The value-added tax (“VAT”) was described in the EU as a “”money machine” over 20 years ago. Yet according to a 2015 study by the European Commission by the Centre for Social and Economic Research (CASE), the “VAT gap” was approximately 168 billion EUR. This represents 15 percent of the theoretical VAT that would be collected if all taxpayers reported and paid VAT in full.
VAT losses stem primarily from lost records, incorrect VAT reporting, and cash transactions, while an additional 36 percent is estimated from fraud, all which have a significant impact on the state budget and weaken national economies, limiting infrastructure, healthcare and education improvements, to name just a few.
Latin America Leading the VAT Gap Charge
Latin American countries have been implementing new VAT compliance regulations for the past 10 years. Standardized processes to support e-invoicing and e-receipts mandates are now active in most countries including Argentina, Brazil, Chile, Colombia, Mexico and Peru. Increasing real-time insights and the level of financial reporting details exchanged between business and the government are not only designed to close the VAT gap through massive increases in tax control capabilities, but ultimately reverse age-old paradigms – for example in Chile the tax administration has abolished VAT returns and now sends businesses their tax statement based on transaction data collected in real time. They also help to streamline the auditing process for businesses, further improving operational efficiency.
In Brazil — which has seen its tax revenue increase by $58 billion since requiring businesses to adopt continuous reporting of tax on an invoice-by-invoice basis versus periodic reporting — the clearance model requires invoices to be validated by the government before goods can be dispatched to customers. What was once a B2B transaction is now a complicated clearance-based business-to-government-to-business financial and logistics data orchestration. However, this standardization improved the ability of business systems to exchange data. Additionally, collecting this tax-related data in real time facilitates business transaction financing, and unlike in the EU, which adopted Directive 2011/7/EU on combating late payment in commercial transactions, does not require any late payment directives to protect the economy and small businesses.
Europe Follows LatAm Lead
Europe has begun adopting real-time invoicing and reporting models to recover its own VAT gaps. In the U.K., the Making Tax Digital (MTD) initiative is going live in April, and many member states including France and Greece are quickly ramping up initiatives to collect invoice and accounting data closer to the actual moment that business transactions take place. Italy’s mandatory electronic invoicing for domestic B2B transactions went live in January 2019, while Hungary’s efforts to eliminate tax evasion and increase revenues through real-time VAT reporting began in July 2018.
Making Tax Digital – Transforming Her Majesty’s Revenue and Customs (HMRC)
HMRC is a non-ministerial department of the U.K. government responsible for the collection of taxes, among other duties. The first component of the Making Tax Digital (MTD) initiative effective April 1, 2019 will require the use of a government-approved portal for all VAT return submissions. The second, requiring businesses to maintain four categories of digital records for VAT accounting purposes (designatory data, as well as data on supplies, purchases and VAT accounting) and populating the VAT return with it using the new HMRC digital portal. HMRC’s goal is to become one the most digitally advanced tax administrations in the world.
Planning for the Digital Future of Tax
While technology innovations in business and government have created this golden age of VAT recovery, businesses must continue to be vigilant of changing government regulatory changes to ensure their processes align and they’re able to continue doing business where digital tax is a priority. Multinational companies, especially, should be using this period of sweeping regulatory change to get financial systems in order and not adding to local, disparate point solution sprawl by trying to solve for each country’s tax jurisdiction reactively.
To thrive in the world of digital tax, companies need to comply with the continuous compliance mandates sweeping the globe. Adopting a cloud solution that supports every type of e-invoicing legislation in every transactional system, integrates real-time tax determination and helps you to stay ahead of transactional tax changes around the world through a single, modern UX platform will ensure the golden age of VAT recovery doesn’t become your dark ages.
Join our ‘UK’s Making Tax Digital (MTD) – Are you ready?’ webinar on Tuesday 19 March at 2:00 pm GMT (UK time) to determine its impact on business and how to prepare.