2. Value-added taxes - Main features and implementation issues
Although most VAT systems are built on the same core VAT principles (see Chapter 1), there is considerable diversity in the design of VAT systems in OECD countries. This is notably illustrated by the variety of reduced rates, exemptions and other preferential treatments and special regimes that are widely used in OECD countries, for practical or historical reasons, to support certain economic sector or to achieve equity or social objectives.
This chapter presents an overview of the VAT rate structures in OECD countries and their evolution between 1975 and 2020 (Section 2.2) and looks in some detail at the VAT exemptions that exist in these countries (Section 2.3). This is followed by an overview and analysis of the wide variety of special regimes used in OECD countries on the following aspects: specific restrictions to the right to deduct VAT on specific inputs (Section 2.4), registration and collection thresholds (Section 2.5), and the application of margin schemes (Section 2.6). It also presents the VAT Revenue Ratio as an indicator of the revenue effect of VAT exemptions, reduced rates and non-compliance (Section 2.7) and the measures taken by governments to combat VAT fraud and avoidance (Section 2.8).
This Chapter concludes with a special section on the VAT policy and administration measures introduced by OECD countries as part their fiscal and tax policy responses to the COVID-19 outbreak. These VAT measures have been particularly important in supporting business cash flow and in alleviating tax compliance burdens for businesses given the restrictions in place in many countries. Most OECD countries have also taken VAT measures to facilitate emergency medical responses and to support the healthcare sector. These measures are discussed in further detail in the special section on COVID-19 VAT measures below. In addition, a comprehensive overview of temporary change to VAT rates implemented by countries in this context is included in Section 2.2 and country notes to Annex Table 2.A.2 below.
2.2.1. Standard VAT rates have remained stable in recent years
The evolution of VAT rates in the OECD can be divided into five periods. The first period between 1975 and 2000 has seen a progressive increase in the average standard VAT rates from 15.6% in 1975 to 18.1% in 2000.
During a second period, between 2000 and 2009, the standard rate of VAT remained stable in most countries, with 26 out of 36 countries maintaining a rate between 15% and 22%. As of 1 January 2009, only four countries had a standard rate above 22% (Denmark, Iceland, Norway and Sweden –see Annex Table 2.A.1).
The third period, between 2009 and 2014, was marked by a considerable increase in the standard VAT rate in many countries, often in response to financial consolidation pressures caused by the economic and financial crisis. VAT standard rate increases have played a key role in many countries' consolidation strategies, since raising additional revenue from VAT rather than from other taxes (such as income taxes) is often considered more effective (it generates immediate additional revenue) and less detrimental to economic growth and competitiveness than income taxes (Jens Matthias Arnold, 2011[1]). Between January 2009 and December 2014, 23 OECD countries raised their standard VAT rate at least once. These changes occurred principally in European Union (EU) countries (Czech Republic, Estonia, Finland, France, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, the Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain and United Kingdom) but also in a number of non-EU countries (Iceland, Israel, Japan, Mexico, New Zealand, and Switzerland). Two OECD countries lowered their standard VAT rate temporarily and then raised it again during this period (Ireland and the United Kingdom). This evolution resulted in a hike of the unweighted OECD average standard VAT rate from 17.7% in January 2009 to an all-time record level of 19.2% on 1 January 2015. Ten OECD countries operated a standard VAT rate above 22% on 1 January 2015 against only four in 2009. All these countries belong to the European Union, except Iceland and Norway.
The increases in standard VAT rates observed until the end of 2014 have not continued and OECD countries have entered a new period of relatively stable standard VAT rates. Only four OECD countries have increased their standard VAT rate between January 2015 and January 2020, i.e. Colombia (from 16% to 19%), Greece (from 23% to 24%), Japan (from 8% to 10%) and Luxemburg (from 15% to 17%). During the same period, two OECD countries have reduced their standard VAT rate, i.e. Iceland (from 25.5% to 24%) and Israel (from 18% to 17%). As a result of these changes in various directions, the increase in the unweighted OECD average standard VAT has remained limited, from 19.2% in 2015 to 19.3% in 2020 (see Figure 2.1).
Source: Author's calculations
Major differences in standard VAT rates can be observed among OECD countries, with rates ranging from 5% in Canada (note, however, that most Canadian provinces levy specific sales taxes or Harmonised Sales Taxes alongside the Federal 5% GST), 7.7% in Switzerland and 10% in Australia, Japan and Korea to 25% in Denmark, Norway and Sweden and 27% in Hungary (see Figure 2.2). On 1 January 2020, 23 OECD countries operated a standard VAT rate of 20% or more, with 9 of these countries having a standard VAT rate of 23% or more. All these countries are EU Member States, except for Norway (with a 25% VAT standard rate).
Source: Author's work
The average standard VAT rate of the 23 OECD countries that are members of the EU (including the UK until 1 February 2020) is at 21.8%, which is significantly above the OECD average (19.3%). EU Member States are bound by common rules regarding VAT rates (VAT Directive 2006/112/EC), which set the minimum level of the standard VAT rate at 15%.
2.2.2. OECD countries continue to apply a wide variety of reduced rates
Most OECD countries continue to apply a wide variety of reduced VAT rates and exemptions (see Annex Table 2.A.2 and Annex Table 2.A.3). With the exception of Chile, all OECD countries that have a VAT apply one or more reduced rates to support various policy objectives. A major reason for the application of reduced rates is the promotion of equity. Countries generally consider it desirable to alleviate the VAT burden on necessity goods and services (e.g. food, water), which typically form a larger share of expenditure of lower income households by taxing them at a preferential VAT rate. Most countries also apply reduced VAT rates or exemptions to medicine, health, education and housing. Reduced VAT rates have also been used to stimulate the consumption of “merit goods” (such as cultural products) or promoting locally supplied labour-intensive activities (e.g. tourism) and addressing environmental externalities.
Evidence suggests that exemptions and reduced VAT rates are not an effective way of achieving such objectives (OECD/KIPF, 2014[2]) and can be even regressive in some instances. Other measures, such as providing targeted through the income tax and/or the social transfer and benefit system, tend to be more effective in addressing equity concerns and to pursue policy objectives other than raising tax revenues (Thomas, 2020[3]). Reduced VAT rates that are targeted at supporting lower-income households (i.e. to address distributional goals) typically do have the desired progressive effect. Notably reduced rates for basic food generally provide greater support to the poor than to the rich as a proportion of household income and as a proportion of expenditure. However, despite their progressive effect, research led notably by the OECD has shown that these reduced VAT rates remain a very poor distributive tool. This is because better-off households tend to benefit more in absolute terms from VAT reduced rates than low-income households. As richer households tend to consume more, and more expensive products than poorer households, their consumption of the tax-favoured goods and services is generally greater than that of poorer households. Research has also demonstrated that preferential VAT rates to stimulate employment (e.g. in the tourism or hospitality sectors), or to support cultural activities (e.g. theatre) or pursue other non-distributional goals, clearly benefit richer households more than lower-income categories of the population, and often considerably so.
Preferential VAT regimes such as reduced rates and exemptions (see Section 2.3) also tend to considerably add to the complexity of the VAT system, increase the compliance burden for businesses and negatively impact on compliance levels (C. Evans; R. Highfield; B. Tran-Nam; M. Walpole, 2020[4]). A more effective policy to achieve distributional objectives is generally to reduce the scope for reduced VAT rates where possible and use measures that are directly targeted at increasing the real incomes of poorer households and public services for these households. It is recognised, however, that although this analysis is widely shared, it is often difficult if not impossible to implement it in practice. The political economy obstacles to broadening the VAT base (in particular their perceived distributional impact) can indeed be formidable, and often insurmountable, particularly where the social transfer and benefit system may not be sufficiently effective to ensure that poorer households are properly compensated for the impact of a VAT increase on the cost of their consumption basket.
EU Member States are bound by common rules regarding the operation of reduced VAT rates (VAT Directive 2006/112/EC). This common framework allows Member States to apply one or two reduced rates of not less than 5% to a restricted list of goods and services set out the VAT Directive. Some EU countries are allowed to apply special VAT rates below the standard rate of not less than 12% for goods not in the list of possible reduced rates (a “parking rate”) and super-reduced rates below 5% on certain supplies. For the time being, over 40 different standard and reduced VAT rates are being applied in the EU, often based on specific derogations granted to individual Member States.
Between 2018 and 2020, a number of countries have expanded the application of their reduced VAT rates. Greece reclassified a number of basic foodstuffs to include them in the scope of its 13% reduced VAT rate. The scope of this 13% VAT rate was also extended to restaurants and hotels, to infant food and other baby products, such as diapers and car seats, and to bicycle helmets. Greece also reduced its VAT rate for the supply of electricity and domestic gas from 13% to 6%. Spain expanded the application of its super reduced VAT rate of 4% to a wider range of bread products. The Slovak Republic extended the list of food items, including fruit and vegetables, which are subject to the 10% reduced VAT rate. Poland introduced an updated and simplified VAT rate structure along with the possibility for businesses to acquire certainty on the applicable VAT rate through a binding decision (WIS). Italy, Belgium, Germany and Iceland reduced their VAT rates for feminine hygiene products from 22% to 5%, from 21% to 6%, from 19% to 7% and from 24% to 11% respectively. The UK announced that it will apply a zero-rate to feminine hygiene products as of 1 January 2021. Germany extended the application of its 7% reduced rate to long-distance rail travel as part of environmental policy measures. Sweden made its 6% reduced rate applicable to the exploitation of natural areas outside urban areas, national parks, nature reserves and national city parks. Some countries have expanded the scope of their reduced VAT rates to support specific economic sectors. Hungary and the Slovak Republic reduced their VAT rate on accommodation services from 18% to 5% and from 20% to 10% respectively. The Czech Republic lowered its VAT rate on hairdressing and clothing repair services to 10%. Portugal extended the application of its reduced VAT rate of 6% to domestic assistance services by telephone to the elderly and chronic patients, as well as to admissions to cultural exhibitions, zoos, parks, aquariums, botanic gardens, museums and buildings of national interest. Slovenia introduced a new reduced VAT rate of 5% for printed and electronic publications (incl. e-books). A number of EU countries have reduced their VAT rates on electronic publications following an EU Council agreement in 2018 that EU Member States are allowed to apply reduced rates on these publications (e.g. e-books and e-newspapers) thereby aligning EU VAT rules for electronic and physical publications. Reduced rates now apply to e-books and e-publications in 16 of the 36 OECD countries that have a VAT – these are all EU Member States, except Norway.
Japan has moved from a single VAT rate to a dual rate system, by introducing a new reduced rate of 8% on a number of food and beverage items, when it increased its standard rate from 8% to 10%. Chile is now the only OECD country with one single VAT rate.
Given the political difficulty to significantly reduce the scope of reduced rates (and exemptions) and the limited scope for increasing standard VAT rates, which are already at a relatively high level in many cases, countries are increasingly looking at other measures to raise additional VAT revenue and improve the efficiency of their VAT systems (OECD, 2018[5]). These measures mainly include the collection of VAT on the supplies of goods and services from online sales (see Chapter 1) and measures designed to improve compliance and combat fraud (see Section 2.8).
2.2.3. Temporary VAT rate reductions have been introduced in response to the COVID-19 crisis
Several OECD countries have included temporary VAT rate reductions, including zero rates, in their tax responses to the COVID-outbreak. Most of these measures have been aimed at supporting the healthcare sector. Some countries have introduced temporary rate reductions to stimulate consumption and/or to support specific economic sectors that have been hardest hit by the COVID-19 crisis (e.g. tourism, hospitality). A comprehensive overview and description of these VAT rate reductions in OECD countries is included in the Country notes to Annex Table 2.A.2 (in italics).
Most OECD countries have introduced zero rates or reduced rates for supplies and imports of medical equipment and sanitary products (gloves, masks, hand sanitiser…) and for healthcare services where these were not yet VAT exempt or subject to reduced rates under normal rules. The European Union introduced a six-month suspension of VAT and customs duties on protective equipment, testing kits and medical equipment such as ventilators. The European Commission published an indicative list of goods potentially covered by this relief but leaves it to the discretion of Member States to decide according to their particular national needs. This relief applies to goods imported by or on behalf of state organisations or charitable or philanthropic organisations approved by the competent authorities of the Member States. The initial measure applied for a period of six months and was further extended until the end of April 2021.
A number of OECD countries apply temporary reduced VAT rates (including zero-rates) to supplies of a range of medical products and equipment needed to combat the COVID-19 outbreak, including Austria, Belgium, France, Germany, Greece, the Netherlands, Portugal and Spain. Germany, the Netherlands, Poland and Portugal apply a 0% VAT rate to donations of certain medical material and equipment to hospitals. In the Netherlands, a rate of (effectively) 0% is applied to the hiring of healthcare workers by healthcare facilities or institutions qualifying for the VAT exemption of medical services.
Some countries have introduced VAT rate reductions to support specific economic sectors, such as restaurants (Austria, Belgium, Germany, Greece); accommodation (Austria, Czech Republic, cinema, culture or sports (Austria, Greece, the Netherlands, United Kingdom); or passenger transport (Greece and Turkey). The United Kingdom introduced a temporary reduced rate of 5% for certain supplies relating to hospitality, holiday accommodation and admissions to certain attractions from 15 July 2020 to 31 March 2021.Poland introduced a temporary 0% VAT rate for the supplies of laptops and tablets to educational institutions.
