Shift from Direct Taxes to Indirect Taxes Set To Continue
15 November 2013
Posted by: Author: Charles De Wet
Author: Charles De Wet (PwC Africa)
The trend for governments globally to raise more taxes through indirect taxes is set to continue. The financial crisis has made governments globally consider the composition of their tax revenues. The International Monetary Fund (IMF), the Organisation of Economic Cooperation and Development (OECD) and the European Commission all promote the shift from direct to indirect taxes to help solve the economic uncertainty, in particular by reducing costs on business to help make them more competitive. Value-added tax (VAT) in the OECD countries accounts for about 20% of total tax revenue, a 70% greater share than in the mid-eighties, according to the OECD. With excise duties at 11% and other taxes contributing smaller sums, revenues from taxes on goods and services are now close to revenues raised from personal income tax (25%), corporate income tax (8%) and other direct taxes such as those on capital gains.
Consumption taxes such as VAT (in some countries known as Goods and Services Tax or GST) are increasing in prominence and now exist in more than 150 countries, with other jurisdictions planning to introduce consumption tax regimes over the coming months. The number of countries with only a sales tax (such as the US) is shrinking. In Africa, 42 of the 51 economies have a VAT system but only three (South Africa, Mauritius and Tunisia) have implemented the tax with an electronic filing and payment capability, which is commonly used.
The members of the European Union (EU) VAT system and the 127 or more other countries with a VAT system already are being joined by those (such as Malta) fairly committed to a VAT system, and those (like the Gulf Cooperation Council states) actively considering VAT plans. A recent report issued by PwC, ‘Shifting the balance from direct to indirect taxes: bringing new challenges’, provides a global perspective on the shift from direct to indirect taxes. The report also looks at the current indirect tax and VAT challenges facing businesses globally, as well as how indirect tax regimes compare across major territories and regions.
South Africa is no exception to the rule with businesses facing a number of VAT challenges. For instance, the number of VAT audits conducted by the South African Revenue Service (‘SARS’) has increased over the last few years, and the information requested and questions raised during these audits have become increasingly complex and specific. Now in its 22nd year, the VAT system of taxation is firmly entrenched in South Africa but continues to present a number of challenges in terms of administration and interpretation. Jurisdictions such as New Zealand and Australia have introduced reforms in an attempt to simplify their systems. More recently, China implemented new VAT reforms on 1 September 2012 in a bid to streamline its indirect taxation system and boost its economy whilst the EU has issued a Green Paper aimed at reducing the complexity that has developed over the last 50 years.
Over recent years VAT rates have risen in a number of countries. South Africa’s VAT rate of 14% has remained unchanged since 1993 and is far less than many countries around the world. It is unlikely that we will see a change in the rate in the near future. It is interesting to note that there is no cap to the maximum normal VAT rate that can be applied in the EU and Hungary’s main rate is now 27%.
In South Africa VAT still accounts for more than half of the overall indirect tax revenues. Total VAT collections for the 2012/13 fiscal year were R215.5 billion and grew by 12.8%. But there are two clouds on the horizon. The healthcare system which the Government is set to introduce will need to be funded: one of the suggestions has been to increase the take from VAT, possibly through higher VAT rates. The government has also proposed the introduction of a carbon tax during 2015: lessening the burden on poorer households could involve playing around with VAT exemptions to target typical spending patterns. In recent years SARS have also been focusing on improving tax administration. The Tax Administration Act, which took effect on 1 October 2012, modifies some outdated procedures, providing the foundations for a better future.
Business operates as an unpaid collector for the tax authorities regarding indirect taxes. The compliance burden for companies can vary from country-to-country. VAT takes the most time on the African continent for businesses to comply with (an average of 133 hours), according to our research. How countries compare depends on a number of factors contributing to a high or low compliance burden. For instance, multiple VAT rates, complex obligations, ineffective collections and late or no refunds can lead to hefty costs for businesses and a high compliance rate.
Where business is unable to obtain a refund of VAT, there will be a cost to the business. Our practical experience of this is that the business tends to stop or change the operations they carry out in the country where the VAT recovery is potentially a problem. Where the interpretation of legislation due to complexity requires court intervention, the business will incur significant costs. An indication of the number of cases brought before the Court of Justice of the European Union provides an idea of the areas of the EU VAT systems that have given rise to problems in the period from 1974 to 2013. More efficient use of technology can reduce the costs of collection and compliance. Electronic invoicing has now become the global norm. Interest is growing in the concept of electronic auditing by tax authorities of a business’s financial records and systems, with countries such as France now applying these techniques.
More countries are adopting tools that can interrogate such records on the basis that they must support the standard audit file for tax (SAF-T) methodology. Singapore is a case in point, where businesses are encouraged to adopt the SAF-T standards. In South Africa the introduction of e-filing for VAT is effectively complete. As a result we have seen some real benchmarks established in the way that taxpayers have been selected for enquiries. Interest is also growing in the concept of electronic auditing by tax authorities of a business’s financial records and systems. However, the trials of wider e-audits have been less successful in South Africa. The IT14SD which requires taxpayers to reconcile across different tax types is a prime example of an initiative which has failed to deliver the expected benefits.
The network of agreements for the exchange of information between territories has also grown substantially since the OECD’s publication of a list of countries not co-operating in applying its information standards. It is now looking at exploring further opportunities for exchanging information. The possible extension of joint audits includes elements of indirect taxes, with tax authorities in different countries collaborating in planning and carrying out an audit, is another interesting development which is already taking place in the EU. We are likely to see more cooperation between the tax authorities on indirect tax in the near future. The key focus areas will include transfer pricing; compliance and enforcement, including the exchange of information and risk management; and the building of capacity – that is the development of a team of civil servants with the right knowledge, skills and tools to administer a viable tax system.
With organisations under increased pressure from regulation and compliance requirements, it is essential that organisational processes become more efficient and streamlined. PwC has a number of technology solutions in place to enable organisations to gain greater efficiency and control in the tax process. Unless companies consider the make-up of their tax bills in future, they won’t be geared up with the right systems and resources to manage them effectively. It may require some fundamental rethinking of the structure of the tax function as well as broader finance and procurement departments to ensure they identify the costs which need to be controlled.
This article was first published in TaxTalk Magazine - November/December