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Lachlan WolfersGlobal Head of Indirect Taxes
KPMG International
P: +852 2685 7791
Lennert JanssenSenior Manager
KPMG in China
P: +852 2847 5084
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AgendaLooking back 5 years ago
Looking ahead 5 years
Questions
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Indirect tax will be charged at the place of
consumption
2013–2014–2015
There will be a Customs Duty regime for
services
XXX
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Every country has a VAT regime
2020
Proliferation of new and old indirect taxes that
you will own
XXX
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Indirect tax rates accelerate dramatically
2020
We know where you are! “Use and Enjoyment”
provisions are here to stay!
12 MONTHS
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From paper to dataNo more periodic returns — tax will be settled
in real-time
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Big data will close the VAT gapThe tax transparency debate will shift to
indirect taxes
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Data quality and analysis will be the new audit
battlegroundYou won’t control all your own data anymore
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Your data will become very interesting to othersIndirect tax legislation will be written with data
analytics in mind
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You will be redundant by 2020!
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Consumption taxes will
dominate
Growth of government
regulated invoicing
systems
VAT refunds will
largely end
VAT will be applied to
financial services
VAT returns will die
Tax professionals to be
transformed
VAT will more closely
resemble sales tax
Tax professionals
disintermediated by tax
authorities
Simplifications will reduce
the risk of fraud
VAT compliance =
technology outsourcing
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Before we go through these predictions in detail, which of the 10 predictions seems
the most controversial?
1. Proposition 1 — Consumption taxes will be the dominant form of taxation around the world
2. Proposition 2 — Government regulated invoicing systems will grow significantly, their importance will grow
ever more significant, and they will wreak havoc on compliance costs for multinationals
3. Proposition 3 — VAT refunds will largely end (except for a few small categories)
4. Proposition 4 — VAT (or equivalent) will be applied to financial services as the default model
5. Proposition 5 — VAT returns (as we know them) will die
6. Proposition 6 — VAT compliance = technology, and it will be outsourced by most large businesses
7. Proposition 7 — Simplifications that reduce the risk of fraud, or that are necessary to prevent errors or
eliminate disputes will grow
8. Proposition 8 — The in-house tax department, and tax advisors, will be disintermediated by tax authorities
9. Proposition 9 — VAT will more closely resemble sales tax (through the use of blockchain technology)
10. Proposition 10 — Unless tax professionals and the organizations they serve transform urgently, they risk
falling down the value chain
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Corporate and
personal taxes
Consumption-
based Taxes
Total Tax Revenue
Tax in place of value creation, or place of
consumption?
Which has greater alignment with business interests?
Digital services taxes
Increase in environmentally oriented
consumption-based taxes
1977 1978 1979 1980 2017 2018 2019 2020+
1977Adoption of VAT
by 25 countries
2018Corporate tax
rate of 26.5%
2019Adoption of VAT
by 168 countries
1980Corporate tax
rate of 46.6%
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Increase in compliance costs for multinational companies
— Slightly different forms, unique software & hardware requirements in
different countries
— Benefits of centralization of compliance will be lost
— Need for business to use interface solutions with their own ERP
solutions
— Duplication of invoices, ring-fencing, reconciliation
Currently variations of same
theme adopted in China,
Brazil, Taiwan, Indonesia,
Korea, India, Vietnam,
Portugal (amongst others)
Real time reporting
— Government gets transaction
level data on a real time basis
— Carries out D&A or
reconciliation with VAT return
information
Regulated invoicing systems
— Government interposed in the
invoicing process
— The system is used to
determine the VAT liability
Machine to
machine invoicing?
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Tax authorities TaxpayerVAT Refunds
Recent developments in VAT refunds
— Carousel and missing trader fraud — increased scrutiny and time required to process refunds from tax authorities
— Tax authorities increasingly imposing tax audits as a precondition to refunds
— Or refunds set-off against other tax obligations before being paid
— Disallowing VAT refunds to foreign businesses unless the principle of reciprocity is followed
— Tourist VAT refund schemes seem to be diminishing
— Countries expanding scope of zero rating reduces need for foreign businesses to claim refunds (Russia, Indonesia, Cambodia, China)
Businesses are increasingly reluctant to claim VAT refunds by amending prior returns
Countries such as France,
Italy, Costa Rica reducing need
for refunds for exporters &
zero-rated suppliers?
Limitations on refunds?
E.g. time periods
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The starting point
Only specific services are exempt.
Broadly where there is:
— a change in legal/financial situation between
parties (payments, securities transactions, credit
card processing etc.);
— operation of a bank account; or
— financial intermediation.
Then the services may qualify for VAT exemption.
Is the service exempt?
Next stage is to drill down into the detail.
It is critical to really understand what the
service is and what it does.
For example: SDC, Bookit, DPAS and Card
Point.
Does it include the provision of taxable or
exempt elements?
What does the customer really want?
Is any element ancillary or a better means
of enjoying another element?
Tax authority challenges
Tax Authorities focus on restrictive
interpretation and seek to restrict
exemption by looking at the technical detail
of what/how the services are supplied
(Nordea).
They also seek to “taint” exempt elements
in bundled supplies (single vs multiple
supply).
For example: technology build services
swamping exempt functionality.
In particular, project management, IT build
and licensing.
Nature of the services
The legal and commercial/economic
realities need to be aligned and it is critical
not to mischaracterize what is actually
being done.
For example: the difference between IT
build/licensing vs. providing exempt
functionality.
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Key issues impacting on VAT exemption
Terms of contracts
Contractual recitals and details of the services will be critical.
Reality
Marketing materials and the way the services are positioned publically will be relevant.
Commercial documents
Exchange(s) of correspondence internally and between parties.
