Wall Street Journal: Beware of the ‘Global VAT Craze’

  • May 14, 2015

Wall Street Journal editorial piece pulls no punches when describing the rapidly rising – and swiftly spreading – risks surrounding value-added tax (VAT).

“The VAT is a sort of turbo-charged national sales tax on goods and services that is applied at each stage of production, not merely on retail transactions,” the column, titled “The Global VAT Craze,” reads. “…The VAT is typically introduced with a low rate but then moves up over time until it swallows huge chunks of national economies.” The editorial also describes VAT as “the hottest trend among tax collectors” because it raises “a gusher of revenue for spendthrift governments worldwide.”

How’s that for a strong opinion? Unfortunately, for tax professionals frustrated by the visibility and control challenges that accompany the management of VAT-compliance risks, the facts and figures supporting these opinions are even stronger.   

Current research from Ernst & Young, some of which is cited in the WSJ editorial, shows that 164 countries had some form of VAT as of last year, which is the highest number of VAT countries on record. Twenty-five years ago, less than 60 countries had a VAT.

VAT requirements are spreading as the rates are also increasing. The average standard VAT rate among European Union countries is 21.6 percent, up from 19.4 percent seven years ago, according to a new E&Y report on indirect tax developments in 2015. And rates are projected to keep rising, thanks in part to likely VAT rate increases in Italy and Portugal.

Not only is keeping track of the rates and rules challenging in some jurisdictions, but large, acquisitive corporations are also dealing with hundreds of legacy transaction processing systems, and often using multiple tax determination systems, some of which are more reliable than others. Further, the drive to reduce costs through corporate shared service centers, where VAT returns and filings are often completed by people without tax knowledge, creates additional audit risk for the tax department.

We’re headlong into an era of hyper-regulation, as Vertex thought leaders have pointed out in recent posts.  The question tax professionals face today is: What do we do about it? The E&Y research report provides a clear answer: get compliant, and stay that way. “Ignoring recent developments in indirect taxes or not being in compliance with indirect tax obligations will become an expensive oversight for companies of all sizes.”

Having the right technology in place will be critical in keeping up with the continuous VAT craze, as well as the ever-expanding global business models and business systems.

Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.

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