Five indirect tax trends: increasing cooperation

More than ever, governments are improving and enhancing their indirect tax systems to make them work in our rapidly changing world. These multi layered developments make great demands on companies that want to be compliant with their obligations. Only those who know what is coming down the line can prepare effectively for these crucial developments.

Businesses should monitor five trends that are shaping global indirect tax: the continuing shift toward indirect taxes, rapidly changing legislation, rising excise taxes, the fast changing landscape in global trade, and increasing cooperation between tax authorities and greater focus on enforcement. In this article, we explore the latter.

Use of modern technology

The increasing importance of indirect taxes and their contribution to countries’ revenue goals probably explain why tax authorities are investing heavily in their enforcement and audit capabilities. Customs and tax authorities around the world are increasing their commercial and legal knowledge and their operational efficiency. Tax and customs inspectors increasingly use modern technology tools to access real-time comparative figures and data when auditing a business.

As a consequence, tax and post-importation audits are becoming much harder to deal with for those companies that are not well prepared. On the flip side, knowledgeable and prepared taxpayers may also find that more professional tax and customs administrations are easier to deal with.

The more efficient use of technology lowers costs of collection and compliance. More and more tax administrations around the world are implementing electronic auditing of a business’s financial records and systems. Countries are adopting tools that can interrogate such records on the basis that they must support the standard audit file for tax (SAF-T) methodology.1 Singapore is encouraging businesses to adopt the SAF-T standards. Portugal requires large companies to use SAF-T, and Brazil, notably, can require a business to hand over all its electronic financial records for scrutiny.

These developments pave the way for electronic invoicing and electronic filing of tax returns, which are fast becoming the global norm. As examples, our report indicates that in Mexico all taxpayers must issue e-invoices since January this year, Lebanon made e-filing mandatory for all VAT-registered taxpayers, and Ghana recently introduced an electronic point of sale (EPOS) device scheme.

Exchange of information

The network of agreements for the exchange of information between territories has grown substantially since 2000, when the OECD first published its list of countries that did not cooperate in applying its information standards. As a next step, the OECD is exploring further opportunities for automatic exchanges of information and joint tax audits, including elements of indirect taxes, with tax authorities in different countries directly collaborating in planning and carrying out an audit. Such systems are already in place within the EU.

Cooperation with tax authorities

The good news in this context is that the large majority of countries surveyed in an EY study allow taxpayers to resolve uncertainty about their specific circumstances by asking for a binding or at least informal tax ruling. Less than 10% of the surveyed countries do not have any kind of ruling procedure in place at all.

And this possibility of obtaining legal certainty is also a rather quick one: more than half of the countries told us that once all necessary information has been disclosed, an answer from the tax authority can be expected in less than three months.

The flipside is that in many countries taxpayers that openly disclose an error made are still being punished severely. Roughly 20% of the countries responded that a voluntary disclosure does not have any influence on the penalties that are applied in full. About one-third of the countries do at least impose a reduced penalty only.

The most progressive countries from a taxpayer’s perspective are those, again about one-third of all countries surveyed, that do not impose a penalty at all but where only late payment interest is due in case the VAT amount declared and paid to the tax authority was too little.

Considering the (ever-increasing) complexity of indirect taxes and the function businesses take as unpaid tax collectors for the governments in relation to indirect taxes, it is to be hoped that this last third of countries will continue to grow and penalties will subsequently be reduced when errors are disclosed voluntarily.

Consequences for business

As a result of all these developments, businesses are likely to be confronted with increased compliance burden and the clearly higher risk that mistakes are detected systematically. Companies will be bound to make the necessary investments to keep up with the technological developments and to implement the new tools required by the authorities. More than ever, it pays to proactively manage indirect taxes by establishing a clear indirect tax strategy aligned to the overall business strategy.

Five indirect tax trends: increasing cooperation