The global shift from direct to indirect taxes is increasing as governments look for ways to boost their tax take in the aftermath of the recession. This is a key finding of the latest report from PricewaterhouseCoopers (PwC), as it tracks the development of indirect tax regimes worldwide.
The document, Shifting the Balance: from Direct to Indirect Taxes, takes a detailed look at tax regimes and how they compare across major countries and regions. It explores some of the most prominent reforms and best practices, and it considers the relative merits of trying to achieve further cross-border alignment.
VAT systems (including general sales tax) have been implemented in 156 countries, with nine more considering implementation by 2013. In the developed world, the trend away from direct tax towards indirect tax has been hastened by the global financial crisis. Soaring budget deficits have put pressure on many governments, particularly in Europe, to look to raise additional revenues, and they are increasingly turning to indirect taxes as the solution, according to the PwC report.
China and India have both signalled their intention to move towards a uniform VAT system to replace current regimes, while the countries of the Gulf Cooperation Council (GCC) are also working towards a similar set-up.
Stephen Coleclough, indirect tax partner at PwC, said, ‘On the face of it, indirect taxes may seem to be more acceptable to businesses because they are passed on to the consumer – but there is a less visible cost to business, that of compliance.’
Although the principles of tax are broadly the same everywhere, the rules can vary considerably country by country, said Mr Coleclough, and the cost of non-compliance can be expensive, in terms of penalties, audits and litigation, as indirect taxes come under increased scrutiny from the authorities.
The PwC study cites Europe’s challenge in reforming VAT largely stems from the fact the basis of the current system was created in the late 1960s when there were just six member states; there are now 27 with numerous exemptions and multiple rates, which are adding to the burden on taxpayers to comply, embedding inefficiencies in collection and administration, and contributing to a ‘VAT gap’ between theoretical full compliance and the amount governments are able to collect.
In the UK, the existence of a sizeable and, according to official figures, growing gap between what is collected in VAT and what the Treasury estimates of the amount that full compliance should deliver, is open to considerable debate, notes the report.
But it goes on to state that, while there is an inevitable difference between the two UK figures, the estimated scale of the disparity has been disputed and the approach to modelling used by HMRC to calculate the gap may need revisiting, and the size of the country’s financial sector and the ability of global financial institutions to recover more VAT than is reflected in current government models may be a major missing element from Treasury calculations.