A few OECD countries have introduced more general temporary rate reductions. Germany reduced its standard VAT rate from 19% to 16% and its reduced VAT rate from 7% to 5% from 1 July to 31 December 2020. Ireland reduced its standard VAT rate from 23% to 21%, with effect from 1 September 2020 until 28 February 2021. Norway decreased its 12% reduced VAT rate to 6% from 1 April until 31 December 2020.
The VAT component of OECD countries’ tax responses to the COVID-19 crisis is discussed further in the Special section at the end of this Chapter.
VAT regimes in the OECD make extensive use of exemptions, in addition to reduced rates (see Annex Table 2.A.3). In this context, exemption means that the supplier does not charge the VAT on its outputs and, as a consequence, has no right to recover the VAT on its related inputs. In some jurisdictions, exemption is referred to as “input taxation” to indicate that the supply is not free of VAT but that there is a “hidden VAT” in the price of the exempt supply - i.e. the VAT burden incurred on the inputs is embedded in the price of the exempt outputs. Exemption is thus not the same thing as absence of taxation.
Although it is a significant departure from the basic concept of VAT, all OECD countries apply a number of exemptions. A wide variety of motivations exist for the application of VAT exemptions. These include the difficulty to determine the tax base (e.g. financial and insurance services) or the desire to exclude activities from the VAT base that are considered as public service or as serving a purpose of general and/or social interest (education, health, postal services, charities). A number of other exemptions have their roots in tradition, such as letting of immovable property and the supply of land and buildings. Certain sectors that are exempt from VAT may also be subject to other specific taxes (e.g. property, insurance, financial services).
Exemptions beyond these core items are also numerous and cover a wide diversity of sectors such as culture, legal aid, passenger transport, public cemeteries, waste and recyclable material, water supply, precious metals and agriculture (see Annex Table 2.A.3). To this regard, EU Member States are subject to common rules providing for the exemption of supplies considered as in the public interest such as postal services, healthcare, social services, education, public broadcasting and charities but also for a number of specific supplies such as financial and insurance services, transactions involving immovable property and gambling. However, EU Member States may choose to allow business to opt to tax certain transactions and set specific conditions for some exemptions.
A number of services that are generally exempt in OECD countries are taxed in certain countries. For example, postal services is taxed in Australia, Canada, Japan, New Zealand and Norway; betting or gambling is taxed in Australia, Canada, Korea, New Zealand, Turkey and the United Kingdom; and insurance services are taxed in Mexico, New Zealand and Turkey and zero-rated in Australia. On the other hand, the transportation of passengers, which is taxed in most countries, is exempt (to some extent) in Chile, Denmark, Ireland and Korea. Chile treats, services that are not specifically listed in the law as “out of scope” of its VAT i.e. they are actually treated in a similar way as exemptions. These include legal, accounting, engineering, architecture and other professional services.
The standard advice in VAT design is to have a short list of exemptions, limited to basic health, education and perhaps financial services. By not allowing the deduction of input tax, VAT exemptions create an important exception to the neutrality of VAT (see Chapter 1). The following paragraphs provide an overview of the main, often adverse consequences of exemptions.
VAT exemptions introduce a cascading effect when applied in a B2B context. The business making an exempt supply can be expected to pass on the uncreditable input tax by including it in the price of this supply. This “hidden tax” will subsequently not be deductible/recoverable by the recipient business. If the outputs of this recipient business are not also exempt, this hidden VAT will presumably be part of the price for the supplies on which it will charge output VAT. The result is a hidden tax at a variable rate depending on the number of production stages that are subject to the tax. This distorts businesses’ production decisions and choices of organisational form. The size of this cascading effect depends on where the exemption is applied in the supply chain. If the exemption is applied at the stage of the final consumption, there is no cascading effect and the consequence is simply a loss of tax revenue since the value added at the final stage escapes tax. If the exemption occurs at some intermediate stage, the consequence of the cascading effect may be an increase of net revenues in a non-transparent manner.
Exemptions create incentives for reducing tax liability by vertical integration (“self-supply”) and disincentives for outsourcing as firms have an incentive to produce their inputs internally rather than to purchase externally and incur irrecoverable VAT. This may lead to economic inefficiencies from the distortion of the structure of the supply chain. It can also initiate a dynamic whereby exemptions feed on each other resulting in “exemption creep”: once a sector receives an exemption, it has an incentive to lobby for exemptions for those from whom it buys its inputs in order to avoid paying hidden VAT on its inputs.
Exemptions generally lead to the under-taxation of supplies to consumers, who face a tax burden equal to the tax on inputs used by the businesses without its value-added, and an over-taxation of businesses who are unable to deduct the “hidden” tax embedded in their inputs. It also leads to the taxation of investments rather than consumption, which is in contradiction with the main purpose of the tax.
The VAT exemption of financial services is often mentioned as one that is increasingly problematic. In a recent paper (GFV N°087 of March 2019), the European Commission recalled that the European Union’s VAT exemption rules for financial and insurance services have not kept pace with developments in these sectors, which makes these rules increasingly complex and difficult to apply in practice. This has led to rising litigation rates, legal uncertainty, and high administrative and regulatory costs. These rules are also interpreted and applied inconsistently across Member States, leading to competitive distortion within the EU. The European Commission has therefore launched a public consultation on this topic in October 2020.
In the international context, exemptions compromise the destination principle for taxation of internationally traded goods and services (see Chapter 1). When an exporter uses exempt inputs, it is not possible to remove the irrecoverable VAT resulting from the exemption applied at an earlier stage in the production chain. The export thus becomes effectively “input taxed”. On the other hand, businesses that use exempt inputs have an incentive to import from countries where these inputs are zero rated for export instead of purchasing them from exempt domestic providers. It has been suggested that managing exemptions also imposes increased administrative and compliance costs. As is the case for differentiated rate structures, it may often be difficult for businesses and tax administrations to distinguish between exempt and taxable supplies, in particular in complex areas such as financial services. Businesses that make both taxable and exempt supplies are often faced with complex allocation rules to determine the share which is attributable to taxed outputs and for which it is thus entitled to an input tax credit. However, there is little evidence on the quantitative extent to which exemptions increase administration and compliance costs (Bird and Gendron, 2007[6]).
For further reading on the theoretical and practical justification of exemptions, see (de la Feria, n.d.[7]); and on the potential of broadening the tax base by reducing the scope of exemptions as an alternative to increasing VAT rates, see (European Commission, 2011[8]).
Although the burden of the tax should not fall on businesses, the right to deduct the VAT on inputs is limited to the extent that those inputs are used for producing taxable outputs. The right to input VAT deduction is legitimately denied in cases where inputs are used to make onward supplies that are not taxable, i.e. exempt without credit (e.g. health care, financial services – see Section 2.3 above) or outside the scope of VAT (e.g. supplies for no consideration). Input-VAT deduction is also denied when purchases are not (wholly) used for the furtherance of taxable business activity, for example, when they are used for the private needs of the business owner or its employees (i.e. final consumption). All these limitations to the right to deduct input VAT result from the application of the basic principles of VAT design.
In addition to the rules described above, most OECD countries have legislation in place that provides for restrictions to input VAT deduction on a number of goods and services because of their nature rather than because of their use by businesses. This is often with a view to ensuring the (input)taxation of their deemed final consumption (see Annex Table 2.A.4).
Restrictions to the deduction of input VAT on entertainment costs are the most widespread, although the items included in that category may vary widely. These restrictions may include VAT incurred on restaurant meals; on (alcoholic) beverages; reception costs; hotel accommodation; attendance at sporting or cultural events; and on gifts and transport services. Seven OECD countries (Chile, Colombia, France, Israel, Japan, Switzerland and Turkey) have not implemented such specific limitation to the right of deduction. The deduction of input VAT on the purchase and/or the use of cars is also subject to limitations in 23 out of the 36 OECD countries operating a VAT. On the other hand, Israel, Japan and Switzerland do not report any of these specific restrictions. In Mexico, there are no specific restrictions but the law provides that input VAT deduction is allowed only on inputs that are “strictly indispensable” for the principal activity. The expenses deductible for VAT purposes must also be deductible under the Income Tax Law, which provides a list of “Authorised deductions” for each type of regime.
The restriction to input-VAT deduction may often be limited to a portion of the VAT incurred. This can for instance be the case for the VAT incurred on the use of cars by the employees of a business, which can be limited to a fixed percentage. Some countries restrict the deduction of input VAT on cars to 50%, even if the car is fully used for business purposes.
The rationale behind those limitations is generally threefold. First, it aims at avoiding the administrative burden associated with the need to control the actual use of goods and services that may easily be used for dual business/private purposes due to their very nature. Second, it is a way of reducing the risks of fraud. Third, such commodities often contain an element of “consumption” - for example restaurant meals. This third justification may be considered inconsistent with the main features of the VAT system. Indeed, businesses (or their employees) never actually “consume” goods and services within the meaning of the VAT when they are used in the furtherance of a taxable activity.
All taxes impose compliance costs on businesses and administrative costs on tax authorities, but VAT is often considered as particularly burdensome for small and medium size businesses (SMEs) to comply with (European Commission, 2013[9]) (Evans et al., 2018[10]). Many countries have therefore introduced simplified regimes for SMEs to ease their compliance burden. These regimes can be grouped into three main categories: those that provide for an exemption from the VAT regime (exemption thresholds); those that facilitate the calculation of the VAT liability; and those that simplify accounting, filing and/or payment obligations (OECD, 2015[11]).
Most OECD countries (except Chile, Mexico and Spain) apply exemption thresholds below which small businesses are not required to charge and collect the tax on their outputs and their input VAT is not deductible. In Colombia and Turkey, the exemption threshold only applies to individuals and not to companies or incorporated businesses. The consequences of such exemptions are equivalent to treating small businesses as non-taxable businesses. There are two kinds of exemption thresholds: registration thresholds that relieve suppliers from both the requirement to register for VAT and to collect the tax; and collection thresholds for which taxpayers, even those below the threshold, are required to register for VAT, but are relieved from collecting the tax until they exceed the threshold. Different types of activities (e.g. supply of services vs supply of goods) or sectors (e.g. the non-profit sector) may be subject to different thresholds or even be excluded from their application (e.g. the construction sector). In most cases registration thresholds do not apply to foreign businesses and in some cases collection thresholds apply only to individuals or to businesses for which commercial accounting is not compulsory.
Annex Table 2.A.5 provides an overview of applicable collection and registration thresholds in OECD countries. In principle, the calculation of thresholds is generally based on annual turnover. In Japan, businesses (companies and individuals) are not required to register and account for VAT during the first two years of establishment if they remain below a capital-based threshold; a threshold based on an annual taxable turnover applies after the first two years (with some exceptions, based on levels of turnover). Although thresholds are generally based on annual turnover, their application may be subject to additional rules and conditions.
The levels of these thresholds vary significantly across OECD countries. Three broad groups can be distinguished.
Twenty countries have a relatively high general threshold above USD 30 000 of turnover per year: Australia, Austria, Belgium, Czech Republic, Estonia, France, Hungary, Ireland, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, New Zealand, Poland, Slovak Republic, Slovenia, Switzerland and the United Kingdom. Of these France, Italy, Japan, Poland, Slovak Republic and the United Kingdom have a particularly higher threshold of more than USD 90 000.
Nine countries have a relatively low threshold between USD 5 000 and 30 000: Canada, Denmark, Finland, Germany, Greece, Iceland, Israel, Netherlands and Portugal. Two countries have a low threshold below USD 5000: Norway and Sweden.
Since 2018, six OECD countries have raised their threshold: Austria, France, Germany, Hungary, Israel, Korea, Netherlands and Portugal while none has reduced it.
There are no definitive arguments on the need for, or the level of, thresholds. The main reasons for excluding small businesses (a notion that may vary considerably across countries) are that the costs of tax administration are disproportionate to the VAT revenues raised and, similarly, the VAT compliance costs can be disproportionate for many small businesses compared to their turnover. It is also assumed that smaller businesses may be less compliant. A relatively high threshold may give an advantage to small businesses, distorting competition with larger companies. A relatively low threshold may act as a disincentive for businesses to grow or as an incentive to avoid VAT by splitting activities artificially. It can also frustrate policy efforts to formalise the economy. However, the latter may be at least partly addressed by applying a simpler alternative tax to businesses below the VAT threshold and thus bring them into the “formal” economy. The level of the threshold is often the result of a trade-off between minimising compliance and administration costs, and the need to protect revenue and avoid competitive distortion.
All OECD countries that have a registration or collection threshold give the option to businesses below the threshold to register and account voluntarily for VAT, except Israel and Korea. Voluntary registration is often intended to provide an option for small businesses to avoid the disadvantages of non-registration - but they increase tax administration costs and impose compliance costs on entities that elect to be in the system. This also increases the risk of VAT fraud by “fly-by-night” traders, who register and claim VAT refunds before disappearing again. Countries therefore often impose a minimum period of time during which taxpayers that have registered voluntarily must remain registered. This period varies from one year (Australia, Canada, Czech Republic, Greece, Hungary, Japan, Slovak Republic and Switzerland) to two years (Denmark, France, and Norway) or in some cases, three years (Netherlands and Sweden) or five years (Austria, Germany, Portugal and Slovenia).
