In the last several weeks, we have monitored many efforts by federal, state and local governments to provide relief to both businesses and individual taxpayers impacted by the COVID-19 pandemic.
As they relate to indirect tax (VAT/Sales Tax/GST), the measures enacted to-date have followed varying paths. Here are a few examples of the types of changes that are currently taking place to help ease the burden on taxpayers during these turbulent times.
- Standard Indirect Rate Reductions – For example, effective April 1 and extending through May 31, 2020 the country of Cyprus will decrease their standard VAT rate and their reduced rate by 2%. A similar proposal is being discussed in Jamaica.
- Temporary Tax Holidays – The Commonwealth of Puerto Rico announced a “Tax Holiday” commencing on March 23 and ending on April 30. During this time, their indirect tax (IVU) will not apply on certain necessities such as hand sanitizers, soap, shampoo, tissues, masks, isopropyl alcohol, disinfectants, antiseptics, household cleaning products, gloves, pain relievers and antihistamines.
- Automatic Extensions of Filing Deadlines and Licenses set to Expire – In Denmark, filing deadlines have been extended by 30 days for March, April and May. In Kansas, given that the Alcoholic Beverage Commission is closing, all active alcoholic beverage licenses set to expire between March 19 and April 30 will receive an automatic 30-day extension
- Permissive Postponement of Tax Collection and Enforcement Activities – This seems to be the most common form of relief being offered in indirect tax. Generally, they involve actions such as extensions of filing and payment deadlines, granting requests for penalty abatement for late filings and payments, allowing tax remittance pursuant to a payment plan, and an agreed suspension of audit activities, being permissively granted on a case by case basis when the taxpayer can demonstrate a COVID-19 related challenge.
The benefit of indirect-tax related relief for individual taxpayers experiencing personal economic strife can be debated. While temporary rate reductions and tax holidays have some considerable political appeal, there are those that would argue that direct relief in the form of direct payments/subsidies to individual citizens (for example as is currently being contemplated by the US federal government) is a far more efficient means of providing relief.
For businesses, these temporary tax measures can represent a substantial hardship. In this time of crisis, are companies particularly vigilant about monitoring and tracking indirect tax rate and rule changes? Will they have the resources available to clearly account for the subtle nuances involved in a sales tax holiday? In the best of times, these types of changes can strain available resources, never mind right now.
Conversely, the benefit of deferred compliance obligations for businesses can be substantial and immediate, especially for companies relying on manual processes and procedures that cannot be executed nearly as efficiently with a remote, distracted or absent workforce. However, when such relief is only granted upon request, the question remains will organizations know such options exist and apply for relief and will there be governmental employees on hand to grant said relief in a timely manner.
Many economists argue that the best tax systems are those that operate entirely behind the scenes, have minimal impact of economic activity, and allow for automated compliance. The gold standard is those countries that have adopted continuous transaction controls that rely heavily on automation and computing power to effectuate compliance. The best companies have scalable and comprehensive automated systems in place, allowing them to effectively control tax compliance out if a single center of excellence as opposed to exposing themselves to multiple points of failure.