Throughout this year, one development we’ve seen substantially increase is the use of targeted VAT rate changes by governments around the world. Given the large proportion of transactions in an economy that attract VAT, these changes are used as a key tool in economic stimulation, especially as economies throughout Europe slowly start to re-open following the COVID-19 pandemic. These rate changes have taken a few key forms. They may be a temporary broad based reduction in the standard and reduced rates of VAT (as in Germany), targeted reductions to key sectors of the economy (food, beverage and entertainment in Austria), or a deferral of a proposed increase to a rate (Italy).
In each of these cases the respective government’s intent would appear to be to stimulate consumer spending in key sectors of the economy. In the case of rate cuts, where the price of goods and/or services are reduced, the aim and hope would be for higher consumption across the economy with the reduction in tax revenues seen as a worthwhile sacrifice. However, what we have yet to see is whether these reductions will be effectively passed on to consumers in all cases, or whether instead they may be used to increase the margins of already stretched businesses. Also, while the Austrian and German measures are temporary, will six months of reduced VAT rates occur at the right time to reap the maximum benefit?
Weighing up the benefit
Perhaps just as important is whether the cost on businesses to administer and comply with rate changes ultimately negates some of these supposed benefits. For any company registered and trading in these territories, a rate change can require the generation and application of new tax codes, which can be an onerous and time consuming task in some business systems, especially when the rate will revert after a set period of time. Also, a temporary increase in rates may lead to a number of ‘fringe’ scenarios, where it may not be clear which rates to apply, as well as issues with the classification of transactions. Certainly, while the rates themselves are transitional, we would not expect leniency from revenue authorities where they are applied incorrectly. And finally, this can lead to a need for additional training of accounts payable and receivable staff, to ensure not only that the correct tax amounts are levied, but also that the correct amounts are recovered as well.
A balanced approach
Given the rapid announcements of these changes, this can put added and unwelcome pressure on stretched tax and finance teams to ensure that the correct rates are implemented, tested, and reported in time for any go-live date. This highlights the need for the role that technology led solutions can play in compliance functions, as they help to not only prepare data for new rates of tax, but also be used for built-in analytics functionality to automatically check for scenarios where rates may not have been applied correctly. Importantly, with the right software, new rates can be automatically programmed in minimising any ERP disruption and removing the need for staff training requirements.
Governments globally will continue taking measures to either increase revenue or stimulate the economy. And as their reporting and compliance requirements increasingly embrace technology to demand more granular data, often in real-time, the role of technology enabled compliance for multi-national companies will need to keep pace.
To find out how Sovos can help you meet your VAT compliance obligations join our upcoming webinar VAT Reporting: Managing Change