Recent research (Li Liu, 2019[12]) shows that firms tend to bunch below the registration threshold by restricting their reported turnover to avoid having to register for the VAT when they have a high share of sales to private consumers (B2C) but tend to register voluntarily, even when their turnover is below the threshold, in cases where they have a low share of such B2C sales, a high input-cost ratio, and more competition in the industry.
One challenge of VAT thresholds is to minimise incentives for small businesses to underreport turnover so as to remain below the exemption threshold, and/or to incentivise small businesses to grow their business. The adoption of a flexible threshold is one option. Under such a regime, small businesses that exceed the regular VAT threshold are not obliged to register immediately but are allowed to continue to benefit from the exemption as long as they do not exceed the threshold by a significant percentage. For example in France, businesses that exceed the regular thresholds of EUR 85 800 (for goods) and EUR 34 400 (for most services) may continue to benefit from the exemption if their turnover does not exceed EUR 94 300 and EUR 36 500 respectively for more than a year.
Other ways exist to reduce compliance costs for SMEs while avoiding the disadvantages of the exemption. One way used in many countries is to apply simplified presumptive schemes to facilitate the calculation of the VAT liability. For example, certain small businesses may be allowed to apply a single flat rate to turnover for determining the amount of VAT to be remitted to tax authorities instead of requiring a detailed VAT calculation of input and output VATs. An alternative simplification scheme for calculating VAT liability relies on simplified input tax credit calculations. A more detailed description of such regime is given in an OECD study on SME taxation (OECD, 2015[11]).
In most cases, registration thresholds do not apply to foreign businesses. However, the OECD VAT/GST Guidelines recommend that jurisdictions implementing a vendor registration regime for collecting the VAT on B2C supplies of services and intangibles by foreign suppliers do so without creating compliance and administrative burdens that are disproportionate to the revenues involved or to the objective of achieving neutrality between domestic and foreign suppliers. They specifically acknowledge that thresholds have been implemented by some jurisdictions to achieve this objective, adding that a balance should be sought between the desire to minimise administrative costs and compliance burdens for tax administrations and foreign suppliers and the need to maintain an even playing field between domestic and foreign businesses. The report on Mechanisms for the Effective Collection of VAT/GST where the Supplier is not Located in the Jurisdiction of Taxation (OECD, 2017[13]) provides further guidance on key policy aspects to consider for the possible implementation of such a threshold. These include neutrality aspects on the competitive position of domestic and foreign suppliers; simplification aspects on the potential reduction of compliance costs for foreign businesses and tax administrations; and the determination of the level of the threshold, including the calculation method (based on the supplier’s turnover in the taxing jurisdiction or its worldwide turnover).
Among the 12 OECD jurisdictions requiring foreign suppliers of inbound services and intangibles to final consumers to register and account for the VAT in their jurisdiction, six apply a registration turnover threshold below which foreign suppliers are relieved from that obligation, i.e. Australia, Iceland, Japan, New Zealand, Norway and Switzerland. In these countries, the registration threshold is the same for domestic and foreign vendors. The EU is considered as one single jurisdiction in this context, as the absence of a registration threshold for non-EU suppliers of remote telecommunication, broadcasting and electronically supplied services under its Mini One Stop Shop (MOSS) regime (non-Union scheme) is set at EU level. A voluntary threshold of 10 000 EUR was implemented as of 1 January 2019 for remote intra-EU supplies of these services to final consumers by EU vendors (Union scheme).
Most countries allow or utilise specific methods for determining the VAT liability in special circumstances. The purpose of these methods is usually to simplify VAT administration and compliance and/or to address specific circumstances. Typical examples are the margin schemes, which are often used when the deduction of input tax according to the normal rules is considered too difficult or impossible – see for instance the resale of second-hand goods bought from private individuals, and the activities of travel agencies. Under a margin scheme, the tax base is calculated on the difference between the price paid by the taxpayer and the price of resale rather than on the full selling price. The reseller is not allowed to deduct the input VAT embedded in the buying price of the items that are resold under the margin scheme.
The Annex Table 2.A.6 shows that all the EU countries employ a margin scheme for travel agencies, second-hand goods, works of art, collector's items and antiques since they share the same legislative root. Beyond the EU, eight other OECD countries employ margin schemes, i.e. Australia (on new residential property, gambling and second hand goods); Chile (second-hand real property); Colombia (sale of used cars, sale of fixed assets made by an intermediary, sale of gasoline); Israel (on coins and postal stamps, furniture, dwellings, used vehicles and foreign currency exchange); Mexico (second hand cars); Norway (on second hand goods, works of art, collectors’ items and antiques); Switzerland (Collector’s items such as works of art and antiques); and Turkey (on travel agencies).
VAT performance can be measured through different methods, depending on the dimension of the performance to be measured. It has traditionally been estimated by the “efficiency ratio”, defined as the ratio of VAT revenues to GDP divided by the standard rate (expressed as a percentage). Although the efficiency ratio has been widely used as a diagnostic tool in evaluating VATs, it does not distinguish a product-type VAT from a consumption-type VAT. This difficulty is addressed by taking final consumption as a reference for the potential tax base rather than production (Ebrill et al., 2001[14]). If measured by the ratio of revenue from the tax to the product of the standard VAT rate and aggregate consumption, a benchmark VAT levied at a uniform rate on all consumption would have “C-Efficiency” of 100% provided that all the tax due is collected by the tax administration.
The estimates of the VAT Revenue Ratio (VRR) for OECD countries presented in this section builds on the “C-Efficiency ratio” principles. It provides an indicator that combines the effect of loss of revenues as a consequence of exemptions and reduced rates, fraud, evasion and tax planning. Although the VRR has to be interpreted with care and erosion of the tax base may be caused by a variety of factors, it may support policymakers in assessing the revenue raising performance of their VAT system and in identifying opportunities to raise additional revenues by improving VAT performance.
2.7.1. What does the VRR measure?
The aim of the VRR is to provide a measure of the extent to which a country collects its VAT on the natural base of the tax: final consumption expenditure. The VRR thus measures the difference between the VAT revenue actually collected and what would theoretically be raised if VAT was uniformly applied at the standard rate to the entire potential tax base and all revenue was collected:
Where: VR = actual VAT revenues; B = potential tax base and r = standard VAT rate
The ‘standard’ rate refers to the default rate applicable to the tax base, unless otherwise advised by legislation. Legislation can (and many countries do) provide that lower (or higher) rates are applicable to a defined list of products. Reduced VAT rates are still widely used in OECD countries, mainly for equity or social objectives (basic essentials, health, education, etc.). No OECD countries apply higher VAT rates (see Annex Table 2.A.1).
In the VRR calculation formula as presented above, the potential tax base (B) is based on the Final Consumption Expenditure under Item P3 in the national accounts. However, the SNA measures consumption expenditures at market prices, i.e. including VAT. This VAT element must be deducted from the amount under P3 for the VRR calculation, because the theoretical basis for taxation should not include the tax itself.As a result, the VRR estimates presented in Annex Table 2.A.1 have been calculated as follows:
Where: VR = actual VAT revenues; FCE = Final Consumption Expenditure (Item P3 in National Accounts); and r = standard VAT rate.
2.7.2. The challenge of assessing the tax base
The main methodological difficulty in the calculation of the VRR lies in the assessment of the potential tax base, since no standard assessment of the potential VAT base for all OECD countries is available. The potential VAT base includes all supplies of goods, services and intangibles made for consideration (or deemed to be made for consideration) by businesses or any other entity acting as a business (e.g. individuals, government entities providing supplies for direct consideration, etc.) to final consumers. In principle, the tax base ultimately corresponds to the expenditure made by final consumers to obtain goods, services and intangibles. In practice, however, many VAT systems impose VAT burden not only on final household consumption, but also on various entities that are involved in non-business activities or in VAT exempt activities (Chapter 1 and this chapter). In such situations, VAT can be viewed as treating such entities as if they were end consumers, or as “input taxing” the supplies made by such entities on the presumption that the burden of the VAT imposed will be passed on in the prices of the outputs of those non-business activities. The tax ultimately collected by the government in these situations is the tax on these inputs.
In the absence of a standard assessment of the potential VAT base for all OECD countries, the closest statistic for that base is final consumption expenditure as measured in the national accounts, VAT is indeed, ultimately a tax on final consumption. Final consumption expenditure in national accounts is calculated according to a standard international norm, the System of National Accounts (SNA 2008 - except for Turkey, Chile and Japan that still use SNA 1993) under Item P3 Final consumption expenditure.
2.7.3. The average VRR for OECD countries has remained stable
Across the OECD, the unweighted average VRR has remained relatively stable at 0.56 in 2017 and 2018, up 0.1% compared to 2016, as is shown in Annex Table 2.A.7. This OECD average has remained around this level since 2010 (0.55), after it had declined during the financial and economic crisis in 2008-9 (from 0.59 in 2007 to 0.53 in 2009). This estimate suggests that, on average, 44% of the theoretical potential VAT revenue is not collected.
The VRR estimates vary considerably among OECD countries. In 2018 the estimates ranged from 0.34 in Mexico and 0.38 in Colombia and Italy, to 0.89 in Luxembourg and 0.99 in New Zealand. An additional four OECD countries have an estimated VRR above 0.65, i.e. Estonia (0.74), Japan (0.72), Switzerland (0.69) and Korea (0.68). All the other OECD countries that operate a VAT (30 out of 36) have a VRR below 0.65; eleven of these countries have a ratio below 0.50. This suggests that a considerable part of the theoretical potential VAT revenue remains uncollected in many OECD countries. The VRR rose in 26 countries compared to 2016, with Poland’s estimated VRR showing the biggest increase from 0.45 to 0.52 and Latvia’s and Hungary’s estimated VRR rising from 0.55 to 0.59 and from 0.54 to 0.58 respectively. The impact of the increase of the estimated VRR of these 26 countries on the OECD average was partly offset by the introduction of Colombia with a VRR considerably below the OECD average of 0.38, and the drop in the estimated VRRs for Australia (from 0.50 to 0.47) and Luxemburg (from 0.92 to 0.89). The VRR estimates remained unchanged for eight OECD countries.
The VRR levels notably reflect the fact that preferential treatments, such as reduced rates and exemptions, are still widely used in OECD countries (see Annex Table 2.A.2 and Annex Table 2.A.3). This is confirmed by tax expenditures data, which reflect the cost of tax concessions (OECD, 2010[15]).
It appears that there is no direct correlation between the level of the standard VAT rate and the VRR. Countries with very different VAT rates may have comparable VRRs. Australia and Ireland, for example, have a very similar VRR estimate 0.47 and 0.49 respectively while their standard VAT rates are at very different levels, i.e. 10% and 23% respectively. Although two thirds of countries (25 out of 36) have a VRR between 0.45 and 0.65, they have standard VAT rates that vary widely from 5% (Canada) to 25% (Denmark, Norway, and Sweden) and 27% (Hungary). These last four countries combine high standard VAT rates (25% and 27%) with a VRR above the OECD average, at respectively 0.62, 0.58, 0.59 and 0.59; while Mexico and Turkey combine lower standard VAT rates (respectively 16% and 18%) with a VRR estimate considerably below the OECD average (respectively 0.34 and 0.40). Japan combines a low VAT rate (8% in 2017-18) and the absence of reduced rates with a relatively high VRR (0.72).
The respective weight of the different factors that affect the VRR may vary widely across countries depending on the circumstances. The two countries with the highest VRR, New Zealand and Luxembourg, are both far above the OECD average (with respectively 0.99 and 0.89 compared to an average of 0.56) and even significantly above the country that immediately follows (Estonia with a VRR of 0.74). However, the reasons behind these high ratios are very different.
The VRR for Luxembourg has increased constantly between 1996 (0.54) and 2014 (1.23). This increase was correlated with deep changes in the EU marketplace, in particular the liberalisation of financial services and the boom of e-commerce. It is reasonable to assume that these market factors and the specific VAT treatment of these markets have had a strong upward effect on Luxembourg’s VRR. It may be assumed that Luxembourg’s position as an international financial centre has resulted in additional VAT revenue for the country. The supply of financial services is generally exempt from VAT in Luxembourg without the right to deduct the input tax, in accordance with EU VAT rules, including when supplied to customers in other EU Member States. This means that the non-deductible VAT incurred by financial service providers in Luxembourg increases Luxembourg’s VAT revenues while a large share of the corresponding final consumption occurs in other EU Member States, as a result of the increased cross-border trade in financial services. Luxembourg had also become an international centre for e-commerce, notably as a consequence of the VAT treatment of this activity under EU VAT legislation until 1st January 2015. According to this legislation, e-commerce supplies to final consumers in other EU Member States were taxed in the Member State where the supplier was established. The low standard VAT rate in Luxembourg, the lowest in the EU (15 % until 2014), acted as an incentive to e-commerce suppliers to establish in Luxembourg; and this generated additional and continuously increasing revenue for the country as internet trade continued to grow. This changed as of 1 January 2015. Since that date, intra-EU e-commerce sales to final consumers are no longer subject to VAT in the Member State where the supplier is established (which was often Luxemburg). These sales are now subject to VAT in the Member State of these consumers’ residence and at the rate applicable in that Member State. The loss of VAT revenues for Luxemburg from this change of the intra-EU place of taxation rules for e-commerce is reflected in the VAT revenue and VRR estimates for Luxembourg (which have declined from 1.25 in 2014 to 0.89 in 2018).
