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Indirect Tax

Managing New Complexities with Value-Added Taxes

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

This article is the second installment in a two-part series on how to manage new complexities in the indirect tax space. To read the first installment, focused on Brexit, please click here.

As we covered in our first installment of this series, new tax compliance challenges are unavoidable in our globally connected world. The business consequences of Brexit, for instance, has caused uncertainty that massively impacts tax departments by making it challenging for them to plan.

Brexit highlights, among other things, just how important value-added taxes are to today’s global business environment. The Value Added Tax (VAT) in the EU is a general, broad-based consumption tax assessed on goods and services purchased or sold for use or consumption within the EU. VAT is not charged on goods or services exported outside the EU. Simply put, if the UK remains in the single market, this tax treatment can, in theory, remain consistent. But if the UK leaves the single market, the current treatment of cross-border transactions will be replaced with something else, and there is no consensus as to what a new solution might be.

Right now, VAT is not a perfect system. EU members lost nearly €150 billion, or more than 12% of the total revenue forecast from VAT in 2016 to tax fraud, evasion, and avoidance, according to the European Commission. This “VAT gap” shows how out of sync tax systems are with the ways companies go about scaling and growing in today’s business environment.

Tax regimes, however, are stepping up their game. For the EU, part of the solution might include more harmonization of cross-border trade and more autonomy for member-states to adjust rates. Ideally, this would be achieved without disrupting business processes, but it would be risky to assume closing the VAT gap is not the top priority in tweaking the EU VAT regime.

And VAT is not an EU-specific tax framework. Members of The Gulf Cooperation Council, an economic union of states of the Persian Gulf, began to implement a VAT framework in 2016. Three now have VAT in force, and the other states are expected to implement a VAT in the coming years.

A trend towards the real-time reporting of indirect taxes is another part of this story, as it would allow these tax jurisdictions to monitor compliance in real time. And because most every jurisdiction will have differences in how this real-time reporting gets done at a technological level, it produces additional complexity for tax departments as it helps tax authorities.

How We See It

Complexity is growing, both in the number of trends that produce it as well as the intensity of the consequences for tax departments that it creates. Tax teams produce significant value to their companies — and nearly everyone wants to automate processes because doing so reduces risk, lowers cost, and makes the work of tax more dynamic and exciting.

Having the tools in place that allow teams to respond quickly and thoughtfully to these landmark changes will be more crucial as this complexity increases. Automation with tax technology ensures that your team has real-time access to accurate content, updated as soon as regulations change, so that your team doesn’t have to spend time constantly updating and reacting to the latest information. And the best tools feed this content directly into your calculations. Instead of scouring sources for how and when rates and rules are changing, you can feel confident that you’re getting tax right the first time, every time.

The pace of change in our connected world will only intensify as time goes on. More than ever, it’s important to have a solution that can take care of the manual tasks and get you the information you need faster, so that your team can focus on more strategic, value-added work.

Want more information on this subject? Register for our upcoming webinar, “Managing New Complexities in Tax: Brexit, Wayfair, and VAT Reform.”

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