U.S. Multinationals Expected to Feel Impact of Accelerated Global Move to VAT
May 3, 2010The new economic realities of budget shortfalls faced by governments worldwide will accelerate a shift toward indirect taxes such as Value-Added Tax (VAT) and present new risks, challenges and opportunities for U.S. businesses operating globally, predicts a new report from KPMG LLP.
“The slow economy and falling direct-tax rates are causing many governments worldwide to tighten their existing indirect-tax regimes or introduce new ones,” said Frank Sangster, a principal in KPMG LLP’s U.S. Indirect Tax practice. “Finance and tax directors must be proactive in considering how their organizations are responding to the global VAT changes, which are already affecting their markets, operations and internal systems.
“The financial and reputational costs of getting this wrong for the multinational are potentially enormous,” Sangster continued. “Getting it right, however, can provide a real competitive advantage for companies through decreased compliance costs and a potential increase in the profitability of their businesses by reducing the amount of unrecovered VAT and enhancing VAT cash flow.”
Indirect taxes such as VAT and Goods and Services Tax (GST) are extending their reach into new areas of the global economy and becoming a greater proportion of government revenues, according to the KPMG report titled Driving Indirect Tax Performance, Managing the Global Reform Challenge.
“Here in the United States, we’re seeing VAT discussed more as a potential means to raise revenue and help reduce the federal deficit,” said Sangster.
“A key issue to focus on would be carefully coordinating existing state and local sales taxes with a federal VAT,” he added. “We’ve seen examples of how a federal VAT works in other countries in concert with sales taxes in a country’s provinces or states, so this matter can be addressed effectively.”
Global Shift to Indirect Taxes
According to the KPMG report, the global shift toward indirect taxes is likely to continue via new VAT / GST regimes being introduced, the maintenance of high VAT /GST rates, and broadening and protecting the base on which VAT /GST is levied.
“Future VAT reforms are likely to focus on certain key areas such as addressing VAT fraud and evasion problems, supporting the green / sustainability agenda by using tax to potentially change certain behaviors, limiting VAT exemptions, modernizing VAT legislation to account for new products, technologies and services, and developing new tax audit approaches,” said Sangster.
Practical Steps for Businesses Offered
The KPMG report also outlines why the importance of VAT to governments globally is unlikely to diminish any time soon, as more countries come to rely on it as a significant, stable source of tax revenue.
A number of high-growth market countries, such as China and India, are looking at the introduction of national VAT systems for the first time to address the combination of demand to generate revenue and modernize historical local tax systems, according to the KPMG report. Major changes are also likely in countries that have had VAT systems for many years, such as those in the EU, as they look to their VAT systems to raise more revenue in the future and to meet other policy objectives.
For a copy of Driving Indirect Tax Performance, Managing the Global Reform Challenge, the second in KPMG’s Driving Indirect Tax Performance series, please visit: http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/Driving-indirect-tax-performance-Global-reform.aspx.