VAT regulations are constantly changing as the tax pivots to keep up with the realities of the global economy. Local, national and international VAT modifications keep consulting companies and VAT professionals on their toes. Worldwide trends – such as continuing e-commerce growth, the explosion of digital content sales, the need for solid VAT anti-fraud measures, and the modernization of VAT management – have significant ramifications on VAT regulations and subsequent recovery. Let’s take a look at these four areas:
Continuing e-commerce growth
The digital economy is here to stay, with experts estimating that global retail e-commerce sales will top $4 trillion in 2020, representing 14.6% of the world’s total retail spending (eMarketer), VAT regulations will continue to be updated and modernized to keep pace with growing cross-border trade and online sales. On the merchant’s side, an online seller’s financial systems must be capable of meeting its VAT obligations. However, challenges abound in determining VAT for complex and varied e-commerce scenarios – from calculating a faceless customer’s tax base to defining VAT requirements of revenue sharing for affiliate relationships and referral partners. In addition, companies dealing with a digital supply chain need to work through the tax complexities involved with selling through an online platform, selling directly to end-users, or a combination of both.
Explosion of digital content
Sellers of digital content must be especially wary of exposure in the face of changing VAT rules. According to VAT regulations, the place of taxation is determined by the “place of supply,” which is where the customer receives electronically-supplied services. If a US company sells an online course or a download video to a customer in the UK, the place of supply is the UK, and the VAT should be charged accordingly. To further complicate these transactions, VAT must be calculated based on the gross amount the customer pays, not the net amount the seller receives after the payment processor or platform provider has taken their fee. Measures such as the introduction of the EU’s VAT mini-one-stop shop (MOSS) have already been implemented to ease the burden, but there is a long road ahead.
As more and more governments view VAT as part of an overall solution to boost their economies, they have also taken a harder look at VAT fraud and its ramifications. The National Audit Office announced that the UK alone lost up to £1.5bn in 2016 due to VAT evasion by foreign online retailers. The conclusion: the difference between expected VAT revenue and the actual amount of VAT collected – also known as the VAT gap – must be targeted and addressed. While every company is expected to implement adequate checks and reporting processes, the onus of combating fraud requires the cooperation of the entire international community – including governments, organizations, and individuals. Local anti-fraud measures, while important, are simply not adequate in today’s global economy.
Modernization of VAT management
In many Western countries, traditional VAT returns are becoming outdated. For example, in the UK, VAT has been online since 2010 and over 98% of VAT registered businesses already file electronic returns. However, the government has recently stepped up its efforts to further modernize the tax system. HMRC’s Making Tax Digital (MTD) program will build on this e-culture by integrating digital record-keeping into a single, seamless tax process. Quarterly updates will be generated and sent directly from the software the company or record-keeping agent. MTD will become mandatory for businesses above a specific VAT threshold by April 2019. While this is a step in the right direction, with only 12% of businesses currently submitting VAT returns directly from software, it is a challenging undertaking. Other countries, such as Hungary and Spain, are seeking to implement near real-time VAT reporting requirements, a move that will place a significant burden on companies’ tax departments.
Are your systems and processes ready to tackle VAT issues in the modern digital environment?
In today’s changing tax landscape, more and more businesses are choosing VATBox to help them navigate the uncertain VAT journey and streamline the VAT recovery process. Leveraging the cloud and utilizing full automation, VATBox exhibits complete control of a company’s VAT spend, while providing businesses with unrivaled visibility, compliance, and data integrity. To explore how VATBox can help your business, schedule a demo today.