Brexit. VAT fraud. Austerity straitjackets. Global tax wars. These are the colliding dynamics of 2018 which will lead the UK, and worldwide governments, to undertake drastic measures on VAT and other taxes. This could include an emergency measure to relieve importers and exporters of potential Brexit VAT liabilities, through to the European Commission up-ending the entire VAT system to fight €50billion in VAT fraud.
UK Brexit Customs and VAT Bill
More than 130,000 UK firms will be forced to pay VAT upfront for the first time on all goods imported from the European Union after Brexit, under legislation considered by MPs last week.
The VAT changes spelled out in the Taxation (Cross Border Trade) Bill
– one of a string of Brexit laws passing through parliament – have already caused uproar among UK business groups, who say that these changes will create acute cashflow problems and huge additional bureaucracy. Without a VAT deal with Brussels, importers will have to pay the VAT upfront in cash and then recover the money later, forcing a huge outflow of funds before they can be recouped. One route to alleviate any new customs requirements, the Approved Economic Operator accreditation, has largely been ignored by the impacted businesses will only 2 successful applications in the past month.
Services imports operate separately, with most relying on the exporter to account for VAT. This situation isn’t expected to change, although travel companies and financial services firms operate under special arrangements and could face extra costs without a specific agreement covering their industries.
Arab Gulf launches VAT with a splutter
The excitement around the six Gulf States’ 2018 VAT launch has been tempered as three of the countries look likely to delay their roll-outs until 2019. In Saudi Arabia and UAE, the countries that introduced VAT from January 1 2018, companies are now shifting to panic stations as they realise they are ill prepared for even basic requirements – such as preparing a compliant VAT invoice.
The impact of the introduction of VAT is likely to have the biggest boost on government revenues in the UAE, given its larger consumer base and importance of retail spending, especially from overseas visitors. The low rate of VAT at 5 per cent suggests that widespread discontent is unlikely across UAE and Saudi Arabia.
However, in Saudi Arabia, the economy has been struggling in recent years — real GDP growth contracted by 0.5 per cent in 2017 with Saudi consumers having suffered the impact of subsidy cuts and fiscal austerity.
Bahrain has announced that it is to follow the UAE and Saudi Arabia in the introduction of VAT in October 2018. Fiscally, Bahrain is in one of the most vulnerable positions in the Gulf, and committing to the introduction of VAT would signal Bahrain’s efforts to put public finances on a healthier footing.
Kuwait and Oman have already announced that they would postpone the introduction of VAT to 2019.
Digitisation of tax reporting
The drift towards live transaction reporting to the tax authorities will continue but may be tempered by some overly ambitious launch dates. At the end of last year, Norway delayed its 2018 SAF-T proposals to 2020. France has watered down its 2018 requirements for live VAT transaction repsorting, limiting it initially to just businesses with cash registers.
With Brexit looming, the UK is pushing forward with its own plan for live VAT and tax reporting once more. The ‘Making Tax Digital’ programme, which includes transactional reporting on all taxes, is set to launch for VAT only in 2019. Whilst it is targeting small enterprises, most medium and large companies are set to be caught out on the requirements to digitise all records, including group VAT registration data – currently largely consolidated on non-compliance Excel format.
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Bringing digital services into the VAT net
The major debate for 2018 will be the taxing of digital services to consumers. The OECD and EU are under pressure to accelerate their own proposals on taxing electronic services provided by large marketplace firms. We may well see a conflict arise between the two, which could lead to the EU having to back down while the US protects its internet giants.
The EU escalates fight on VAT fraud
2018 will bring major challenges for the European Commission’s radical plans to create a single VAT area on B2B transactions, targeted at tackling the stubborn €50bn VAT fraud problem. There will be a lot of political pressure from member states to water down some of the EC reforms – especially from Germany. As a result of the EC’s aggressive timetable of 2022, the implementation of a destination-based VAT system will inevitably slip. That said, progress towards a Mini-One-Stop-Shop on EU B2C e-commerce should see better fortunes.
In the UK, businesses are crying out for some indications on the type of trading model and VAT regime that will be in place post-Brexit. This won’t begin to become clear until the second half of the year when the Free Trade Agreement talks get going. A 2-year+ transition agreement, or a temporary revocation of the Article 50 exit looks likely, which would keep the UK within the EU VAT Directive and the European Court of Justice’s (ECJ) reach.
US tax reform ignites global retaliation
Increasing retaliation against President Trump’s federal tax reforms could launch a global trade war that undermines international trade agreements and plays havoc with international budgets. The reforms are designed to spur future investment in the US and bring back trillions of dollars in offshore US profits, though they are viewed by some countries as an attack on the global tax consensus and the balance of global investment. These countries could make a referral to the World Trade Organization (WTO) court, leading to a US retreat on international trade cooperation.
For over 30 years, the US has stayed out of the “race to the bottom” on corporate tax rates, leading to significant international investment by US companies that have helped underpin the economies of many trade rivals. However, the new US reforms make the US far more attractive to multinationals that are able to shop around the world for the most favorable tax environments.
The key reforms tabled include cutting the US federal tax rate from 35 percent to 21 percent, a one-off tax charge of 15.5 percent on historic earnings sheltered offshore and now repatriated to the U.S and an imposition of a minimum tax on earnings held offshore from technologies and related intellectual property.
2017 promised strides forward in tax automation. There has been a lot of progress – but it hasn’t come quickly enough. This is pushing the likes of the EU to escalate measures on a trans-national level. This will be the key theme for VAT and all taxes for 2018 – including the fallout from the Paradise Papers tax scandal.
It’s clear that greater automation of tax departments is one of the best defenses. Despite the uncertainties of Brexit and associated issues, many companies are actually bringing forward investment in ERPs and tax reporting software, so that they can react in real-time to whatever challenges come over the barricades next.