Fee structures
Clarity of fees structures which may give indication to HMRC of tax treatment.
Global contracts
May give rise to place of supply issues or use and enjoyment issues, depending on
detail and structure.
Billing arrangements
VAT and wider tax impact of Hub vs Regional vs Country-to-country billing to be considered.
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Past/current
Same service
Withdraw
from ATM
Credit card surcharge,
or payment
processing fee
Future
VAT will be applied to FS with 3 major
exceptions:
Personal loan products
Trading of derivatives and
other financial instruments
Where substitutes for VAT
are in place (e.g IPT (EU),
Education Tax (Korea), SBT
(Thailand)
Source: The Guardian, 18 June 2019
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Do you believe that VAT will be applied to most financial services by 2025 in your
jurisdiction?
A) Yes
B) No
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India
Brazil
Europe
Inevitable consequence of several factors
Electronic invoicing through government regulated
invoicing systems
The need to carry out data matching or verification of
purchase invoicing through government regulated
invoicing systems
Real-time reporting of transaction level data (e.g.
Spain, Hungary, SAF-T)
Short and medium term
— VAT returns will be pre-filled for taxpayers (e.g. India)
— Reconciliation exercise to check the accuracy of the
returns, and to perform adjustments required
Long term
— The actual filing of VAT returns to be rendered
completely redundant — blockchain technology & POS
collection
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Challenges facing in-house tax departments
— Data management problems
— Unable to fully comply with tax laws because of
system limitations
Deploy technology tools
Tax compliance will be outsourced by most
large businesses
— Comes down to simple economics
— Requires significant up-front investment cost if
built by the organization for their own needs
The use of
multiple systems
Reconciling the
data/making manual
adjustments
Extracting data from
multiple systems
The continuation of
historical practices
Data
management
problems
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Motor vehicle usage
costs
Mobile phone costs
for employees for
business use
Meal costs and
entertainment-related
costs for employees
Digitalization — impact
of systematized
processes
Judgment and
resources to verify the
correctness of these
credit claims
Deny credits outright
OR
Provide an
automatically
determined credit
amount or
percentage
Applicable to partial exemption/
apportionment such as in financial
services? (e.g Singapore)
Are current approaches or
methodologies for calculating input tax
credits relevant in an era of
digitalization?
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Deal electronically with business
— Publish extensive information to
help businesses comply — self-
help
— Chatbots and similar programs can
provide 24/7 support
Tax authority dealing directly with
business
1
Data flowing directly
— Government regulated invoicing or
real time reporting allow
government to obtain transaction
level data automatically
— Data and analytics testing
Tax authority having the data
2
Use of tax authority technology
— Government can mandate use of
technology tools by all taxpayers
— Technology tools generally
enhance compliance
— ROI need only be $1
Tax authority controls your
systems
3
Development in tax authorities’ practices
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Extract from the Explanatory Memorandum to Australia’s GST Act
21st century taxation system?
Sells timber for $220
(including $20 GST)
Buys timber for $220
Makes and sells table
for $440
(including $40 GST)
Buys table for $440
Sells table for $550
(including $50 GST)
Buys table for $550
Commissioner
Timber merchantFurniture
manufacturerFurniture retailer Consumer
$20 GST
$20 input tax
credit
$40 GST
$40 input tax
credit
$50 GST
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Is multiplicity of obligations in VAT systems still able to prevent fraud and ensure VAT is
properly accounted for?
— Imposing collection
obligations on online
platforms (e.g. Australia
& post-Wayfair)
— Overcomes fundamental
limitations in traditional
VAT collection methods
for non-resident
— Use of intermediaries as
principal in accounting
for VAT
— Application to domestic
transactions?
— Critics failed to take into
account the impact of
technology
developments — create
greater security and
validity in the transaction
lifecycle
— B2B highly publicized
fraud examples —
precious metals, trading
of carbon permits
Special rules or exceptions
are increasingly being used
to combat fraud
Examples:
— Domestic reverse
charge
— VAT withholding on
property (Australia)
— B2B zero rated land
supplies (New Zealand)
— B2B transactions —
supplier not to remit and
recipient not to claim —
digital certification
— B2C — fundamentally
transforms the VAT
collection process with
greater transparency
and security
— Connect taxpayers, tax
authorities,
intermediaries and even
banks
Growth of e-commerce
platforms
Michael Gove proposal —
replace UK’s VAT with sales
tax system
Special rules to combat
fraud
Use of blockchain or
distributed ledger
technology
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Do you believe that VAT will resemble a retail sales tax by 2030 in your jurisdiction?
A) Yes
B) No
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We can’t get the data
The quality of our data is poor
Inordinate amount of time scrubbing and
reconciling data
Significant manual adjustments — all done in
Excel
Data is spread across multiple systems,
which do not speak to each other
The tax authorities believe we have the data
at the ready, in the form in which they want it
Current data problems Future Transformation
Easier to teach a tax professional about IT,
or to teach an IT professional about Tax?
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In your experience, is it easier to:
A) Teach a Tax professional about IT
B) Teach a IT professional about Tax
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What other prediction(s) have we missed?
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Now that we have gone through the 10 future predictions, choose the most accurate
statement of your belief:
A) I agree with all of the predictions
B) I agree with most of the predictions
C) I disagree with many of the predictions
D) I disagree with all of the predictions
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Lachlan WolfersGlobal Head of Indirect Taxes
KPMG International
P: +852 2685 7791
Lennert JanssenSenior Manager
KPMG in China
P: +852 2847 5084
© 2020 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG
network of independent firms are affiliated with KPMG International. KPMG International provides no client
services. No member firm has any authority to obligate or bind KPMG International or any other member firm
vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member
firm. All rights reserved.
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