The impact of COVID-19 on VAT/GST regimes: Five areas that could change
Compared to previous financial crises, the COVID-19 pandemic has elicited a very different response to indirect tax regimes in particular, because governments have been unable to lean on policies that might increase demand, the standard fiscal stimulus for an economic downturn. Instead, many governments are adjusting VAT/GST regimes in real-time to assist financial liquidity to help households and businesses through the immediate storm. In this blog we look at what effect this political and economic volatility will have in the longer term and the unintended consequences that fast-moving regulatory changes are having now.
Looking beyond the crisis - a time for change
In the first half of 2020, governments around the world imposed sudden and strict measures to contain the spread of the coronavirus. As a result, a large number of businesses saw their revenue decrease or, in some cases, disappear completely, whilst they still incurred fixed running costs and tried to operate remotely from home offices. These realities have led to a number of significant VAT/GST issues.
Some businesses found that, with their costs outweighing their income, they had become a repayment trader, and needed to recover VAT. Others changed their business model and found themselves in unexpected territory. Some repurposed their production lines to make items such as hand sanitiser or medical devices, only to encounter unexpected VAT/GST issues when they donated those goods rather than selling them. Buildings and arenas have been used as accommodation for key workers or as field hospitals, and this change of use carries VAT implications. Many businesses were simply trying to survive or to ‘do the right thing’ and often were not in a position to consider the VAT/GST consequences in advance. Good intentions can prove costly if businesses fail to carefully consider the VAT/GST position.
The education sector in particular has been hit hard by these unexpected consequences. During the COVID-19 crisis, many of PwC’s education sector and training provider clients have taken the necessary actions to enable them to continue to provide degree courses and training for their students and swiftly moved to deliver online tutorials and distance learning. From an indirect tax perspective, these changes may raise a number of issues, including about the nature of and place of the supply, which can carry substantial VAT registration and compliance implications.
Moreover, just keeping up with the sheer volume and pace of new measures and relief packages has been challenging for both businesses and policymakers. In order to support businesses and governments in navigating the complex landscape, the Global PwC indirect tax network has compiled, by territory, an extensive database of COVID-19 measures announced by governments around the world for VAT/GST/customs (link), and for broader tax, legal and economic purposes (link).
Whilst there may be VAT/GST reliefs available in many territories, the devil is (as always) in the details. In particular, it is important to understand when the measures apply and who can benefit from them, as well as to consider matters of your enterprise’s corporate responsibility and reputation prior to applying for or taking any relief.
A time for change
In their report ‘Tax and Fiscal Policy in Response to the Coronavirus Crisis: Strengthening Confidence and Resilience,’ the OECD focuses on how tax policy can aid governments in dealing with the COVID-19 pandemic. It looks at different policies and their sequencing to address different phases of the crisis (link).
Much of the focus to date for tax authorities, governments and policymakers has been on the immediate response measures required to manage the emergency and mitigation phases of the crisis. Attention in some parts of the world is slowly shifting to measures to stimulate recovery and, beyond that, to mechanisms to balance the books in the longer term. These developments could provide the impetus for governments to take hitherto politically difficult steps to positively reform, simplify and improve global VAT/GST systems.
Here are five areas to look out for.
Broadening the VAT/GST base. Often cited as an inherent problem in many VAT/GST systems, exemptions and reduced rates that create legal uncertainty and which may be seen as inefficient, hard to administer and overly complex are likely to be reevaluated and possibly removed. Realistically, moves like this could be just one part of a long-term strategy of reform, including, where required, support for businesses and individuals using other, and better targeted, financial measures outside the VAT/GST system.
Removing unnecessary limitations on the right to recover input tax. VAT/GST neutrality is a cornerstone of the system, and, in principle, the right to recover input tax should not be restricted. VAT/GST is intended as a tax on private consumption, but it has increasingly become a tax on business as well. Fast and efficient VAT/GST refund mechanisms are critical to removing unnecessary restrictions on input tax recovery, as is ensuring that VAT/GST is not charged or paid to the government when it doesn’t need to be. Changes to watch for could include reexamination of topics such as cash accounting, bad debt relief, assignment procedures, TOGC treatment, exporter scheme reliefs, postponed import VAT/GST accounting, and VAT/GST grouping.
Improving efficiency of VAT/GST collection. Problem areas in VAT/GST stem less from the allocation of taxing rights (now reasonably settled in line with the destination principle) than from poorly designed systems. Improvements are needed in collection mechanisms based on a simple and consistently applied international VAT/GST framework, together with the efficient use of modern technology and expanded availability of cooperative compliance procedures.
Reevaluating the right technology. Technology alone will not ensure a fully functioning VAT/GST system, but it is nevertheless important to evaluate what kind of impacts technological developments (e.g., data analytics, real-time reporting, pre-filled returns, split payments, AI) could have on the design and operation of future VAT/GST systems. Any changes need to address the pace of technological change and the need for technologies to converge or work together (there are currently too many competing technological solutions). This examination could determine whether the staged collection process is still fit for purpose or it should be replaced by enhanced digital accounting and reporting processes.
In order to deliver effective solutions, there needs to be greater interaction between tax and technology stakeholders throughout the policymaking process (from inception to conclusion).
Looking back and learning lessons. Finally, it will be important to look back on how VAT/GST emergency response measures were implemented, to analyse their overall effectiveness, and to learn appropriate lessons considering both best practices for future emergencies and any underlying weaknesses inherent in current VAT/GST systems that need to be fixed.
The takeaway
For now, some governments will continue to focus efforts on fighting the spread of COVID-19 whilst keeping their economies afloat, whereas others are starting to look to tax measures to stimulate the economy and further protect jobs (e.g., general VAT rate reductions or rate cuts targeted at specific hard-hit sectors, such as leisure and hospitality). As we look to the future, it is clear that the crisis has produced both profound suffering and enormous anxiety, and it has also resulted in a fundamental rethinking of many aspects of the daily lives of people around the world. In that respect, the crisis can be an action-forcing event for both policymakers and businesses to promote beneficial change throughout society.
Taxation has a part to play in this complex puzzle, and, from a VAT/GST perspective, governments may have an opportunity to improve the neutrality, proportionality, practical administrability and security of the tax to better deliver for their citizens. With respect to VAT/GST and in numerous other areas, the weeks and months ahead will reveal how governments, businesses and citizens respond to the moment.
For a deeper discussion of how these issues might affect your business, please call your usual indirect tax PwC contacts.
Or call me: Tom Corbett, Global Indirect Tax Policy Leader, Dublin +353 (0) 87 2571646, tom.corbett@pwc.com
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