Archive for VAT news

Italy has a VAT Gap of 48 BILLION Euro

Not all is well in the finances of the European Commission. VAT collection is important for the Commission, because the Member States’ contributions to the budget of Commission is partially measured on the VAT revenue in that Member State.

The VAT Gap is defined as the difference between the amount of VAT actually collected and the VAT Total Tax Liability (VTTL), in absolute or percentage terms. The VTTL is an estimated amount of VAT that is theoretically collectable based on the VAT legislation and ancillary regulations.

And not every country is equally diligent in collecting VAT. Countries like Romania and Lithuania are high on the naughty list, and larger economies like Italy is a (very!) bad apple as well.

Imagine a country that is unable to collect one-third of its indirect tax revenue – Italy has a VAT Gap of 48 BILLION Euro, which is more than the gaps in the UK and Germany together. Germany’s gap of 24 billion Euro is a good reason to worry.

The only reason for the UK’s relatively minor gap (15 billion Euro) is the relatively extensive use of zero-rates and reduced rates on UK sales of goods.

Remember: the VAT gap is created by lack of audits and enforcement, and straight-forward non-payment and tax fraud by domestic businesses.

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs said: “This important study highlights once again the need for further reform in VAT collection systems across the EU. I urge Member States to take the steps needed to fight tax evasion and tax fraud at all levels. This remains a burning issue and is at the top of this Commission’s agenda.”

The entire report (a rather dry write-up of macro-economical stats) is here for your download pleasure.

Download (PDF, 1.1MB)

Comments off

No GST in India any time soon

India’s introduction of a nation-wide Goods and Services Tax (GST) has once again been postponed. The idea of integrating all indirect taxes into a single GST is too big of a step for a significant number of politicians. Currently, parliamentary approval is not in the cards.

The proposed introduction date of April 1, 2016 was too soon anyway for government authorities and businesses to set up new audit, compliance and accounting systems.

Introduction of a GST in one of the biggest countries in the world is a big deal. It is significantly different from the April 1, 2015 introduction of GST in Malaysia – not only politically but also from an integration perspective (Malaysia only had a sales tax on goods and a handful other indirect taxes).

It is also quite different from the VAT revision in China. China’s politics are more persuasive to local and regional authorities than India’s, and both companies and authorities were familiar with the VAT system (on goods) that previously existed,

In the meantime, the indirect tax system in India remains a significant burden for India’s domestic and global trade. (see

Also see here for more background info:

Comments off

Pay your ‘fair share’ of tax, or else…

Reuters reports that Mexico is slow in repaying VAT refunds to companies that (per the Mexican authorities) don’t pay their fair share of Mexican income tax.

It appears that since 2012 Mexico has focused on a handful of very significant VAT refunds to review the company’s Mexican income tax position. Typically the authorities find that ‘not enough’ income tax has been paid to the Mexican coffers, and negotiations follow. Unilever has reached a deal, Reuters says, but Colgate and Procter & Gamble are still waiting for their refunds.

I assume that these companies got into a VAT refund position because they procure raw materials on the domestic market, or import goods without suspension of import VAT. Then they manufacture products locally, and export most, if not all finished goods outside of Mexico. Because exports are zero-rated, the companies have an excess amount of input tax credit and need to claim the excess from the government.

Mexico is not at all unique in stalling such VAT refunds. Outside of the EU and other major economies, there are very few countries that would provide blanket payments of input tax credits. Some allow input tax credits to be offset against income or wage tax liabilities.

Italy and other EU countries have similar VAT refund challenges.

A partial solution to this issue would be to move or expand operations in free trade zones, or under some sort of customs control. This would minimize the amount of input tax incurred.

Mexico is well-known for their VAT-free export ‘schemes’, and every country has similar simplifications. Even though the scope of these schemes is sometimes a bit fuzzy, if input tax becomes a cost of doing business it is worth exploring these and other alternatives.

