Ongoing Trends in VAT Determination and Reporting

2019 was an exciting year for VAT and, given the ever-increasing pressure on governments to increase revenues, it’s likely that 2020 will be just as eventful. Although VAT is an ever-shifting landscape, below are three recent trends that we believe are poised to continue in 2020 and beyond:

1.  VAT obligations for remote sellers

Globally, tax collection and remittance obligations imposed on remote sellers will continue to gain momentum, spurred by OECD guidelines regarding Base Erosion and Profit Shifting (BEPS). Many countries, including all European Union Member States, have already imposed such obligations, and that number is certain to grow in the near term:

• Since the beginning of 2020, Singapore, Malaysia, and Uzbekistan have required foreign suppliers of digital goods and electronic services to charge pertinent indirect taxes. Moldova will impose similar obligations starting in April 2020, and Mexico will do the same in June 2020.
• In Latin America, countries seeking taxes on B2C cross-border sales of electronic services typically require payment agencies such as credit card companies to withhold VAT from payment on such transactions. New countries that are enacting, or considering enacting, legislation to make credit card companies liable for VAT withholding in 2020 include Paraguay, Chile, and Ecuador, while Argentina plans to expand its current system.
• There’s a parallel trend to implement collection of indirect taxes on imports of low-value goods. In the EU, effective 1 January 2021, online marketplaces will be liable for VAT when they facilitate imports of goods with a value up to €150 from non-EU suppliers to customers in the EU. Norway will eliminate the low-value goods exemption on 1 April 2020, following in the recent footsteps of New Zealand, which imposed tax obligations on imports of low-value goods in December 2019. 

2.  Marginalization of periodic VAT Returns

Countries will continue to shift away from the periodic VAT Return as a primary means of tracking VAT collection obligations and will instead rely on complex digital reporting schemes. Four countries have already introduced new digital VAT reporting obligations for taxpayers:

• Hungary will introduce a Standard Audit File for Tax (SAF-T) in 2020 (exact date TBD);
• Romania will introduce its own SAF-T, likely becoming operational in mid-2021
• Norway has made its current SAF-T mandatory, beginning 1 January 2020;
• Italy has announced it will begin “prepopulating” taxpayer VAT Returns in July 2020, using data collected primarily from invoices submitted through the SDI platform and Esterometro.

It’s not surprising that Romania, Italy, and Hungary are three of the four countries on this list. These countries rank 1st, 4th, and 7th respectively as the EU Member States with the highest share of revenue lost, by percentage, in comparison with expected VAT revenue. Countries experiencing similar revenue losses are likely to impose their own complex reporting requirements to try and reduce their VAT gap.

3.  B2B e-invoicing

Mandatory B2B e-invoicing is a widely used tool in Latin America and parts of Asia to combat VAT fraud and has gained a foothold in Europe via Italy’s SDI platform. While B2B e-invoicing requires investment in technical infrastructure, the efficacy of this mechanism in raising VAT revenue – as shown in Brazil, Mexico, and elsewhere – ensures its adoption in other countries. France has already announced plans to implement mandatory B2B e-invoicing starting in 2023, Vietnam will require B2B e-invoicing from 1 November 2021, and Portugal has taken steps to build an underlying infrastructure by requiring the use of certified invoice software for processing paper and electronic invoices. Of note, EU Member States must obtain a derogation from the EU VAT Directive in order to make B2B e-invoicing mandatory; but given the experience of Italy and the announced plans of France, it seems the derogation process is not overly dissuasive. 

Conclusion

There is an underlying thread running through all these trends: governments are aggressively targeting gaps in VAT collection, by (a) attempting to expand the taxpayer base, and (b) using digital record-keeping standards to help track taxpayer obligations. In this environment, it’s essential businesses ensure the accuracy of their source data and understand the obligations they entail when expanding into new jurisdictions.