The factors underlying the constant very high VRR since the implementation of the VAT (GST) in New Zealand are very different from the Luxembourg ones. First, unlike Luxembourg, New Zealand operates a very broad GST tax base with limited exemptions (see Annex Table 2.A.3) and a limited use of zero rates (see Annex Table 2.A.2). Second, New Zealand treats public services as GST taxable (see Chapter 1). Although this does not generate actual additional revenue (the GST charged by public bodies to the government is compensated through budgetary transfers and the GST collected on local government activities is included in local taxes), this increases the share of revenues from GST in total tax revenues, which has an upward effect on the VRR. On the other hand, the potential GST base determined on the basis of the national accounts (see section above) does not include the value added by the government. The combination of these factors may explain why the VRR for New Zealand is so high and even sometimes above 1.
At the opposite end, Mexico and Colombia have the lowest VRR (0.33 and 0.38 respectively) amongst OECD countries. This is likely to be due to a combination of factors such as the scope of VAT exemptions, the application of a domestic zero rate and a low compliance level.
2.7.4. A number of factors influence the VRR
In theory, the closer the VAT system of a country is to a “pure” VAT as a broad-based tax on all final household consumption, the closer its VRR is to 1. A VRR close to 1 can be taken as an indicator of a VAT bearing uniformly on a broad base with effective tax collection. A lower value reflects such factors as the effects of reduced rates, exemptions or a failure to collect all tax due. A VRR above 1 is possible in theory, notably where almost all the tax base is covered by a VAT at a single standard rate and a number of exemptions without right to deduction apply so that the cascading effect of the exemption provides additional revenue for the government that exceeds the cost of the exemption. In practice, the VRR rarely equals 1 and a number of complex factors, alone or in combination, may influence the results positively or negatively. These include:
The application of lower VAT rates to a number of goods and services and the level of such lower rates that reduce the tax revenue and have a negative impact on the VRR.
The level of the registration and/or collection threshold under which small businesses do not account for VAT. These thresholds reduce the amount of VAT collected, although it could be argued that the adverse revenue consequences of such thresholds are likely to be limited since the businesses under the thresholds will generally not be able to deduct any input VAT and their value added can be expected to be modest.
The scope of the exemptions. Depending on the features of the exemptions and market structures, exemptions may influence the VRR upwards or downwards. Exemptions may reduce the tax revenue when the exemption applies to goods or services directly supplied to final consumers without requiring much investment or expenditure other than the supplier’s own labour. They may increase revenue when the exemption occurs early in a supply chain and the revenue arising from the non-recoverable input VAT and its cascading through the value chain exceeds the potential tax arising from taxation at standard rates with the deduction of input tax (e.g. financial service supplied to businesses). The application of a VAT exemption for financial services in particular may have a considerable impact on the VRR, given the economic importance of this sector in many countries.
The VAT treatment of public sector activities. Final consumption by government is the second largest final use in national accounts after household consumption. From a VAT perspective, governments’ activities are exempt or outside the scope of VAT in most countries, New Zealand being the notable exception treating all governments activities as taxable. As a consequence, public bodies cannot deduct the input VAT paid on their taxable expenditure, again with the exception of New Zealand that provides a full right to deduct input tax for government activities. A number of countries have created mechanisms for balancing the adverse effects of the exemption of public sector activities, such as targeted VAT refunds, full or partial right to deduct input VAT, budgetary compensations or extended taxation of government activities. The different options chosen by governments may have varied impacts on the VRR. Compensations outside of the VAT system (e.g. a simple budgetary compensation) have no direct effect on the VRR. The government activities remain input taxed, generating the corresponding VAT revenue, before and after the compensation measures. A measure that provides the right to input-VAT deduction to government bodies will normally reduce VAT revenue if the outputs remain exempt, and hence influence the VRR downwards. Applying VAT to government activities like New Zealand does, on the other hand, will increase the amount of VAT collected and influence the VRR upwards, as it results in the taxation of the total output rather than just the inputs.
The implementation of an effective regime for the collection of VAT on supplies of goods, services and digital products from online sales by foreign vendors and electronic marketplaces. Many VAT regimes have struggled to ensure the proper collection of VAT on online trade, in particular when faced with the challenge of collecting these taxes from non-resident vendors, which has caused increasingly important revenue losses as the value and volume of digital trade has continued to increase (see Chapter 1).
The capacity of the tax administration to manage the VAT system efficiently and the degree of compliance by taxpayers influences the VRR as low compliance has a negative impact on VAT revenues. The level of taxpayer insolvencies and bankruptcies can also influence the VRR.
The failure of a tax administration to operate an appropriate VAT refund process (with timely refunds of excess input-VAT credits to domestic businesses and/or refunds to non-resident businesses), which is contrary to the fundamental principle of VAT-neutrality, may influence the VRR upwards (for the “wrong” reasons).
Similarly, the failure of a VAT regime to ensure the proper implementation of the destination principle to the exportation of goods and/or services, notably by taxing exports in the origin jurisdiction or by exempting exports without a right for the exporter to recover the associated input-VAT, my influence the VRR upwards “for the wrong reasons”.
The evolution of consumption patterns may also affect the tax revenue. The VRR can for instance decline, all other things equal, when the share of consumption of necessities that are taxed at the lower VAT rate increases, e.g. as a result of an economic crisis (OECD, 2020[16]).
Finally, also the possible impact of the differences between the measurement of final consumption expenditure in the national accounts and countries’ potential VAT base should be taken into account when interpreting the VRR.
For further technical discussion on the factors influencing the calculation of the VRR see (OECD, 2016[17]).
2.7.5. Policy and compliance factors influencing the VRR
The level of the VRR rarely depends on one factor in isolation but rather on the interaction between them. For example, a high standard rate may create an incentive for evasion while multiple lower rates may lead to revenue loss due to misclassifications. Exemption of certain sectors of activity may create distortions and incentives for avoidance, which require additional administrative capacities that cannot be used for the efficient collection of VAT. Inefficient tax administration, burdensome administrative requirements and complex VAT mechanisms may reduce taxpayer compliance levels.
These potentially influencing factors can be divided in two main categories:
Those resulting from policy decisions, mainly affecting the tax base or the coverage of the standard rate (i.e. reduced VAT rates and exemptions – “policy gap”), and
Those related to the efficiency of the tax collection and compliance levels (“compliance gap”).
The VRR is a combination of the result of policy decisions and the “compliance gap”. Analysis to further break down the composition of the VRR can be carried out. One method to decompose the VRR into its policy and compliance components consists in using tax expenditure data from VAT preferential regimes (i.e. the revenue cost of a system’s departure from the application of the standard VAT rate to the entire theoretical tax base) to estimate the “policy gap”. The remaining difference between 1 and a given country’s VRR then provide an estimate of the “compliance gap by” deduction. However, given the number of other factors that may influence the VRR, such figures should be used with caution.
Another method is to calculate the “compliance gap” (or “VAT gap”), i.e. the difference between tax collected and the tax that should be collected if all consumers and businesses fully complied with a given jurisdiction’s VAT rules. This method is employed for the annual VAT Gap estimates in the European Union where the VAT Gap is defined as the difference between the amount of VAT actually collected and the theoretical tax liability according to tax law (VAT Total Tax Liability VTTL). (Institute for Advanced Studies, 2015[18]). (CASE – Center for Social and Economic Research, 2020[19]). The VAT Gap is estimated using a “top-down” approach that applies a jurisdiction’s respective VAT rates to the relevant components of consumption (including final consumption of households; final consumption of government and non-profit institutions, intermediate consumption for partially exempt businesses; expenditure on housing, country-specific, adjustments, etc.). Australia uses a similar method (Australian Taxation Office, 2020[20]). The International Monetary Fund RA-GAP framework (Eric Hutton, 2017[21]) uses national accounts data to calculate the potential VAT base per economic sector. It calculates the potential VAT revenues for a given VAT system by applying its current tax schedule (exemptions, zero-rates, reduced rates) to that VAT base. Potential VAT revenues under the reference policy are calculated by applying the current standard VAT rate to the base. The VAT gap is calculated by comparing actual VAT revenue with potential revenues under the current policy and the reference policy.
2.8.1. VAT revenue losses from fraud and non-compliance remain significant
Reducing the revenue losses from VAT non-compliance remains a key challenge and a priority for countries around the world. Many tax administrations carry out research to estimate their country’s VAT compliance gap, i.e. the revenue loss from VAT fraud, non-compliance and bankruptcies. The VAT Gap in the European Union (EU) was estimated at EUR 140 billion for the 28 EU Member States for 2018 in the latest VAT Gap report (CASE – Center for Social and Economic Research, 2020[19]). Although it remains very high, the EU Commission observed that this VAT Gap has improved marginally in recent years in both relative and nominal terms. In relative terms, the EU-wide VAT Gap fell to 11% of the VAT total tax liability (VTTL) in 2018, from 12.3% in 2016 and 14.3% in 2014. In nominal terms, the overall EU VAT Gap slightly decreased by almost EUR 1 billion to EUR 140.04 billion in 2018, slowing down from a decrease of EUR 2.9 billion in 2017. However, figures for 2020 forecast a reversal of this trend, with a potential loss of EUR 164 billion in 2020 due to the effects of the coronavirus pandemic on the economy.
The smallest VAT Gaps in the EU were observed in Sweden (0.7 percent), Croatia (3.5 percent), and Finland (3.6 percent); the largest in Romania (33.8 percent), Greece (30.1 percent), and Lithuania (25.9 percent). The United Kingdom estimated its VAT Gap at GBP 10.0 billion in 2018-19, i.e. 7.0% of the estimated net VTTL (HMRC, 2020[22]), declining from 13.3 billion and 9.6% of the VTTL in 2017-18. A number of other OECD countries provide public estimates of their VAT gap. In Australia the GST gap is estimated at AUD 5.8 billion or 8.1% of VTTL (Australian Taxation Office, 2020[20])); in Canada, the multi‐year average GST/HST gap for 2000‐2014 is estimated at 5.6% VTTL (CRA, 2016[23]). In Latin America, the VAT gaps showed a wide diversity in 2017 (CEPAL, 2020[24]) but OECD countries in this region had a relatively low VAT gap compared to others, i.e. 21.4% in Chile, 23.6% in Colombia and 16.4% in Mexico (compared to e.g. 45.3% in Panama and 43.8 in the Dominican Republic).
Losses of VAT revenue from non-compliance can result from a number of factors. In addition to “traditional” VAT avoidance (i.e. arrangements intended to reduce the tax liability that could be strictly legal but in contradiction with the intent of the law) and evasion (illegal arrangements where liability to tax is ignored or hidden) VAT systems have often been the target of organised criminal attacks. This organised and criminal VAT fraud has been shown to have connections with other criminal activities such as terrorism and money laundering in a number of cases (EUROPOL, 2020[25]).
The most common type of organised VAT fraud is the “missing trader” or “carousel” fraud. It arises when a business makes a purchase without paying VAT (typically a transaction for which tax self-assessment applies), then collects VAT on an onward supply and disappears without remitting the VAT collected. Originally, the fraud involved primarily high-value goods that can easily be moved across borders, such as computer chips and cell phones - but it expanded to services that can be bought and sold like goods. Organised VAT fraud in CO2 emission trading, for instance, caused billions of Euros of VAT revenue losses in a range of countries. Energy markets are also vulnerable to organised VAT fraud. European energy regulators, energy trading firms and gas and electricity operators notably warned EU authorities about the serious impact of VAT carrousel fraud on the functioning of European gas and electricity markets (Europex – Association of European Energy Exchanges, 2018[26]). They reported signs of "a major penetration of the gas and electricity markets by VAT fraudsters”. Research in the past also showed that certain accounting software products contained hidden tools (zappers) for the manipulation of VAT receipts (OECD, 2013[27]). The digitalisation of the economy creates new challenges for VAT regimes in addressing fraud and non-compliance, notably in light of the exponential growth of cross-border e-commerce (OECD, 2015[28]).
Tax authorities are developing, and implementing, a growing variety of responses to the increasingly complex challenge of protecting important VAT revenues against VAT fraud and non-compliance. The following sections look in slightly more detail at three categories of responses that can be observed among OECD countries: changes in VAT collection mechanisms; reinforcement in taxpayer’s reporting obligations and data analysis; and international administrative cooperation and exchange of information.
2.8.2. Changes in the VAT collection methods: domestic reverse charge and split payment
Domestic reverse charge (see Annex Table 2.A.12)
In a standard VAT regime, the VAT is collected from suppliers through a staged process whereby the supplier collects the VAT from its customer and remits it to the authorities after having deducted any recoverable input VAT (see Chapter 1). Under a reverse charge mechanism, the liability for remitting the VAT to the tax authorities is shifted from the supplier to its business customer (i.e. in B2B transactions). Shifting the VAT liability from the supplier to the customer removes the possibility for dishonest suppliers to disappear with VAT that they collected from their customers without remitting it to the tax authorities, which is for example typical for so-called “missing trader” fraud. Nor can businesses claim the deduction or refunds of VAT that they have not paid (e.g. VAT on false invoices) or that has not been remitted to the tax authorities, which it typical for “carrousel fraud” schemes.
