From a global perspective, the most widespread type of consumption tax is the Value-Added Tax (VAT). Currently, more than 170 countries have mandated the usage of this type of consumption tax. This type of tax is levied on the value added at each stage of production and distribution of goods and services, while the end consumer ultimately bears the value of VAT.
The introduction of this type of consumption tax is gaining increasing attention in countries where it hasn’t been implemented. VAT is an essential source of revenue for most countries. Based on statistical analysis and verified sources, VAT accounts for, on average, between 18% and 30% of total country revenue from taxes.
Without much hesitation, the relevance that indirect taxes have in general, especially VAT, to forming state coffers is undisputably essential to the excellent functioning of state apparatus.
Considering these facts, we can imagine how vital VAT is for the well-being of the country’s tax revenues. The Ministries of Finance and complementary State institutions focus on reducing the gray economy and the national VAT gap.
This can be done by adopting one or more monitoring instruments, which, thanks to digitalization and technological advancements, exist in much greater numbers today. The introduction of digital reporting tools, collaboration with tax authorities of different countries, cross-border controls of imported goods, withholding tax measures, and many others give tax authorities many choices.
The possibility of tax authorities having at their disposal various tax technological monitoring tools puts additional pressure on taxable persons to invest more time in developing their VAT compliance solutions. It’s not just merely establishing compliant systems in one or more countries, depending on where they have customers, but also tracking these changes in a practical and up-to-date manner.
The effects of cross-border trading, expansion of e-commerce, and rapid growth of the entire digital economy ecosystem make VAT compliance for international vendors or digital service providers challenging and demanding.
To underscore, the legislation in these sectors is continuously being modified. Developing an up-to-date compliance system is challenging if you have one VAT registration and one place of business, but if you have customers in different countries, you most probably have more than one VAT registration.
This demands more awareness and resources for establishing a VAT compliant system. The internal development of VAT compliant solutions for cross-border e-commerce vendors and digital services providers for most SMEs is very difficult, costly, and time-consuming.
This is why this category of taxable persons often transfers their B2B and B2C VAT compliance to external service providers.
Regarding VAT solutions for businesses, such as large companies, digital platforms, or multinational companies, global statistical data show that the number of firms that choose to develop their indirect tax advisory for VAT challenges varies from region to region.
VAT Consulting and Advisory
As stressed in the introduction part of the article, the relevance of VAT for state revenue is of significant proportion. Suppose the taxable person isn’t following the VAT regulations and hasn’t adhered to the local or international compliance requirements sooner or later.
That being the case, the taxman will come with the notification of an audit on many occasions.
We know the numerous obstacles international-driven vendors and service providers are experiencing in this rapidly evolving VAT landscape. The broadness of challenges grows exponentially for cross-border vendors and providers of digital products and services. This is one of the reasons why we are investing so much in establishing a portfolio of high-quality VAT consulting for international businesses.
Why VAT Consulting?
Depending on the different factors, the business can decide to develop internal tax advisory and consulting teams, find the best VAT consulting service provider for its operations, or introduce a sort of hybrid work model. With the last one, clients have established tax teams that handle one part of the VAT compliance responsibilities, and other parts of the work have been outsourced to one or more service providers.
The VAT experts for businesses are here to help taxable persons with valuable insights into all essential aspects of successfully navigating VAT frameworks. The reach of the VAT consultancy for businesses varies depending on the service provider’s spectrum of services. In most cases, VAT consultancy firms offer the following scope of services:
- VAT Compliance and Management
- VAT Consultation
- VAT Registration and Deregistration
- VAT Refunds
- VAT Fillings
- Assistance with payments
- VAT Calculations
- Tax Representative Services
- Mediation with third parties
- Assistance during audits
- Voluntary Disclosure Agreements
- VAT Advisory Services
- Digital Services VAT Compliance
- Other
VAT Consulting and Online Commerce
The rapid expansion and global reach of online commerce(mainly supported by e-commerce and the digital economy) have established an entirely new business landscape. Within this relatively new framework, many entirely new types of business models have arisen.
With new business models and types of transactions, the almost ever-present element for businesses is cross-border sales. The complexity of understanding the tax requirements in different regions and accompanying countries has reached entirely new levels in comparison with how it was prior to this level of growth of e-commerce and platform economy.
E-commerce vendors and digital services providers have slightly different business mindsets when it comes to establishing their businesses in the highly competitive global market. Their almost default operational mindset is to have an international reach.
From a VAT perspective, this means that they will need to get familiar with the tax requirements in each country where they have clients. To get even more practical, it means that most probably, depending on their sales revenue, in one or more countries, they will need to register for VAT(or maybe even for other types of taxes).
Alongside these obligations, they will need to file periodical returns, archive and store supporting documentation, issue compliant invoices, communicate with tax authorities, and perform many other chores, depending on the rules adopted in the governing country.
This is also one of the essential factors that influenced the VAT Consulting and Advisory sector. Many professional consulting and advisory firms have been established in the last 10 years, with a high specialization in assisting e-commerce vendors and digital service providers.
The highly competitive market, global reach, and cross-border element demand from the businesses in this ecosystem to put at the top of their time and money investment priority the development of the product or services, advertising, putting the tax compliance a bit on the margin in the first months or years since the inception of the businesses.
However, this approach could hurt the business tax-wise in the long run. The business could later be involved in one or more tax audits in different countries. This exposure will likely end with penalties, interest, and paying all owed taxes. This is one reason business owners should pay close attention to their tax responsibilities in all the countries where they have clients and that potential exposure to one or more types of taxes. Business that operate only within the EU borders, could look for service providers that have tailor-made EU VAT compliance consulting.
Taxpayers operating in one or more countries should pay close attention to their tax responsibilities. The meteoric growth and expansion of online commerce and the digital economy have introduced entirely new business models, ways in which businesses interact with customers, and new types of challenges.
In most cases, the inseparable part of the online business is the drive to make supplies across national borders. The adoption of the cross-border operating style automatically brings new tax requirements that the supplier will need to address in many instances through the adoption of practical solutions. Having a VAT consulting service provider or advisory team at your disposal is crucial for establishing a successful and trustworthy business.
Aleksandar Delic
1stopVAT Senior Indirect Tax Researcher (Global Content)