Technology the key to lighten worldwide VAT compliance load
It is instructive to learn from other countries’ systems and experiences in most fields. Indirect tax and its compliance costs are no different.
That task has been made easier for governments and tax authorities worldwide by a new comparative assessment, and associated diagnostic tool, designed by UNSW Sydney, and supported by KPMG tax professionals, both here and internationally.
The study compared the comparative compliance requirements and related administrative burden associated with adhering to local VAT and GST rules across the 47 member-countries of the OECD’s Forum on Tax Administration (FTA) that administer a VAT system of taxation. The OECD originally commenced exploratory work on a methodology in 2012, but the advent of the Base Erosion and Profit-Shifting (BEPS) agenda sidelined the VAT project.
Compliance burden indicators were found to be influenced by four key factors at the country level, including:
- tax law complexity
- the number and frequency of administrative obligations
- revenue body capabilities to support taxpayers
- monetary costs and benefits.
Using various indirect tax policy settings as key indicators*, the research concluded that 14 countries performed well, led by Singapore followed by a grouping including Australia, Costa Rica, New Zealand and South Africa.
15 countries scored less positively, suggesting the need for policy and/or administrative reforms in those locations in order to help reduce the compliance burden — for taxpayers and for tax administrators.
Implementing technology solutions in order to help streamline processes would be a clear take-away for the lower-ranked countries.
Businesses are telling KPMG tax professionals in many countries that, as their compliance obligations are globalising through the digitalisation of business models, the ability to deal with tax authorities electronically in registering, invoicing and filing is becoming increasingly important.
So what are some of the best practices governments and tax authorities could learn from? Recent initiatives such as Making Tax Digital (MTD) in the UK and Singapore’s Assisted Compliance Assurance Program (ACAP) stand out. These, plus electronic invoicing, filing and registration systems all support taxpayers in efficiently managing VAT compliance costs, while at the same time enhancing the integrity of countries’ tax systems.
The research finds that features of tax policy design, including reduced rates, exemptions, and registration thresholds, had a negative impact on taxpayers’ compliance burden in over two thirds of the countries studied. However, part of the compliance burden is sometimes an inevitable consequence of express policy decisions, such as measures to make the system more progressive.
The results of the tool also show that, as a VAT regime grows older, the relative compliance burden tends to be higher, and that, from a macroeconomic perspective, the VAT compliance burden is generally higher in less developed countries. Both higher levels of exports as a percentage of GDP, as well as the higher the ratio of tax to GDP in a country, are also associated with a higher compliance burden.
In addition, the diagnostic tool can be used to highlight the importance of best practice VAT policy settings to assist in managing compliance costs, with countries like China and India – which marks the two-year anniversary of its VAT system today July 1) – both recently recognising the value in having fewer VAT rates which operate off a broad base.
It will be interesting to see the results of this diagnostic tool in a few years’ time as different technology initiatives play an increased role in both VAT collection and enforcement — measures such as real-time tax reporting, the increased use of data and analytics in managing compliance, and the deployment of blockchain technology.
While Australia performed reasonably well in this research, we should be aware that our essential GST framework still impose a considerable weight especially on smaller businesses.
With a re-elected government, we must hope that tax reform is back on the agenda, and it should include an assessment of the compliance burden of relative taxes, with an emphasis on simplification where possible.
* Using the specialised diagnostic tool, built for the purpose of this project, UNSW applied 27 different compliance burden indicators to assess the VAT compliance burden on taxpayers in a comparative and relative sense across groupings of countries, including such indicators as:
- The use of multiple VAT rate structures
- The ease of registering for VAT
- The ability to deal electronically with tax authorities for registration, filing, payment and information services
- The complexity of the VAT return forms
- The speed of VAT refunds
- The availability of simplified processes for small businesses