OECD countries that are using the domestic reverse charge mechanism have typically limited its application to economic sectors that are particularly vulnerable to such organised fraud schemes. It is particularly used to counteract missing trader and carousel fraud in sectors such as trade in mobile phones; integrated circuit devices; game consoles; tablet PCs and laptops; cereals and industrial crops; raw and semi-finished metals; gas and electricity; and telecom services.
No OECD country operates a more generalised reverse charge regime for the collection of all VAT on domestic transactions between businesses. Although this would reduce the risks of specific fraud types, as described above, it would also have several drawbacks including new burdens for businesses and tax administrations and growing risks of other types of fraud at the retail level (e.g. sales suppression, misuse of VAT identification numbers). One concern is that it would effectively transform the VAT into a retail sales tax, with the concentration of all revenue risks at the stage of the final sale or at a limited number of points, with the inherent weaknesses of such a system.
In the EU, Member States can apply a domestic reverse charge mechanism to a determined list of supplies, on an optional and temporary basis. EU Member States have also been allowed since 2013 to apply a domestic reverse charge to any kind of supply in case of sudden and massive VAT fraud.
Annex Table 2.A.12 shows that the use of domestic reverse charge as a means of combatting VAT fraud is widely used in the 23 OECD countries that are EU Member States, in particular for the supply of CO2 emission certificates (all except Estonia, Poland, Latvia and Lithuania); scrap materials and waste (all except Belgium, Luxembourg Poland, and the United Kingdom); and construction work (all except Estonia, Luxembourg, Poland and the United Kingdom). The domestic reverse charge is also applied by many EU countries to the supply of gold (14 countries); electronic devices such as laptops, chips, mobile phones etc. (11 countries) and the supply of gas and electricity to taxable dealers (10 countries). Also other OECD countries use a domestic reverse mechanism albeit to a much lesser extent i.e. Canada (supplies of real property by non-residents and some supplies between provinces); Chile (supplies of rice, construction works, waste and certain plants and animals); Israel (metal debris); Mexico (waste, some supplies made by individuals); New Zealand (supplies of land incorrectly zero rated); Norway (supply of CO2 emission allowances and investment gold) and Turkey (some supplies made by non-taxable persons). More than half of the OECD countries (19 out of 36) apply the reverse-charge to supplies in the construction sector.
Domestic reverse-charge has not been implemented in Colombia, Iceland, Japan, Korea, and Switzerland. Poland replaced its domestic reverse charge arrangements with a mandatory split payment mechanism in November 2019 (applicable only to the supplies that were previously subject to the domestic reverse charge; see also the section below).
The split payment mechanism (see Annex Table 2.A.12)
Another means of reducing the vulnerability of VAT regimes to fraud and non-compliance is through the implementation of a so-called split payment (or withholding) mechanism. Under such a mechanism, the supplier charges the VAT on its domestic supplies to the customer according to normal rules, but the VAT paid by the customer (or part of it) is either directly remitted to the tax authorities (“withholding scheme”) or deposited on the supplier’s special VAT account (“split payment”) rather than to the supplier. The supplier can generally use the amounts deposited in its special VAT account under a split payment regime only to pay VAT either to the tax administration or to another supplier (and to this supplier’s VAT account only). Poland, which operates such a split payment regime (see previous section), has extended the possible use of amounts on special VAT accounts to pay certain other public levies.
A split-payment or withholding regime has a similar fraud-prevention effect as a domestic reverse-charge mechanism in that it removes the possibility for a supplier to collect the VAT without remitting it to the tax authorities. Among the drawbacks of these regimes are the added complexity (incl. the requirement for suppliers to determine for each transaction whether or not it is in the scope of the regime) and the cash-flow impact for businesses, which can be significant particularly under a withholding regime as businesses receive no/less output VAT against which they can offset deductible input-VAT (and this could result in a perennial excess-input VAT position). Some have observed that split-payment mechanisms may not prevent more complex missing trader frauds (Bartosz Gryziak, 2020[29]). Annex Table 2.A.12 shows that such a regime has been implemented in only five OECD countries and these are all targeted at specific sectors or types of supplies.
In Poland, a mandatory split payment mechanism applies to business-to-business (B2B) supplies of a defined list of goods and services that are considered to be sensitive to fraud (such as scrap metal, of CO2 emission allowances, mobile phones, tablets, construction services etc. which were previously subject to a domestic reverse charge), if the invoiced gross amount exceeds PLN 15 000. Upon decision of the customer, an optional split payment mechanism can be applied to B2B supplies that are not covered by the mandatory split payment.
Italy requires public authorities or government bodies, public owned companies and companies listed on the Italian Stock Market to remit the VAT on their purchases of goods and services directly to the tax authorities instead of to their suppliers. Under this withholding regime, suppliers are entitled to faster refunds of excess input VAT credits. Korea applies a withholding regime for the supplies of gold, copper and scrap gold and iron. In the Czech Republic, such a system is only optional for customers that wish to avoid possible joint and several liability for the supplier’s unpaid taxes. Turkey operates a partial withholding regime whereby customers are required to withhold a percentage of the VAT charged to them by suppliers and remit it directly to the tax authorities for supplies in certain sectors, such as construction, scrap metal, glass, plastic and paper, advisory and audit services, some repair services etc. Australia requires recipients of new residential property suppliers to effectively withhold GST from payment to the supplier and they are instead obliged to remit the full amount of the GST to the tax authority which is reconciled against taxable amounts of GST required to be reported for these supplies by the supplier.
Colombia, Chile and Mexico operate a withholding requirement as a fallback for the collection of VAT on inbound business-to-consumer (B2C) supplies of services and intangibles by foreign vendors. Where the foreign supplier of such B2C services and intangibles does not register to account for the VAT in the country, payment providers that facilitate the payment for these supplies (credit and debit cards; payment wallets; and banks) are required to withhold VAT on the payment for these supplies and remit it to the tax authorities.
2.8.3. Collecting transaction data from the taxpayers
Many OECD countries have used technology to enhance the reporting of tax relevant data to tax authorities. After a generalisation of mandatory e-filing of VAT returns (OECD, 2015[30]), many OECD countries have introduced or consider introducing a requirement for taxpayers to provide transaction data to tax authorities, sometimes in real time. These measures typically require detailed information to be provided in an electronic format at individual taxable transaction level. This information can include invoicing information and accounting data or any other information that allows tax authorities to monitor supplies made and/or received by individual taxpayers.
Annex Table 2.A.11 shows that most OECD countries have implemented transaction information reporting obligations since 2000, except Belgium, Canada, Finland, Iceland and Japan. Amongst the countries that have implemented transaction information reporting obligations, nineteen impose a specific format for such reporting (Chile, Colombia, Czech Republic, France, Greece, Israel, Italy, Korea, Lithuania, Luxembourg, Mexico, Netherlands, Norway, Poland Portugal, Slovak Republic, Slovenia, Spain and Turkey). Eight of them use (a variation of) the Standard Audit File for Tax (SAF-T) format developed by the OECD Forum on Tax Administration (OECD, 2005[31]). This involves the use of accounting software to create an electronic file (the SAF-T) containing tax-relevant accounting data. The SAF-T format enables the transfer of these data from the taxpayer to the tax authorities in a standardised electronic format.
Half of the countries requiring electronic transaction reporting (16 out of 31) require the systematic transmission of such information to the tax administration (Chile, Colombia, Czech Republic, Estonia, Greece, Hungary, Israel, Italy, Korea, Lithuania, Mexico, Poland, Portugal, Slovak Republic, Spain and Turkey) and eight of these require this transmission to happen in (near) real time (Chile, Colombia, Hungary, Italy, Korea, Mexico, Spain and Turkey).
Countries are also increasingly concerned with the monitoring of transactions in cash in the business-to-consumer (B2C) environment and more than one third of OECD countries (16 out of 36) have implemented requirements for suppliers to use electronic cash registers (Austria, Belgium, Czech Republic, France, Greece, Hungary, Israel, Italy, Korea, Latvia, Lithuania, Norway, Poland, Slovak Republic, Slovenia, and Sweden). Six of these countries require the systematic transmission of data to the tax administration (Austria, Greece, Israel, Korea, Slovak Republic and Slovenia, in (near) real time for Korea, Slovak Republic and Slovenia.
The volume of information collected by tax administrations has increased dramatically in recent years. In order for countries to take advantage of the opportunities that such data collection provides, countries and their taxpayers need to have confidence in the security and confidentiality of the information gathered by tax administrations. Facing the risks of inappropriate disclosure of information whether intentionally or by accident (e.g. hacking of tax administration databases), countries must ensure that both the legal framework and appropriate data protection systems are in place (OECD, 2012[32]).
2.8.4. International administrative cooperation
There is also a growing recognition that effective strategies to tackle VAT fraud and evasion would benefit from the enhanced international administrative co-operation. Governments increasingly recognise that information exchange and administrative co-operation play a significant role in combatting international VAT fraud and ensuring effective tax collection, not least in the context of the digitalisation of the economy (OECD, 2015[28]); (Court Auditors, 2015[33]). This need was also recognised in the 2015 OECD Report on Tax Challenges Arising from Digitalisation (OECD, 2015[34]) and the OECD is developing work in this context.
A number of instruments already exist that provide the legal foundation for the international administrative co-operation in the area of VAT. These include the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (OECD/Council of Europe, 2011[35]), the bilateral treaties implementing the current Articles 26 and 27 of the OECD and UN Model Tax Conventions, and Tax Information Exchange Agreements (TIEAs) based on the OECD Model. Regional agreements also provide legal base for such co-operation. These include EU Regulation No 904/2010, the Nordic Mutual Assistance Convention on Mutual Administrative Assistance in Tax Matters, the CIAT Model Agreement on the Exchange of Tax Information, and the African Tax Administration Forum Agreement on Mutual Assistance in Tax Matters.
Amongst these instruments, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention) is considered the most promising. The Convention was developed jointly by the Council of Europe and the OECD. It was opened for signature by the member states of both organisations in 1988. It was then aligned with the internationally agreed standard on transparency and exchange of information and opened to all countries in 2011. It provides for all possible forms of administrative co-operation between the Parties in the assessment and collection of taxes, in particular with a view to combating tax avoidance and evasion. The Convention has a very wide scope and covers all forms of compulsory payments to general governments (i.e. the central government and its political subdivisions) including VAT (although the obligations set forth in the Convention are subject to any reservations by the Parties). As of November 2020, 141 jurisdictions participate in the Convention.
Within the EU, the VAT Directive (2006/112/EC) and implementing regulation (904/2010) provide legal background for administrative co-operation and exchange of information among members. It is supported by an operational network of tax officials, Eurofisc. In December 2018, the European Commission adopted a proposal to reinforce administrative cooperation within the EU to improve the exchange and analysis of information between the Member States’ tax administrations and with law enforcement bodies. The VAT e-commerce package applicable as from July 2021 will remove the VAT exemption on imports of low value goods this obliging suppliers to pay the VAT on all goods imported into the EU. These measures will reduce the possibility for certain fraud involving these goods and they are accompanied by reinforced co-operation between tax and customs authorities. Eurofisc has also strengthened its co-operation and exchange of information with the European Anti-Fraud Office (OLAF) and Europol. In addition, the Council has adopted in February 2020 a legislative package requesting payment service providers to transmit information on cross-border payments originating from Member States and on the beneficiary of these payments. A new central electronic system of payment information (“CESOP”) will be set up for storage of the payment information and for further processing of this information by national anti-fraud officials. The EU also signed a bilateral agreement on the VAT exchange of information with Norway in February 2018.
Governments have taken rapid and unprecedented action to address the health crisis and the drop in economic activity caused by the outbreak of COVID-19. Containing and mitigating the spread of the virus has been the first priority of public authorities. With containment measures in place, countries’ immediate policy reactions focused on alleviating hardships and maintaining the productive capacity of the economy. As the duration of the pandemic lengthens and uncertainty about its development remains high, governments have begun extending and expanding emergency policy measures. Some countries have started relaxing their containment rules and are announcing economic recovery and stimulus packages.
This section takes stock of the tax measures that have been introduced to mitigate the impact of the COVID-19 crisis, with a particular focus on the VAT measures that were included in most countries’ fiscal and tax policy responses. After recalling the broader policy background to countries’ responses to the COVID-19 outbreak, this section outlines the measures in the area of VAT policy and administration introduced in OECD countries focusing on countries’ immediate, short-term responses to the outbreak of the pandemic. It looks consecutively at the VAT measures aimed at supporting businesses cash flow, at reducing business compliance burden and at supporting the healthcare sector, before concluding and looking ahead at possible post-pandemic policies.
This section is based on a database (https://oecd.org/tax/covid-19-tax-policy-and-other-measures.xlsm) compiled by the OECD on tax policy responses to the COVID-19 crisis. Other important sources are the OECD reports on Tax Policy Reforms 2020 – OECD and Selected Partner Economies (OECD, 2020[36])and on Tax and Fiscal Policy in Response to the Coronavirus Crisis: Strengthening Confidence and Resilience (OECD, 2020[37]).
