Historical advances of VAT recovery.

Historical Advances of VAT Recovery

We all wondered what specific abbreviation while we were in a shop during a delightful holiday. It was placed just below the price tag with a “+” next to it. Of course, we reached Google and asked: What is VAT?

  • VAT stands for “value-added tax,” and its modern implementations have been around for nearly 70 years. The VAT is a vital part of almost any countries’ tax system which is not only creating indirect tax revenue to state but also helping companies financially. Companies can reclaim their VAT payment for their business-related purchases.

The age-old VAT system worked just fine for every party, but the net VAT income for countries lowered gradually because of fraud, outdated systems, goods with unstable VAT limit and cash transactions.

This led countries to find solutions to the expected revenue versus net income problem called VAT gap.

Latin America Leading the VAT Gap Charge

What regulations Latin America implemented to tackle VAT gap before EU member countries?

  • Most of Latin America countries including Mexico, Colombia, Chile, Brazil, Argentina, and Peru enjoyed a drastic tax revenue increase after they embraced the digital tax system wholeheartedly.

First of all, Latin America countries implemented digitalized and business-oriented regulations. Companies and countries created a real-time financial reporting system which is mandatory and useful.

For example, their tax processes mandated e-Receipts and e-Invoicing. Also, their audit systems on input VAT and output VAT became more accessible to grasp for businesses.

Brazil’s tax system shined during this period. The country adopted invoice by invoice system rather than periodic reporting thanks to its digitalized tax system and real-time communication with businesses. They mandated that the government approves invoices before the goods make their way to buyers. Even if the system is more complicated than the classical VAT system, it created a huge tax revenue that keeps on growing and is keeping the VAT gap in minimum.

Europe Follows LATAM Lead

How are the European Union countries changing their tax system after observing the successful fight of Latin America against the VAT gap?

  • The VAT is originated from Europe and reshaped by it many times. European Union countries are looking to change it again, but this time they are taking hints from a faraway land, Latin America.

Many countries in the EU are reforming their VAT reporting system digital to be able to collect the data faster. They are trying to implement collecting invoice rather than scheduled reporting. They aim to account the data closer to real-time just like in Latin America countries. Countries with high tax fraud rates like Italy also trying to improve their VAT system by making it digital.

UK is the leading country of VAT system reformation in the European Union. UK has begun implementing new regulations to close the VAT gap earlier this year. Their most significant initiative, Making Tax Digital (MTD) will bring a drastic change in HMRC (Her Majesty’s Revenue and Customs) which is the main body regarding the collection of taxes in the UK. Its current goal is “to become one of the most digitally advanced tax administrations in the world.”

Making Tax Digital – Transforming Her Majesty’s Revenue and Customs (HMRC)

What is the primary purpose of Making Tax Digital initiative and how will it affect businesses?

  • Making Tax Digital initiative brings a comprehensive change to the UK’s tax system which has been dealing with VAT gap for years. Although HMRC is trying to make the system more effective, more efficient and more accessible for taxpayers to pay their tax right, the initiative’s primary focus will be getting more of the current VAT system which created 33.3% of total tax revenue of UK’s in 2017.

HMRC’s survey found that the majority of their taxpayers want to pay their taxes but find it too hard to do it right. Therefore, the institution will mandate the taxpayers to use government approved website for all VAT related business to reduce tax evasion caused by avoidable errors and to collect data in real-time. Making Tax Digital initiative will also minimize hardships that come with the customer refund service.

Planning for the Digital Future of Tax

How can companies get ready for the age of digital taxation?

  • Technological advancements in the digital world created a valuable chance both for governments and businesses to have a fair tax system. Businesses, especially multinational companies, have to get better regarding compliance with new tax regulations. They can do it so by investing better digital tools.

If you are looking for Global Regulatory Compliance Solution for SAP to get a deeper understanding of country electronic invoicing regulations, don’t forget to get in contact with us.

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