See the Reuters article here:

Comments (1)

VAT-friendly leasing of private aircraft and yachts

As I always proclaim on my presentations and webcasts, VAT is due on almost everything that you pay for. And – like U.S. sales tax – the burden of VAT is on the end customer; the VAT-exempt company or individual that has no way to reclaim or deduct VAT.

This leaves us with on-going efforts to minimize the VAT burden of individuals. There have been structures that use different countries to lease cars, and another persistent set-up is leasing aircraft and yachts through Cyprus (which is an EU member state). The payable VAT rate would potentially drop as low as 4.37%.

Cyprus considers these structures a part of their foreign investment policy, and the tax authorities encourage and support leasing with two very useful public rulings. The one for aircraft has recently been updated and is discussed in the link below.

Obviously, this structure is only useful for flying within the EU – outside the EU generally no VAT is due on aircraft and yacht leasing. Also, I should note that other EU tax authorities consider this leasing process tax avoidance and will do their utmost to investigate and catch lessees. So let me know if you are interested in pursuing these (by themselves very beneficial) opportunities.


Comments off

Prep for a new GST in India

This summer is unusually quiet in the global VAT scene and therefore my updates have been scarce. I did come across this piece of thoughtware from EY India, which highlights the need to be very proactive in the preparation for a potential new GST in India.

From my own experience I know that some multinationals were not ready for the implementation of GST in Malaysia last April, and needed to scramble to put in the first GST return. This even to a point where the Malaysian authorities decided to delay the filing deadline for the second quarter GST return. (It should be mentioned that the Malaysian government was not as prepared either.)

Implementation of GST in India on April 2016 is still a big “if” – there are many challenges to be resolved and frankly I would be surprised if they would meet the April 1 date. Nevertheless, the points EY makes are noted. If you do business in India, the upcoming GST implementation (whenever that happens) should be high on your to-do list for the rest of this calendar year.

EY India says:

“Businesses that are proactive in preparing for the GST early can gain a real competitive advantage by reducing disruption and maintaining and improving relationships with suppliers and customers alike. Each action will require early planning and timely execution to leverage this advantage, including managing budgets, resourcing and the overall success of the project.”

See the article here:

Comments (2)

UK tax man and U.S. tax debt recovery

The Brits finally get to turn the tables after the Boston Tea Party! A posting on LinkedIn suggests that HMRC will go after U.S. companies that don’t pay their UK VAT liability.

This is going to be interesting because there must be hundreds of U.S. e-businesses that still have not registered for VAT to file their B2C VAT liabilities.

Could HMRC even collect non-UK e-business VAT debts, based on the “simplified” one-stop shopping registration rules for electronic services? I don’t think so, because the ‘simplification’  (register in one country and file VAT for all EU liabilities) is optional and conditional.

And then there is the question of disclosure. If a U.S. e-business now starts the EU VAT registration process, should they pay VAT retrospectively – going back 5 ton 7 years? (Err… I think that HMRC will now be much more reluctant to make a deal than a few years ago).

Comments off

A UK requirement to publish your tax strategy?

The UK authorities have been chastised for being lax on the tax compliance of large businesses, and now they have come up with a number of proposals to introduce:

  • A legislative requirement for all large businesses to publish their tax strategy, enabling public scrutiny of their approach towards tax planning and tax compliance;
  • A voluntary ‘Code of Practice on Taxation for Large Business’, which sets out the behaviours which HMRC expects from its large business customers; and
  • A narrowly targeted ‘Special Measures’ regime to tackle the small number of large businesses that persistently undertake aggressive tax planning, or refuse to engage with HMRC in an open and collaborative manner.

I will spend more time on discussing this initiative when the time is right, but for now it sounds like the “partnership with businesses” that HMRC (and other tax authorities, like the Dutch) has been trumpeting did not work out as well as they had hoped. Apparently now it is time to put down the carrot and show the stick!

First, however, HMRC invites large businesses to provide feedback as to how exactly they propose to be more compliant.

Read it all in the hefty pdf linked below.

Download (PDF, 507KB)



Comments off