OECD Tax Policy Reforms 2018: The key VAT changes worldwide
Elizabeth Wilson 5 October 2018 No comments
In September, the Organisation for Economic Co-operation and Development (OECD) published its 2018 report on Tax Policy Reforms: OECD and Selected Partner Economies, summarising recent tax policy reforms in the 35 OECD members and in Argentina, Indonesia and South Africa.
The key VAT findings in the report, which are analysed in more detail below, are:
- The OECD average standard VAT rate has stabilised over the last four last years.
- VAT revenues have increased in the last 15 years in the majority of countries, now reaching record levels.
- Many countries have broadened their VAT basis by increasing reduced VAT rates or by reducing their scope.
- Administrative improvements and anti-fraud measures have been a central part of countries’ VAT reforms.
- New measures are being introduced to collect VAT on the imports of low value goods.
- Taxation of inbound digital services in-line with the OECD International VAT/GST Guidelines continues.
Standard VAT rates have stabilised
Many countries raised their standard VAT rates after the 2008 financial crisis, with the OECD average standard VAT rate increasing by 1.5 percentage points to 19.2% between 2008 and 2015.
Raising standard VAT rates was a common strategy for countries seeking to achieve fiscal consolidation in the wake of the crisis, as it provided immediate revenues without directly increasing competitiveness.
The report highlights that since 2015, standard VAT rates appear to have stabilised (the average standard VAT rate as at January 2018 is 19.2%). This is partly explained by improved fiscal positions in the surveyed countries, in addition to the historically high VAT rates reached in many of them having limited the potential for additional increases.
VAT revenues reach record levels
VAT revenues have increased in the majority of countries, with 27 recording increases in their VAT revenues as a share of GDP between 2000 and 2016.
Longer term trends show that VAT revenues have reached historically high levels in most countries. In 1975 VAT revenues accounted for less than 9% of total tax revenues on average in the OECD, but this figure is now 20%.
The report notes that a number of factors account for these higher revenues, including the gradual increase in VAT rates and the progressive substitution of specific consumption taxes with VAT in most countries.
Base Broadening has contributed to increased revenues
High VAT rates have led many countries to look for alternative ways of raising additional VAT revenues. Many countries have broadened their VAT bases by increasing reduced VAT rates or by scaling back their scope.
These reforms are broadly in line with OECD findings and recommendations: maintaining a broad VAT base through a limited use of reduced VAT rates minimises distortions and gives countries room to keep standard VAT rates at current levels or potentially lower them.
Administrative improvements and anti-fraud measures
Other policies commonly adopted in many of the countries, and which have formed a central part of their reforms, are administrative improvements and anti-fraud measures.
These measures, to enhance efficiency and collect greater VAT revenues, include:
(i) Increasing reporting obligations for taxpayers
These reforms reinforce taxpayers’ reporting obligations, such as the use of Standard Audit Files for Tax (SAF-T) and real-time data transfer to tax administrations.
SAF-T was developed by the OECD to enable the transfer of accounting data from companies to tax authorities in a standardised electronic format, to allow tax authorities to conduct more efficient tax inspections. Its adoption is slowly progressing, with five OECD countries currently using some form of SAF-T (Austria, France, Luxembourg, Poland and Portugal).
Real-time VAT invoice reporting is also becoming increasingly popular, with Spain introducing a system for large taxpayers in July 2017, followed by Hungary and Italy in July 2018.
(ii) Alternative VAT collection mechanisms
These measures modify traditional tax collection systems to combat certain types of VAT fraud and include split payment and domestic reverse charge mechanisms, both of which imply major changes to the way VAT has traditionally been collected.
Split payment is increasingly being considered as an alternative VAT collection method in the fight against fraud. Under split payment mechanisms, the VAT charged by businesses on their supplies is not collected by the supplier as in the traditional method, but collected separately to ensure its payment to the tax authorities. Different split payment methods are being considered, or introduced, by a number of countries. In the UK, a consultation on a split payment system for online sales of goods has recently been carried out, proposing that the VAT collection is performed by payment service providers – further details are available in our recent blog article.
The domestic reverse charge mechanism is also increasingly being used in European countries to combat “missing trader fraud”, where fraudsters import goods free of VAT, charge VAT when selling the goods and then disappear before remitting the VAT to the government. Under this mechanism, the customer is liable to collect the tax on domestic supplies, instead of the supplier. Greece has recently adopted, and Latvia extended, the reverse charge mechanism to cover certain supplies, and in June 2018 the UK held a consultation on draft legislation for a VAT domestic reverse charge on certain construction services, as detailed in our blog article.
(iii) Extending VAT accountability to other entities in the value chain
Countries generally expect these measures to bring in significant additional tax revenues.
Our recent blog article looked at the introduction of measures in the UK to extend VAT accountability to online marketplaces in an effort to combat VAT fraud in online sales. HMRC can now hold online marketplaces “jointly and severally” liable for any future unpaid VAT by a domestic or foreign seller on their platforms.
In addition, HMRC has called on online marketplaces to sign an agreement to assist them in tackling fraud through educating online sellers on their VAT obligations in the UK, as well as providing information to HMRC on sellers using their platform when requested.
The introduction of new measures to collect VAT on the import of low value goods
Another tax reform highlighted in the OECD report is the introduction of new measures to collect VAT on the import of low-value goods.
Most countries provide VAT relief regimes for low-value imports, however with the growth of online sales in recent years, there has been a significant and rapid increase in the volume of low value imports of physical goods on which VAT is not collected. In addition to potentially material amounts of uncollected VAT revenue, this has resulted in unfair competition for domestic retailers who are required to charge VAT on their sales to domestic consumers.
Australia was the first country to address this in July 2018 by repealing its goods and service tax (GST) relief for imports of goods with a value of AUD 1,000 or less supplied by foreign vendors to Australian final consumers, as detailed in our recent white paper.
Switzerland is also seeking to level the playing field between domestic retailers and foreign (online) suppliers selling low value goods to Swiss customers. Currently VAT on imports is only levied if the VAT amount exceeds CHF 5 i.e. where the value of goods is over CHF 200 (taxable at 2.5%) or CHF 65 (taxable at 7.7%). However, under new legislation effective from January 2019, foreign retailers must charge Swiss VAT to their Swiss customers once a turnover limit of CHF 100,000 per year has been reached on consignments of low value goods.
Progress on taxation of inbound digital services continues.
Finally, the OECD report notes continuing progress on the implementation of the OECD International VAT/GST Guidelines with respect to the effective collection of VAT on B2C (business to consumer) supplies of services and intangibles, including digital supplies, by foreign suppliers.
The guidelines recommend:
- that the right to tax these supplies for VAT purposes be allocated to the country where the customer has its usual residence; and,
- the foreign suppliers of these services and intangibles register and remit VAT in the country of the customer’s usual residence.
The guidelines also recommend the implementation of a simplified registration and compliance regime to facilitate compliance for foreign suppliers.
Argentina, South Africa and Turkey are among the surveyed countries that have recently introduced changes to ensure or enhance the taxation of inbound digital services.
The OECD report highlights a significant number of changes being made in the field of VAT around the world, many of them affecting businesses in the e-commerce sector. Please get in touch for further information if there are any aspects of the report that could have an impact on your business.