The VAT Evolution and Why It’s So Complex Part I: Thinking Globally

To understand why there is an ongoing evolution in the managing and administration of value added taxes (VAT), it is important to first understand the motivations of the governments behind the changes. The primary responsibility of any tax authority is to collect the revenue in which the government is legally owed. The difference between what is owed and what is collected is referred to as the tax gap and these can represent serious shortfalls in revenues for countries looking to fund critical programs. For example, according to the European Union Economic Commission, the estimated tax gap for the EU in 2018 was 140 billion pounds, or 11% of total revenue.

When you understand the stakes, it’s easier to understand why governments all over the world have embraced digitization and other new technologies to better track and collect revenue that they are legally entitled to. Creating a clearer picture of the new VAT landscape was the primary motivation behind we here at Sovos working with IDC to create a new report titled: Taming the Value-Added Tax Beast with Technology. You can download your free copy here.

Benefits for tax authorities

So now that we understand the motivations for governments embarking on this tax journey, let’s look closer at some of the benefits. Using digitization, tax authorities around the world can better:

• Fight suspicious supply chain activity and VAT fraud
• Gain greater control over necessary reforms/changes
• Generate greater efficiency and automation
• Lessen the burden of compliance and paper trails
• Create efficient sharing of data between countries for cross-border transactions
• Collect additional revenues

With these improvements in place, governments can more quickly and easily identify blind spots in processes, review data to determine that taxes are being paid correctly and implement enforcement measures when necessary.

Why is it so complex?

We now understand the motivations for the changes in the VAT system and the benefits that governments are positioned to receive. But why, with all the technology and automation of systems does VAT continue to increase in complexity rather than getting simpler? There are a few reasons for that and why VAT is only going to get more complex as new systems, laws and mandates continue to evolve.

VAT complexity is primarily a result of how widespread VAT is and the lack of uniform approaches from country to country. Situations that add to the complexity include:

• VAT returns can differ greatly from country to country
• Different countries mean translation issues abound
• Different industries can have different requirements
• The list of eligible transactions/services is growing rapidly

It’s important to remember that while all countries and tax authorities are motivated by increasing revenues and closing tax gaps, no two processes look the same. Each country has its own priorities, industries can vary greatly by geographic region and the economic posture of governments can play an important role on how quickly and aggressively they pursue revenue streams.

When it comes to VAT, don’t take chances and never assume. It’s best to talk to an expert with localized knowledge that can help you guide you through the processes you need to have in place to remain compliant and avoid potential audits and fines.

Be sure to read our second blog in this series, Three Focus Areas for VAT, and please remember to download your complimentary copy of Taming the Value-Added Tax Beast with Technology.