The calm before the storm: are VAT regulations on the rise?

Generally speaking, companies have little control over indirect, national tax policies, and when they will occur. Policies are often unpredictable and, at times, inconsistent – regularly being postponed, delayed, or escalated at a moment’s notice.

Of course, the COVID-19 crisis has made fiscal policy-making somewhat volatile. In the past few months, we have seen delays in significant legislative and fiscal changes, from Vietnam to India to Italy. Actual economic circumstances will always influence fiscal legislation, and while companies worrying about compliance management is no secret, recent research brings a painful issue to the fore.

VAT Global, a global leader in outsourced international VAT and tax solutions, researched companies’ approaches and responses to the issue. Their findings were striking. For example, responses indicated that nearly half of companies (46%) in Europe do not feel confident about their capability to comply with specific national regulations (Italy’s SDI, Spain’s FACE, France’s Chorus Pro, etc.). For countries moving towards e-invoice standardisation – Germany, Italy, and the UK being good examples – tax regulation was previously proved to be one of their biggest headaches – and needed a solution urgently.

How did we get here?

We know European countries are not deciding to pursue e-invoicing regulation spontaneously. This reflects a trend that picked up steam initially in Latin America, in countries like Mexico. In fact, some of the new European regulations being discussed are markedly similar to examples like Mexico’s. The reason? – simply put, they worked very well.
Beginning in 2004 – Mexico mandated for e-invoicing use gradually over ten years, and expansion was fast. Highlighted by the figures gathered in the SAT 2017 (Tax administration service) between 2011 – 2017, the volume of digital invoices issued increased from 1.7 billion to 6.5 billion.

One of the critical elements of the Mexican models’ success – and perhaps a reason for the lack of confidence amongst European countries – are the focused and direct strides towards standardisation of e-invoicing that Mexico made. Several other countries have deliberated overusing or directly featured this ‘scaling-up’ process in their approach. In short, e-invoicing is unlikely to slow down or stay limited to B2G transactions because it has been so effective. The scope is inevitably going to increase because the digital transition provides visibility of cash flow within their borders much better than before.

Fail to Prepare

A reluctance to act has only worsened the issue in Europe. Take the UK’s ‘Making Tax Digital for Business’ initiative for an example – as VAT Global CEO, Gareth Kobrin explained;

“(UK) Companies don’t have the right measures in place to comply with …it’s even trickier for exporters to nations with more specific rulings…furthermore, many firms are making life more difficult by seemingly not making the most effective use of the limited resources they have made available to the function.”

There’s proof in their research too.

Businesses are showing reluctance to invest in tools – 51% of respondents expecting no investment in internal VAT functions this year.

More worryingly, of the 49% that did expect to invest in VAT functions in 2020, less than half (44%) anticipated investment in technology, despite the increasing necessity for technology in compliance management.

This highlights a frustrating reality – digital tax services like online portals are considered one of the easiest ways to handle tax (43% agree). Despite that, the majority choose to do nothing about it (86%). Will adoption only pick up when companies begin to feel the sting of failing to meet regulation? It shouldn’t have to be the case.

Immediate Priorities

The results of this research point to a clear challenge for businesses – the combination of knowing the need for better monitoring and addressing of new changes, while remaining hesitant of acting, before regulatory changes hit them.

Closing tax gaps and fighting fraud are issues not particularly pressing in the UK. Equally, Brexit’s immense logistical and operational impact would delay any major changes in tax systems in the UK – the UK’s ‘MTDfB’ (Make tax digital for businesses) initiative was just delayed, for example.

However, the eventual absence of all EU regulations in the UK opens the door for future British tax overhauls in the near future. It’s fair to say that very few countries are ‘safe’ or ‘unlikely’ not to need to address an issue like this.

It reinforces what many already think. VAT regulation is a problem that isn’t going away. Many companies aren’t addressing it, and – until it really is on the metaphorical doorstep – most global companies will be temporarily satisfied to stick to tried-and-tested methods. However, in light of the many last-minute changes and delays – only the businesses who are already digitally-capable will find the migration easy. For those who aren’t, those sudden changes will be costly and complex issues to solve.

Secondly, it reveals the internal issues that are causing this delay in adoption. Lack of confidence, both in monitoring the changing landscape and leveraging tools to manage their indirect tax risks are major contributors to this problem. Therefore, addressing the whole spectrum of managing a regulatory change through to execution is fundamental.
The future of VAT regulation is very uncertain. However, we can confidently predict that businesses are going to be under pressure to act as regulation continues to develop in complexity. Not just because their everyday operations rely on a responsive approach to country compliance, but because standardising your internal payment practices demands a totally digital solution.