VAT in Asia: Challenges and Opportunities



When compared with other areas of the world’s economy, the Asia-Pacific region stands apart. The region is highly integrated from an economic viewpoint, yet there is a wide variation in the tax policy across Asian countries. This lack of uniformity presents a significant challenge for businesses seeking to establish tax-efficient operations across the region in compliance with a myriad of local requirements. However, many of the common tax issues within the region reveal a number of clear opportunities as well. If your business is considering expansion into the Asia-Pacific region, consider some of the following challenges and opportunities:

Low overall tax burden
On a regional scale, the tax burden in Asia is one of the lowest in the world. According to the IMF Government Finance Statistics Database, the average tax-to-GDP ratio in Asia has been approximately half of the European Union’s 15+ countries and below the ratio for Africa, the Middle East, and the Americas. While the disadvantages of Asia’s low tax-to-GDP ratio include the unfortunate lack of resources to provide adequate public or welfare services, the advantages are a more business-friendly environment and increased foreign investments.

Indirect taxes play a significant role
On a world average, direct taxes provide a larger source of revenue than indirect taxes by 50% and in OECD countries specifically they supply over 100%. However, in Asia, indirect taxes are higher than direct taxes by 10%[1]. A possible explanation for this phenomenon is that personal income and social security taxes play a smaller role in Asian countries, while taxes on foreign trade are more significant. In addition, indirect domestic taxes, as part of the GDP, have grown at a faster rate than the pace of direct taxes over the past two decades.

Further expansion of VAT/GST base
The OECD has reported that 21 out of 34 OECD member countries increased their VAT/GST rates at least once over the period from 2009 to 2014, with the average VAT/GST rate among OECD member countries now exceeding 19 percent. With most VAT rates across Asia well below this average, there now exists an opportunity for Asian governments to further broaden their tax base.

Cross-border services and intangibles
The BEPS global framework for applying VAT/GST to cross-border flows of services and intangibles is based on the ‘destination principle’ that VAT/GST should be levied in the place where goods and services are consumed, in contrast to the location from which they originate. China’s new modernized business VAT refund system has adopted this principle, presenting an opportunity for increased revenue for foreign businesses supplying digital services and other intangibles to end consumers in China.

Lack of central tax administration
The natural outgrowth of multiple tax systems across one region is the lack of a central administration to provide a form of oversight. Asia-Pacific countries face significant challenges in reforming and modernizing their tax policies to improve revenues, increasing compliance by improving detection and penalties, and changing the overall tax culture across Asia. Even within specific countries, there is a significant opportunity to consolidate complexities when it comes to foreign VAT reclaim, especially in China where there are multiple VAT rates of 3%, 6%, 11%, 13% and 17%.

Considering expanding your business into the Asia-Pacific region? VATBox can help. VATBox has successfully streamlined the global VAT recovery process, providing businesses with unrivaled visibility, compliance and data integrity. Leveraging the cloud and utilizing full automation, VATBox exhibits complete control of a company’s VAT spend, while making the recovery process more productive and yielding higher returns. Since 2012, VATBox has been revolutionizing the automated VAT recovery marketplace with its cloud-based solution, leading the worldwide foreign VAT recovery arena. With offices in London, Paris, Munich, New York and Tel Aviv, VATBox provides global VAT compliance businesses full control over their tax spend and recovery.

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