2.9.1. Policy background
Uncertainty about the development of the COVID-19 health and economic crisis remains high. To discuss the policy responses to this crisis, it is useful to break down the crisis into different phases that may each require their own policy approaches. Recognizing that they may overlap and vary across countries, and that countries have moved at different paces through the crisis as the epicentre of the pandemic has shifted between regions, Figure 2.4 presents a schematic view of these different phases and how policy responses may be expected to evolve.
In the initial phase (Phase 1), countries confronted with a virus outbreak have implemented containment and mitigation measures, aimed primarily at halting the outbreak. In this phase, tax and broader fiscal policies have tended to focus on liquidity and income support. As the health crisis continues and containment measures remain in place, tax and fiscal measures have evolved gradually into a more sustained effort to reduce the adverse impacts of containment (Phase 2). As countries have begun to relax containment and mitigation measures, the focus on keeping businesses and households afloat and on limiting hardship has begun to shift towards an emphasis on economic recovery, including through fiscal stimulus policies (Phase 3). The progression towards recovery may not be linear: there may be some overlap with Phase 2, where containment and mitigation measures are only being removed gradually or partially. Containment measures are likely to be reinstated in countries that are confronted to a second wave of the pandemic. Once economies have recovered, a shift towards restoring public finances can be anticipated, during which there may be renewed attention on strengthening resilience to health risks but also to other known risks, including climate change (Phase 4).
Source: Based on (OECD, 2020[38]).
Fiscal policy responses by OECD countries have focused on cushioning the immediate impact of the crisis, with very similar objectives across countries: preventing hardship and reducing burdens for households and businesses caused by the COVID-19 outbreak and by the restrictions introduced to contain the virus; and ensuring that households and businesses are able to resume economic activity when the worst of the health crisis has passed. For businesses, this has generally meant providing liquidity support to help them stay afloat. For individuals, the priority has been to provide income support to the most directly affected households. Most OECD countries have also introduced measures to reduce compliance burdens for businesses and to secure the continuity of public administration, as well as to enhance the funding and functioning of the healthcare sector. Most of the measures introduced in the emergency phase have taken effect immediately and have been time-bound. These rapid responses may often have been introduced based on the assumption that containment phases would be shorter than what has proved to be the case. As the crisis has continued, countries have retained their focus on keeping businesses and households afloat and have often expanded their initial packages of measures. Some countries have prolonged existing crisis measures and expanded support to groups that were not covered by the initial measures.
2.9.2. VAT measures as part of countries’ tax policy response to the COVID-19 crisis
This overview focuses on the measures taken by OECD countries in the area of VAT as part of their fiscal and tax policy responses to support households and businesses during the emergency and the mitigation and containment phases of the COVID-19 crisis (Phases 1 and 2 as described above). Measures for individual taxpayers have generally focused on preventing hardship and reducing burdens in light of the restrictions from mitigation and containment strategies. Most countries have introduced measures to provide income support to households, generally through enhanced cash benefits targeted at the most vulnerable households. This support to households has largely been provided through direct transfers rather than through the tax system.
VAT measures have primarily been part of countries’ COVID-19 tax responses aimed at supporting businesses. Tax measures for businesses, both legal entities and the self-employed, have generally focused on alleviating cash-flow problems to help avoid escalating problems such as the laying off workers, inability to pay suppliers and closure or bankruptcy. Liquidity support has been provided through a mix of tax and non-tax measures. The most common non-tax instrument used by OECD and partner economies throughout the crisis has been loan guarantee schemes, where the government guarantees all or part of the value of loans granted to eligible businesses. Other measures have included small interest-free loans and cash grants, typically targeted toward small businesses or businesses in the most affected sectors. The most common type of tax measure to enhance business cash flow has been the deferral of tax payments. Many countries have complemented these business cash flow support measures with measures to alleviate tax reporting and other compliance burdens during the mitigation and containment phase of COVID-19 crisis. Most countries have also taken tax measures to support the healthcare sector and facilitate medical urgency responses to the crisis.
VAT policy and administration measures have been an important component of countries’ COVID-19 tax responses to support businesses and the healthcare sector during the mitigation and containment phases. This section hereafter first provides an overview of the VAT measures aimed at supporting business cash flow. This is followed by an outline of VAT measures taken to alleviate tax compliance burdens for businesses and, finally, by an overview of VAT measures aimed at supporting the healthcare sector.
2.9.3. Measures to support business cash flow
The majority of measures in OECD countries have sought to ensure that businesses have sufficient cash flow through a mix of tax and non-tax measures. The most common type of tax measure to enhance business cash flow has been the deferral of tax payments. These measures have generally applied to taxes that require frequent (monthly or quarterly) payments, including advance payments of corporate income tax (CIT) or personal income tax (PIT) and social security contributions (SSCs).
Measures to defer the payment of VAT have played a critical role in countries’ tax policy and administration responses to support business cash flow. VAT can often be due before businesses have effectively received payment from their customers (e.g. at the time of invoicing). When the volume of payment delays or defaults escalates during the mitigation and containment phases of the COVID-19 crisis, businesses face growing pressure to pre-finance VAT on their sales that they have not, and may never receive, from their customers. Given the typically short VAT filing and payment obligations (monthly or quarterly), the pressure on businesses to pre-finance potentially considerable amounts of VAT that they have not received from their customers can add very quickly and significantly to businesses cash flow burdens. VAT deferrals have therefore been a key component of the tax measures introduced by most OECD countries to reduce business cash flow pressures. These measures have not only granted a temporary relief from the burden of having to pre-finance VAT on unpaid invoices, but have also proven to be and efficient and easy-to-implement manner of providing financial support to businesses by allowing them to deploy any received VAT amounts temporarily as working capital.
Most countries have complemented VAT payment deferrals with a suspension, or reduction, of penalties and/or interest charges that are normally applied for late tax payments. Such penalties or interest payments can both add to businesses’ cash flow problems as well as cause significant stress for taxpayers during periods of mitigation and containment, particularly if there are difficulties in communicating with the administration on these issues or in exercising appeal rights. Similar payment deferrals and suspensions of penalties and/or late payment interest have been introduced for Retail State Taxes in most US States.
The process and conditions for obtaining deferral of VAT payments and the suspension of penalties and/or interest for late tax payments have varied across countries, along with the duration and other modalities of these measures. Most countries have required businesses to apply for the relief and/or to prove a link with the COVID-19 crisis. Some countries have applied these measures automatically. Several countries made these measures available to all businesses, while others have limited them to certain sectors (e.g. tourism, retail, entertainment and hospitality) or have targeted small and medium size enterprises (SMEs) or self-employed businesses. Some countries offered businesses flexibility to opt for partial deferral or to negotiate a flexible payment plan with their tax administration.
Several countries (approximately one third of OECD countries) have taken measures to accelerate and/or to enhance the processing of excess input VAT refund claims. These measures have primarily been introduced through adjustments to administrative practice rather than through legislative or regulatory change. Enhancing the refunding of excess VAT credits is arguably as important for improving business cash flow as VAT payment deferrals. While output VAT is falling for many businesses as a result of declining sales, the input VAT on fixed costs and other business purchases keeps accruing. These may be significant as many businesses may face payment obligations under longer-term contracts, e.g. for key functions that they may have outsourced to third-party contractors. This may lead to growing amounts of excess input VAT credits, i.e. VAT incurred on costs and investment that cannot be credited against VAT collected on sales. This may generate spillover effects, with businesses potentially defaulting on their invoices to avoid the growing cost of non-refundable VAT, and defaults rippling through supply chains.
The measures taken by tax administrations to enhance VAT refunds include the internal reprioritisation of activities to fast track the treatment of refund claims, notably by redirecting administrative capacity to expedite the process; the simplification of procedures notably through the increased use on electronic/online processes instead of paper-based ones; relaxing the risk checks that are normally done before making refunds; facilitating the offsetting of VAT refunds against other tax or similar liabilities (e.g. social security contributions). Tax administrations have typically restricted simplified or expedited VAT refunds to claims below a certain threshold (typically EUR 10.000 - 30.000) or to businesses with a good compliance history to limit fraud risks.
A temporary relaxation of the conditions for claiming relief from VAT on bad debts is another possible measure for tax authorities to support business cash flow as well as broadening the access to cash-accounting schemes. Bad debt relief regimes allow businesses to claim relief from the VAT on the supplies for which they have not been paid. Most VAT systems provide for such relief under relatively strict conditions. A temporary relaxation of these conditions (e.g. shortening the period for which the debt must have remained unpaid) may be an efficient measure to further alleviate cash flow pressure for businesses that are likely to see payment delays and defaults escalating as the COVID-19 crisis continues. Cash accounting schemes, on the other hand, allow businesses to account for the VAT on their sales on the basis of the payments they receive, rather than on the tax invoices they issue. They can only reclaim the VAT on their inputs once they pay their suppliers. Such a scheme supports cash flow, as VAT does not have to be remitted to the tax authorities until payment has been received from the customer. These schemes are typically available to small and medium enterprises subject to several conditions. Although a temporary relaxation of these regimes could further support cash flow for businesses during the COVID-19 crisis, such measures have generally not been considered necessary by tax authorities in OECD countries. Most OECD countries have relied primarily on the deferral of VAT payments, and on the extension of such measures where necessary, to support business cash flow as the COVID-19 crisis continues.
While the deferral of VAT payments is generally considered as an effective and relatively straightforward approach to supporting cash flow, tax authorities have highlighted that this measure requires careful management notably to minimise risks of fraud (e.g. deferred payments siphoned off in fraudulent schemes) and to avoid VAT debts building up to unsustainable levels or deferred payments leading to severe cash-flow problems at a later date making it more difficult for taxpayers to return to normal conditions.
2.9.4. Measures to alleviate business compliance burden
Tax authorities in many OECD countries have introduced measures to reduce compliance burdens on businesses in light of the restrictions in place during the mitigation and containment phases of the COVID-19 crisis. Measures to facilitate VAT compliance are particularly important in this context, given the volume and frequency of filing and reporting requirements associated with the operation of these taxes (incl. returns, invoices, sales listings etc.).
Over one third of OECD countries has extended deadlines for the filing of VAT returns and related forms, typically on request, along with the waiver of penalties for late filing. Some tax authorities have introduced further reporting simplifications, such as allowing VAT liabilities to be computed on a “best estimate” basis. Several tax administrations reported the increased use of digital communication channels to simplify compliance processes (incl. VAT registration), to facilitate the interaction with taxpayers and to help reduce physical contacts. This includes the enhanced use of direct digital messaging, of web chat, social media, mobile applications, hotlines (possibly with call-back facilities), changes to mobile applications, virtual assistants, etc. This is particularly important where taxpayers require the assistance of intermediaries or specialised staff and systems to file returns, process invoices, manage VAT registrations, claim VAT refunds, produce listings, etc. Remote working may often make these tasks more difficult or even impossible for taxpayers, for example for systems security and access reasons, and key staff may not always be available due to illness or caring responsibilities.
Tax authorities have typically made the extension of filing and reporting deadlines available only on request and/or in limited cases, in light of the various possible consequences of these measures for both taxpayers and tax administrations. VAT returns are notably an important source of information to monitor and understand the economic impact of COVID-19, to identify which businesses and/or sectors require additional assistance, to support a proper management of compliance risks and tax debts, and to see when the economy is starting to recover. VAT returns may also be used to provide cash support or other government benefits. For businesses, the filing of VAT returns is generally required to claim refunds of excess VAT credits so that extending the filing deadlines would add to these businesses’ cash flow pressure rather than to reduce business burdens.
Several countries have temporarily suspended audits and other enforcement and/or recovery actions to limit the additional stress and diversion of resources and time that these actions may cause during the COVID-19 crisis. Cases involving fraud or tax businesses with a high-risk profile have typically been excluded from these measures.
Some countries have delayed reforms that were due to be implemented. The European Union postponed the implementation of its new e-commerce VAT rules from 1 January 2021 to 1 July 2021. This reform comprises a comprehensive package of VAT measures relating to e-commerce, incl. abolishment of the VAT exemption for the importation of low-value goods and its replacement by a special import scheme that requires the seller or the online marketplace to account for the VAT at the point of payment by the customer. Delays of reforms in other countries include the postponement of real-time reporting requirements and delays in the introduction of new e-invoicing rules, e-filing requirements and formats and of electronic cash registers, and the postponement of VAT rate changes.
2.9.5. Measures to support the healthcare sector
Most OECD and partner economies have adopted measures to strengthen patient care and reduce the pressure on healthcare systems. VAT measures have been a core component of these healthcare and medical support packages. Most OECD countries have introduced zero (or reduced) rates for supplies and imports of medical equipment and sanitary products (gloves, masks, hand sanitiser…) and for healthcare services where these were not yet VAT exempt or subject to reduced rates under normal rules. The European Union introduced a six-month suspension of VAT and customs duties on the importation of protective equipment, testing kits and medical equipment such as ventilators. This measure has since then been extended for another six months. Several countries implemented temporary VAT zero-rating of staff secondments to healthcare institutions and measures to safeguard the deduction of input VAT on items donated by businesses to healthcare institutions or to avoid a donation triggering any VAT liability (see Country notes to Annex Table 2.A.2 and Section 2.2. above).
