How hard is it for businesses to comply with VAT/GST obligations around the world? In which countries is it optimized?

How hard is it for businesses to comply with VAT/GST obligations around the world? In which countries is it optimized?

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Modernizing VAT systems to reduce the compliance burden for all could benefit tax administrators, businesses and society at large.

A new study has been released that yields significant global findings as to the relative compliance burden of Value Added Tax (VAT) and Goods and Services Tax (GST) around the world1. Using an exclusive VAT Diagnostic tool developed for the purposes of this study, UNSW Sydney has released a new comparative assessment, which considers the compliance requirements and related administrative burden associated with adhering to local VAT and GST rules across 47 different jurisdictions.

The research concluded that 14 countries around the world score favorably overall, including Singapore, Australia, Costa Rica, New Zealand and South Africa, with a compliance burden index of 4 or less, while 15 countries were rated with a score of 6 or more, suggesting the need for policy and/or administrative reforms in those locations in order to help reduce the compliance burden — for taxpayers and for tax administrators. The study also suggests that governments and their tax administrations can learn from those jurisdictions where the compliance burden is rated more favourably. For example, by implementing technology solutions in order to help streamline processes.

Lachlan Wolfers, Global Head of Indirect Taxes, KPMG International, says of the study, “The findings highlight the importance not only of countries having the right VAT policies in place, but also the call to modernize the delivery of tax administration to support businesses in efficiently managing VAT compliance costs. Businesses are telling us that, as their compliance obligations are globalizing through the digitalization of business models, the ability to deal with tax authorities electronically in registering, invoicing and filing is becoming increasingly important.”

The UNSW research team intends for the diagnostic tool to be used by governments and tax authorities around the world to help them see variances and identify best practices that can help to reduce compliance costs and improve compliance. For example, recent initiatives such as Making Tax Digital (MTD) in the UK, Singapore’s Assisted Compliance Assurance Program (ACAP), as well as electronic invoicing, filing and registration systems all support taxpayers in efficiently managing VAT compliance costs, while at the same time enhancing the integrity of countries’ tax systems.

“We are pleased to support UNSW in their research as a part of our global Responsible Tax project, and believe it will be a valuable tool for tax authorities to assist in making the system more efficient, reducing the cost of collection and improving the compliance environment,” says Chris Morgan, Global Head of Tax Policy, KPMG International. “Ultimately, a more efficient system means less need to devote resources and investment to administrative compliance processes, which can benefit not only businesses and tax administrators but also society at large.”

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The tool focuses not only on the VAT policy settings in place in any given country but also on how the VAT system is administered in line with the needs of the community it serves.

The compliance burden indicators were found to be influenced by four key factors at the country level, including:

  • tax law complexity
  • the number and frequency of administrative obligations
  • revenue body capabilities to support taxpayers
  • monetary costs and benefits.
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Looking across all countries, the research finds that features of tax policy design, including reduced rates, exemptions, and registration thresholds, had a negative impact on taxpayers’ compliance burden in over two-thirds of the countries studied. However, part of the compliance burden is sometimes an inevitable consequence of express policy decisions, such as measures to make the system more progressive.

The results of the tool also show that, as a VAT regime grows older, the relative compliance burden tends to be higher, and that, from a macroeconomic perspective, the VAT compliance burden is generally higher in less developed countries. Both higher levels of exports as a percentage of GDP, as well as the higher the ratio of tax to GDP in a country, are also associated with a higher compliance burden.

In addition, the diagnostic tool can be used to highlight the importance of best practice VAT policy settings to assist in managing compliance costs, with countries like China and India both recently recognizing the value in having fewer VAT rates which operate off a broad base.
“What will be fascinating is to see the results of this diagnostic tool in a few years’ time as different technology initiatives play an increased role in both VAT collection and enforcement — measures such as real-time tax reporting, the increased use of data and analytics in managing compliance, and the deployment of blockchain technology,” says Lachlan.

The UNSW diagnostic tool has initially been deployed to assess VAT compliance costs but is expected to be expanded to cater for other business taxes. Adjunct Professor Richard Highfield of the UNSW, says:

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“The UNSW team considers that, at this stage, it has sufficient proof of concept to be able to undertake, in collaboration with stakeholders, the development of a broader suite of diagnostic tools designed to measure and evaluate the tax compliance burden of other business taxes, in particular, the corporate income tax; tax regimes applicable to the provision of labor; and customs duties and excises.”

Background

About the research and the VAT Diagnostic Tool

UNSW Sydney, in collaboration with KPMG International and the KPMG network of member firms, has released a paper outlining the results of a ground-breaking diagnostic tool, which compares the value-added tax (VAT) / goods and services tax (GST) (hereinafter “VAT”) compliance burden on taxpayers across countries.

Using the specialized diagnostic tool, built for the purpose of this project, UNSW applied 27 different compliance burden indicators to assess the VAT compliance burden on taxpayers in a comparative and relative sense across groupings of countries, including such indicators as:

  • The use of multiple VAT rate structures
  • The ease of registering for VAT
  • The ability to deal electronically with tax authorities for registration, filing, payment and information services
  • The complexity of the VAT return forms
  • The speed of VAT refunds
  • The availability of simplified processes for small businesses

The tool focused not only on the VAT policy settings in place in any given country but also on how the VAT system is administered and in line with the needs of the community it serves. The above compliance burden indicators were objectively rated and weighted, in consultation with tax authorities, academics and/or professionals. Collectively, the 27 different compliance burden indicators reflect four factors that are perceived to be the main drivers of the aggregate VAT compliance burden at the individual country level, including tax law complexity, the number and frequency of administrative obligations, revenue body capabilities to support taxpayers, and monetary costs and benefits.

Taking all of the indicators applied at the individual country level, the tool computes an overall `compliance burden index’ rating on a scale of 1 to 10, with 1 representing a VAT system with a very low/ minimal compliance burden.

To test the diagnostic tool, a joint UNSW/ KPMG research study was launched in September 2018 across the 47 member countries of the OECD’s Forum on Tax Administration that currently have a VAT and has just recently been completed.

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