attachment.

Could the GST model be used with SAF-T?

So, what does the future of digitalisation in the EU look like? Will there be a greater movement towards mandatory e-invoicing? Will EU Member States follow the e-invoicing models in Mexico, for example, or now in Italy​?

Potentially, the answer lies in India.

For the last few years, India has operated an innovative and forward-looking system which could be repeated in Europe. In 2017, India introduced GST (Goods and Service Tax) and since then there have been significant advances with the streamlining of their system.

Is what’s happening in India indicate the future or development of a standardised SAF-T by the EU Commission?​ While this could save businesses a lot of time Lisa feels that it doesn’t seem likely. There have been attempts at standardisation in the past however they have failed to get a consensus.

Digitalisation – Italy & E-invoicing

E-invoicing in Italy has been in effect since 1st January 2019. Since then, invoices and related corrections for supplies of goods and services between parties resident and VAT registered in Italy must be issued electronically.​

However, the electronic invoicing obligation is not mandatory if the supplier is a non-resident taxable person registered in Italy for VAT purpose through direct VAT identification or appointment of a VAT representative.​

Significant Problems with e-invoicing in Italy

The use of this system has necessitated the involvement of IT and requires additional time from other internal teams. Businesses still need to use third parties to send and receive electronic invoices.

In some cases, the e-invoicing system has actually presented itself as a barrier to many businesses. Three years on and we are still working through tailored solutions for our clients.

Real Time Reporting – Spain

Suministro Inmediato de Información’ (SII) is the real time electronic reporting VAT system for Spain. SII was a huge issue for many businesses and raised a lot of questions, such as:

  • What are the tax office using this information for?
  • Are they looking at the granular information?
  • Are they looking at input Vat for discrepancies?

Changes in the reporting time period have also caused confusion. Originally, it was 8 days from the date of the sales invoice or from the date on which the purchase invoice was booked to the company’s accounts.​ Now it is 4 days.​ There has also been some question and interpretation around what ‘booked’ means, this in turn has influenced how the processes flow.

Continued Confusion

The future of this reporting system has yet to be determined. Will SII be extended to all taxpayers? What is the benefit on report of purchase data?

Another part of the confusion is that non-deductible inputs supported by simplified invoices which comply with simplified invoice requirements are reportable even if they are not deductible for VAT purposes.​

The automatic transfer of data through SII kicks back an exception report if any data is not in the required format e.g. supplier VAT registration number missing a prefix. Business are still struggling to comply and finding ways of adhering to compliance guidelines.

Real Time Reporting – Hungary

Introduced from 1st July 2018 ​only applicable to sales transactions. ​Any Hungarian VAT registered entity that issues invoices with a VAT amount above HUF 100,000 (approx. €279) to another entity VAT registered in Hungary.

Reporting of those sales transactions “without delay” to the Hungarian Tax Office. This posed issues for the set up for businesses as invoices had be reported as soon as they are issued, without human intervention.​ This included businesses established outside Hungary but VAT registered in Hungary.​

Businesses must report specific data relating to:

  • Only sales​
  • Only domestic transaction ​
  • Only B2B ​

Only invoices with VAT of more than HUF 100,000 (approx. €279.27)

India – GST introduced 1st July 2017

As briefly mentioned above, on 1st July 2017 the GST (Goods and Services Tax) came into force in India.​ This was introduced mainly to remove the cascading effect on the scale of goods and services.​ In the pre-GST regime, every purchaser including the final consumer paid tax on tax. ​

What’s so interesting and noteworthy about GST in India is that it’s largely technology driven. All activities like registration, return filing, application for refund and response to notice must be done online on the GST Portal.

​It will be interesting to see where India goes with technology and what Europe could learn from their advances in reporting.

Brazil – Incrementally changing a complex system

Brazil continues its review of its indirect tax system as it is one of the most complicated indirect tax systems in the world. The current Brazil tax system poses a significant compliance burden for businesses because of its complexity.​

The Brazilian Congress have been considering a complete Tax Reform for a number of years. Back in August 2017, the Chamber of Deputies announced a proposal for a constitutional amendment, implementing a tax reform to simplify the tax system through unified taxes on consumption, in the form of VAT.​

This tax reform could see the introduction of VAT to consolidate or replace a number of its current taxes.​ While it initially had good traction, COVID brought much of the momentum to a halt. Now it’s more incremental of the implementation change with any progress or changeover likely to take a number of years.

 

Overall Trends

  • Digitalisation and digitised reporting
  • Immediate reporting of transactions
  • Pre-population of inputs
  • Anti-fraud measures and risk analysis
  • Move to mandatory e-invoicing
  • Continuing spread of VAT/GST

For more detailed analysis around digitalisation, join Teodora Vallone in the third instalment of the TBI Expert View. Teodora will provide a closer look at the continued digitalisation of tax processes and offer her perspective on the potential opportunities and challenges for 2022.

In the fourth instalment of TBI Expert View, Barbara Barcsik will discuss the options for outsourcing and the hidden difficulties. She will also outline what she sees as the pros and cons and offer her advice on what businesses might consider before making the change.

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