2.9.6. Conclusions and looking ahead
This section has provided an overview of the main VAT policy and administration components of OECD countries’ short-term fiscal and tax policy responses during the mitigation and containment phases of the COVID-19 crisis. As the crisis has continued, countries have retained their focus on keeping businesses and households afloat and have often expanded their initial packages of measures. Some countries have prolonged existing crisis measures and expanded support to groups that were not covered by the initial measures. Countries’ experience and feedback from the business community through Business@OECD suggest that the VAT measures to support cash flow and to reduce VAT compliance burden have been particularly important in helping to mitigate the impact of the crisis for businesses. VAT payment deferrals, fast and flexible refunds of excess VAT and enhanced relief of VAT on bad debts have been flagged up as particularly important measures to support business cash flow. Measures to temporarily simplify VAT procedures and formalities notably by moving away from paper-based to electronic and online processes have been highlighted as critical in alleviating compliance burdens and in allowing business to continue given the mitigation and containment restrictions in place in many countries.
The transition from containment and mitigation to recovery is likely to be gradual and to differ across countries. While economic activity will gradually be allowed to resume, severe restrictions could continue to apply for specific sectors or restrictions could be tightened again as renewed outbreaks arise. As economies recover, countries are likely to continue re-evaluating their short-term measures, removing some while extending or expanding others and implementing stimulus where such policies would be most effective to boost economic recovery. The extension of support for businesses, such as tax payment deferrals, will require careful consideration notably to mitigate risks of fraud and of negative impact on compliance culture, and to limit damage to countries’ medium-term tax revenue raising capacity. This may require the further targeting of support, notably to businesses with a low risk profile and/or with a positive compliance history, and to economically healthy or viable businesses to avoid maintaining ‘zombie’ firms that would not have survived in the absence of containment and mitigation measures. The removal of short-term measures will need to avoid spikes in tax liabilities. The removal of measures such as tax deferrals will need to ensure that where tax payments were deferred, large tax liabilities do not generate cliff-edges that could result in solvency problems for recovering businesses and jeopardise recovery.
Recent announcements and discussions suggest that the recovery phase will be supported by expansionary fiscal policy. Discussions have begun both in countries that are removing containment measures and in countries that are still in mitigation and containment phases. Most countries have signalled that government stimulus will be a key pillar of a recovery effort that aims to be inclusive and sustainable. This may include measures to support consumption through temporary cuts in VAT rates that apply to all consumption (e.g. Germany and Ireland) or to specific categories supplies or sectors such as tourism and hospitality (e.g. Belgium, Norway, United Kingdom). Questions have been raised about the effectiveness of such temporary VAT rate reductions, notably as evidence suggests that the impact of lower VAT rates on consumption and consumer prices may be short-lived and difficult to roll back once they have been introduced, even on a temporary basis, or lead to net price increases when they are rolled back. VAT rate cuts are also likely to give the greatest benefit to those who spend most, i.e. those with medium and high incomes. Feedback from the business community suggests that the additional compliance burden from implementing VAT rate changes may often be considerable. On the other hand, temporary VAT cut could boost investment and consumer confidence and induce people to make certain purchases earlier than they had planned, particularly of durable goods.
Tax policy is likely to remain an important part of countries’ strategies to support recovery and to restore public finances in a fair and sustainable way after the crisis. Countries are expected to explore a wide range of options. These may include efforts to address the international tax challenges posed by the digitalisation of the economy (Pillar 1) and to introduce a minimum corporate tax (Pillar 2), to enhance the progressivity of tax systems, and to strengthen the role of carbon taxation. Governments may also consider new and under-used tax bases. Where governments need to expand tax revenues, efforts can focus on raising revenues from tax bases that will be the least detrimental to growth, including recurrent taxes on immovable property and general consumption taxes.
The OECD will keep monitoring countries’ responses to the COVID-19 crisis. Monitoring tax policy measures is crucial to informing tax policy discussions and assisting governments in their response to the crisis.
For the tables in annex, references to the ‘European Union and its Member States’ includes the UK as a Member State for January 2020 and as an addition to the Member States (‘Member States and the UK’) for the period 1 February 2020 until the end of December 2020.
Austria*. A standard rate of 19% applies in Jungholz and Mittelberg. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Belgium*. Specific reduced VAT rates apply in the context of the Covid-19 – See country note to Table 2.2.
Canada. The following provinces have harmonised their provincial sales taxes with the federal Goods and Services Tax and therefore levy a GST/HST at the following rates: New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island: 15%; and Ontario: 13%. Québec applies GST at a rate of 5% and Québec Sales Tax at a rate of 9.975% (applied on the same tax base as the GST). With the exception of Canada’s territories (Yukon, Northwest Territories and Nunavut) and the province of Alberta, other Canadian provinces apply a provincial sales tax to certain goods and services in addition to the federal GST.
Czech Republic*. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Denmark*. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Estonia*. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Finland*. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
France*. Rates of 0.9%; 2.1%; 10.0%; 13.0% and 20.0% apply in Corsica; rates of 1.05%; 1.75%; 2.1% and 8.5% apply to overseas departments (DOM) excluding French Guyana and Mayotte. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Germany*. The standard VAT rate is reduced from 19% to 16% and the reduced VAT rate from 7% to 5% from 1 July to 31 December 2020. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Greece*. Specific regional rates of 4.0%; 9.0% and 17.0% apply in the islands of Leros, Lesbos, Kos, Samos and Chios until 31 December 2020. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Hungary*. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Ireland*. The standard VAT rate is reduced from 23% to 21%, with effect from 1 September 2020 until 28 February 2021. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Israel. The rate of 0% applies when an Eilat resident dealer buys goods from Eilat non-residents. Supplies made by an Eilat resident supplier (to be consumed in Eilat) are exempt from VAT.
Italy*. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Japan. The standard VAT rate was increased from 8% to 10% on 1 October 2019. A reduced VAT rate of 8% was introduced as of the same date for the supply of food, beverages (excluding alcoholic beverages and eating-out services) and certain subscription newspapers (see Table 2.2).
Latvia*. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Lithuania*. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Luxembourg*. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Mexico. A reduced VAT rate of 8% applies in the northern border region (Ensenada, Playas de Rosarito, Tijuana, Tecate and Mexicali in the state of Baja California; San Luis Río Colorado, Puerto Peñasco, General Plutarco Elías Calles, Caborca, Altar, Sáric, Nogales, Santa Cruz, Cananea, Naco and Agua Prieta in the state of Sonora; Janos, Ascensión, Juárez, Praxedis G. Guerrero, Guadalupe, Coyame del Sotol, Ojinaga and Manuel Benavides in the state of Chihuahua; Ocampo, Acuña, Zaragoza, Jiménez, Piedras Negras, Nava, Guerrero and Hidalgo in the state of Coahuila de Zaragoza; Anáhuac in the state of Nuevo León; and Nuevo Laredo, Guerrero, Mier, Miguel Alemán, Camargo, Gustavo Díaz Ordaz, Reynosa, Río Bravo, Valle Hermoso and Matamoros in the state of Tamaulipas) from 1 January 2019 until 31 December 2020.
Netherlands*. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Norway. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Poland*. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Portugal*. In the Islands of Azores, the standard VAT rate is 18% and the reduced rates are 4% and 9%. In the Islands of Madeira the standard rate is 22% and reduced rates are 5% and 12%. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Slovak Republic*. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Slovenia*. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Spain*. Rates of 0.0%, 2.75%; 3.0%; 7.0%, 9.50%; 13.50% and 20% apply in the Canary Islands. Rates of 0.5%; 1.0%, 2.0%; 4.0%; 6.0%; 8.0%; 9.0% and 10% apply in either Ceuta and Melilla. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Sweden. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
Turkey. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
United Kingdom. Specific reduced VAT rates apply in the context of the Covid-19 pandemic – See country note to Table 2.2.
*Member States of the European Union apply a customs duties and VAT exemption for the importation of certain goods needed to combat the effects of the COVID-19 outbreak in 2020 See Table 2.2.
Note: Specific or temporary VAT rates applicable in the context of the Covid-19 crisis are shown in italics. Specific reduced VAT rates applicable in the context of the Covid-19 pandemic – are shown in country notes to Table 2.2.
Austria*. A rate of 0% applies to imports of goods needed to combat the Covid-19 pandemic from 30 January until 31 October 2020. The same applies to supplies and Intra-Community acquisition of some of these goods from 14 April until 31 July 2020. From 30 June 2020 to 31 December 2020 a rate of 5% applies to restaurants, certain supplies by artists, writers and composers; admission to cultural events and cinemas, hotel accommodation, books, newspapers and periodicals (both physical and electronic).
Belgium*. A rate of 0% applies from 13 March until 31 October 2020 to imports of certain goods needed to combat the Covid-19 pandemic; a rate of 6% applies to the supply, intra-Community acquisition and importation of masks and hydro alcoholic gels from 4 May until 31 December 2020; a rate of 6% applies to restaurant and catering services, excluding alcoholic beverages from 8 June 2020 until 31 December 2020.
Colombia. The Colombian VAT legislation distinguishes three categories of supplies: (i) “taxable supplies” (subject to VAT); (ii) “exempt supplies” (zero-rated with the right in some cases to credit VAT paid on inputs); and (iii) “excluded supplies” (not subject to VAT nor with the right to credit VAT paid on inputs).
Czech Republic*. From 1 May 2020 the reduced rate of 10 % applies to supplies of certain e-publications and e-books, passenger transport, water, collection and treatment of waste and waste water, restaurant and catering services, domestic care services, cleaning in private households, domestic care services, hairdressing, and repairs of clothing, shoes and leather goods. From 1 July 2020, the reduced rate of 10 % applies to supplies of passenger transport, accommodation, admission to cultural events and facilities, admission to sporting events and use of sporting facilities. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 from 1 January until 31 October 2020.
Denmark*. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 31 July 2020.
Estonia*. Certain electronic publications and e-books became subject to the reduced rate of 9% as from 1 May 2020 A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 31 July 2020.
Finland*. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 from 1 January until 31 July 2020.
France*. Rates of 0.9%; 2.1%; 10.0%; 13.0% and 20.0% apply in Corsica; rates of 1.05%; 1.75%; 2.1% and 8.5% apply to overseas departments (DOM) excluding French Guyana and Mayotte. Reduced rates of 0% or 5.5% apply to imports of certain goods needed to combat the Covid-19 from 1 January until 31 July 2020. A rate of 5.5 % also applies to supplies of certain goods needed to combat the Covid-19 from 1 march 2020 until 31 December 2021.
Germany*. A rate of 0% applies to donations of certain medical material and equipment to hospitals from 1 March 2020 to 31 July 2020. A rate of 0% applies to imports of goods needed to combat the Covid-19 pandemic from 1 January until 31 July 2020. Restaurant and catering services are subject to the reduced rate of 5% from 1 July 2020 until 31 December 2020 and 7% from 1 January 2021 until 30 June 2021.
Greece*. Specific regional rates of 4.0%, 9.0% and 17.0% apply in the islands of Leros, Lesbos, Kos, Samos and Chios until 31 December 2020. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January 2020 until 30 April 2021. Sanitary products essential for the protection of public health during the COVID-19 pandemic (masks, gloves, etc.) are subject the reduced rate of 6% from 20 March until 31 December 2020. Between 1 June 2020 and 30 April 2021, the reduced rate of 13% applies to admission to cinemas; transport of passengers and their accompanying luggage. In the same period, the reduced rate applies to the supply of non-alcoholic beverages in restaurants and similar businesses, excluding nightclubs. Also, between 1 September 2020 and 30 June 2021 the reduced rate of 13% applies to sports tickets.
Hungary*. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 31 July 2020.
Ireland*. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 31 July 2020.
Israel. The rate of 0% applies when an Eilat resident dealer buys goods from Eilat non-residents. Supplies made by an Eilat resident supplier (to be consumed in Eilat) are exempt from VAT.
Italy*. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 30 January until 31 December 2020. A rate of 0% applies to the supplies of same goods from 19 May until 31 December 2020. From 1 January 2021 a VAT rate of 5% will apply to the supplies of goods deemed necessary to fight the spread of COVID-19.
Japan. The standard VAT rate was increased from 8% to 10% on 1 October 2019.
Latvia*. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 31 October 2020.
Lithuania*. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 31 July 2020.
Luxembourg*. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 31 October 2020.
Mexico. A reduced VAT rate of 8% applies to sale of goods, provision of independent services, and granting of the temporary use or enjoyment of goods in the premises or establishments located in the northern border region from 1 January 2019 until 31 December 2020.
Netherlands*. A rate of (effectively) 0% applies to the hiring of healthcare workers by healthcare facilities or institutions qualifying for the VAT exemption of medical services. The measure applies from 16 March 2020 to 1 January 2021. The rate of (effectively) 0% also applies to donations of Covid-19 related medical material and equipment to healthcare facilities or institutions and to general practitioners from 16 March 2020 to 1 January 2021. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 30 January to 1 November 2020. A rate of 0% applies to the purchase in the Netherlands of mouth masks (medical and non-medical) from 25 May 2020 to 1 January 2021. The reduced rate of 9% applies to online fitness classes from 16 March to 1 July 2020.
Norway. The reduced rate of 12% is temporarily reduced to 6% from 1 April until 31 December 2020.
Poland*. As of November 2019, taxpayers have the right to obtain, upon request, an administrative decision (Binding Rate Information - WIS) to ensure the correct application of VAT rates. This administrative decision provides the taxpayers with legal protection in this respect. A rate of 0% applies to donations of certain medical material and equipment to hospitals; supply of imported pharmaceutical products imports of certain goods needed to combat the Covid-19 pandemic from 1 January until the epidemic state in Poland is terminated; supplies of laptops and tablets made until 30 June 2020 by VAT payers to educational institutions.
Portugal*. In the Islands of Azores, the standard VAT rate is 18% and the reduced rates are 4% and 9%. In the Islands of Madeira the standard rate is 22% and reduced rates are 5% and 12%. A rate of 0% applies to donations of certain medical material and equipment to hospitals from 1 March 2020. A rate of 0% applies to supplies, intra-community acquisition and imports of certain goods needed to combat the Covid-19 pandemic acquired by the State and other public entities, the national health service, private hospitals contracted by the State to fight COVID-19 and NGOs, from 30 January until 31 October 2020. A rate of 6% applies to imports, supplies and intra-community acquisitions of protective masks and disinfectant gel, from 8 May until 31 December 2020.
Slovak Republic*. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 30 January until 31 October 2020.
Slovenia*. A rate of 0% applies to imports of certain goods needed to combat the Covid -19 from 30 January 2020 until 30 April 2021. The same applies to supplies and Intra-Community acquisition of these goods from 13 March until 31 July 2020.
Spain*. Rates of 0.0%, 2.75%, 3.0%, 7.0%, 9.50%; 13.50%, 20% apply in the Canary Islands. Rates of 0.5%, 1.0%, 2.0%, 4.0%, 6.0%, 8.0%, 9.0% and 10% apply in either Ceuta and Melilla. Certain electronic publications and e-books are subject to the reduced rate of 4% from 23 April 2020. A rate of 0% applies to the supply of medical equipment from national producers to public entities, NGOs and hospitals until 31 October 2020. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 31 July 2020.
Sweden*. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January 2020 until 30 April 2021.
Turkey. A rate of 1% applies to the supply of domestic air transport from 1 April to 30 June 2020.
United Kingdom. Certain electronic publications are subject to a rate of 0% from 1 May 2020. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 30 January until 31 December 2020. A temporary reduced rate of 5% was also introduced for certain supplies relating to hospitality, holiday accommodation and admissions to certain attractions from 15 July 2020 to 31 March 2021 as an urgent response to the Covid-19 crisis.
*According to the European Commission Decision C(2020)491 (as amended), a rate of 0% for VAT and import duties applies to the importation in the European Union of goods needed to combat the effects of the COVID-19 outbreak during 2020.
Specific or temporary VAT rates applicable in the context of the Covid-19 crisis are shown in italics
Australia. For taxi drivers, including chauffeur driven limousines, hire cars and sharing economy ride-share services, there is no registration threshold. The applicable registration threshold to not-for-profit organisations is AUD 150 000.
Belgium. The registration threshold for Belgium does not apply to several sectors: real estate; hotels and restaurants; sale of used and waste materials. A number of specific supplies are also excluded from the application of the threshold: several supplies of new real estate, supplies of certain products subject to excise duties and undeclared and illicit activities.
Canada. The registration threshold does not apply to certain selected listed financial institutions; non-residents who enter Canada to make taxable supplies of admissions to a place of amusement, a seminar, an activity or an event; and persons who carry on a taxi or limousine business (which include a commercial ride-sharing business). These persons are required to register for and collect GST/HST. An alternative threshold applies to charities and public institutions. A charity or public institution is not required to register if either its revenue from worldwide taxable supplies is CAD 50 000 or less in a calendar quarter and over the last four consecutive calendar quarters, or its gross revenue in either of its two preceding fiscal years is CAD 250 000 or less.
Chile. All taxpayers are required to register and obtain a taxpayer’s identification number (this TIN is not required for VAT purposes only, but also for any other tax purpose). However, small businesses, craftsmen and small service providers may be eligible for a special simplified regime according to which they account, for output VAT purposes, a monthly fixed amount based on an average level of earnings. This special regime has to be calculated by taking into account the earnings from the last 12 months and there is a threshold of 20 Monthly Tax Units (CLP 940 380 - USD 1 530). This simplified tax regime does not apply to legal entities but to individuals only. This system must be adopted for at least for 12 months after which the taxpayer can return back to the ordinary regime.
Colombia. The VAT exemption threshold is mentioned in Tax Units (Unidad de Valor Tributario - TVU) in the tax code. The VAT exemption threshold is 3 450 TVU. The value of the TVU in Colombian Pesos (COP) is set every year by decree. The value for 1 TVU is COP 35 607 for fiscal year 2020. The VAT registration threshold for individuals is therefore 3 450 x 35 607 = 122 844 150 COP. There is no VAT registration thresholds for incorporated businesses.
Czech Republic. A taxable person that is not established in the Czech Republic should register immediately once he starts to provide any taxable supply within the territory of the country, except for supplies being subject to the reverse charge mechanism or to the mini one-stop shop (MOSS).
Denmark. A higher threshold of DKK 170 000 (EUR 22 840) applies to the blind, and a threshold of DKK 300 000 (EUR 40 300) applies to the first sale of works of art by their creator or his successors in title. For the purposes of the latter exemption, the threshold of DKK 300 000 must not have been exceeded in the current or preceding year.
Finland. Where a business has exceeded the registration threshold of EUR 10 000, it must register and is subject to VAT, but a graduated relief is available until they reach a second threshold of EUR 30 000. On 1 January 2021, the registration threshold will be increased to EUR 15 000.
France. The VAT relief applies to businesses whose annual turnover does not exceed EUR 85 800 or when their turnover does has not exceeded EUR 94 300 the preceding calendar year (when the turnover has not exceeded EUR 85 800 the penultimate year). For supplies of services (except hotel accommodation and food and drink in restaurants), the annual turnover must not exceed EUR 34 400 or EUR 36 500 the preceding calendar year (when the turnover has not exceeded EUR 34 400 the penultimate year). For lawyers (in the furtherance of their regulated business), writers and artists, the turnover must not exceed EUR 44 500 (the threshold is EUR 18 300 for their supplies outside the normal framework of their affairs). Experimentally, for a period of five years, a specific threshold of EUR 100000 has been implemented in Guadeloupe, Martinique and La Réunion.
Germany. Taxpayers are relieved from VAT obligations if their annual turnover does not exceed EUR 22 000 and their expected turnover for the current calendar year will not exceed EUR 50 000.
Greece. If the annual turnover from taxable supplies is less than EUR 10 000, the business can voluntarily enter the Special Scheme for small businesses under which no VAT is collected. New businesses may also enter the Special Scheme upon registration. Farmers under the flat-rate scheme are not eligible to enter the Special Scheme for small businesses. Small businesses that have entered the Special Scheme will be obliged to enter the “normal” scheme and collect VAT from the moment they perform a taxable supply on account of which they exceed the threshold (and for the full value of that supply). In case the administrative period is less than a year, then the value of the taxable supplies for the purpose of determining whether the business may enter the Special Scheme during the next year is calculated on a proportional basis.
Ireland. The general turnover threshold for the supply of goods is EUR 75 000. Persons supplying goods liable at the reduced or standard rates which they have manufactured or produced from zero-rated materials must however register if their turnover is EUR 37 500 or more. The general turnover threshold for the supply of services is EUR 37 500. For persons supplying both goods and services where 90% or more of the turnover is derived from supplies of goods (other than of the kind referred to in the previous sentence) are subject to the threshold for the supply of goods applies.
Israel. Self-employed persons with annual revenue below NIS 100 491 are considered "Exempt Dealers". Some professions are not allowed to be Exempt Dealers: agronomist, architect, technician, private investigator, rabbinical attorney, dental technician, organizational consultant, management consultant, scientific consultant, economist, engineer, surveyor, bookkeeper, translator, insurance agent, lawyer, accountant or appraiser, chemical or medical laboratory owner, artistes, various others in show business, doctor, psychologist, physiotherapist, veterinary surgeon, dentist, driving school owner, school owner, real estate agent or dealer.
Italy. The micro-sized taxpayers’ scheme (“Regime forfetario”) applies to individual businesses if, in the previous year, they earned revenues or received remuneration, calculated per year, not exceeding EUR 65 000. (in addition, the gross expenses for employees must not exceed EUR 20 000). The regime does not apply to persons who are members of partnerships, professional associations or SRLs (limited liability companies) and are subject to the "regime di trasparenza" for income tax; persons who carry out sale of buildings or land or intra-EU supplies of new cars and trucks. Are also excluded, foreign businesses not established in Italy, except for those that are established in one of the EU Member States, or in a State party of the European Economic Area, and produce in Italy at least 75 percent of their total revenue.
Japan. Domestic and foreign businesses (both companies and individuals) whose taxable sales in Japan are less than 10 million yen, as well as new businesses of up to 2 years (except for the subsidiary of a certain large corporation) are exempt from JCT return. Exempted businesses can opt to be liable for Consumption Tax, in which case they shall remain liable for at least two years.
Luxembourg. Taxpayers established in Luxembourg are entitled to opt for the special scheme; the exemption only applies to goods and services supplied in Luxembourg. Taxpayers can opt out of the special scheme but have then to apply the normal VAT rules for at least five years.
Netherlands. The special scheme for small businesses applies to all businesses, irrespective of their legal form and including corporate businesses (e.g. foundations, private and limited companies).
Norway. The higher threshold of NOK 3 000 000 applies for admission to sporting events. The higher threshold of NOK 140 000 applies to charitable institutions and organisations.
Poland. The registration threshold does not apply to taxpayers supplying (a) certain types of silver, gold, platinum, knives, cutlery, jewellery, non-hazardous metal waste, museum collections and coins; (b) goods subject to excise duty with a number of exceptions; (c) certain buildings, structures and their parts; (d) building land; (e) new means of transport. The threshold does also not apply to taxpayers supplying (a) legal services; (b) consulting and expert services with certain exceptions; (c) jeweller services and taxpayers not established in Poland. As of September 2019 also supplies of certain goods bought online such as computers, electrical and non-electrical household appliances, cosmetics and toilet preparations are excluded from the exemption.
Portugal. The collection threshold does not apply to commercial legal entities. The threshold has been raised to EUR 11 000 from the 1st April 2020 and will be raised to EUR 12 500 from the 1st January 2021.
Sweden. The threshold does not apply to taxable persons not established in Sweden, taxable persons voluntarily registered for VAT for rental of immovable property, trade with investment gold and artists.
Switzerland. The thresholds refer to the worldwide turnover. The higher threshold of CHF 150 000 applies to non-for-profit sport and cultural associations and to public interest institutions.
Turkey. Certain small individual taxpayers who are exempt from Individual Income Tax are also exempt from VAT.
Chile. From 1 June 2020, foreign (non-established) suppliers providing digital services to final consumers (B2C) in Chile (i.e. customers that are not registered for VAT purposes in Chile) are required to register under a simplified “pay only” registration and collection regime. Registration under the standard registration procedure is also available. Digital platforms are liable to collect the VAT on inbound supplies made through them and remit the tax in Chile. The services covered include notably the supply of digital entertainment content, software and data storage. Such supplies are taxable in Chile provided they are “consumed within the country”. Foreign suppliers are able to use proxies as evidence to identify the place of consumption. These proxies include: the location of the IP address of the device used by the customer (or another geolocation mechanism) at the time of contracting or paying the services; the country of issuance or registration of the card, bank account or other method of payment used; the invoicing address; and/or the country code of the mobile phone´s SIM card being used. Two items of non-contradictory evidence are required. There is no registration threshold and foreign suppliers are in principle requested to register from the first sale to Chilean consumers. B2B supplies continue to be subject to a reverse charge mechanism if the customer is registered for VAT in Chile.
Mexico. From 1 June 2020, foreign (non-established) suppliers providing digital services to consumers (B2C and B2B) in Mexico are required to register under a simplified “pay only” registration and collection regime. This registration does not grant the right to the registered businesses to deduct VAT incurred in Mexico. The registration does not generate a permanent establishment for income tax purposes in Mexico. Digital platforms are liable to collect the VAT on inbound supplies made through them and to remit it to the Mexican tax authorities. The digital services covered include notably downloads or access to images, movies, text, information, videos, audio, music, games, as well as other multimedia content, but not e-books or electronic versions of newspapers and magazines. The defined digital services also include distance learning, tests, and exercises and online clubs. Such supplies are taxable in Mexico provided they “take place” in the country. Foreign suppliers are able to use proxies as evidence to identify the place where these supplies take place. These proxies include: the location of the customer, the location of the IP address of the device used by the customer; the country of issuance or registration of the card, bank account or other method of payment used or the country code of the mobile phone´s SIM card being used. There is no registration threshold and foreign suppliers are in principle requested to register 30 days after the first sale to Mexican consumers. B2B supplies continue to be subject to a reverse charge mechanism if foreign suppliers are not registered for VAT in Mexico. Foreign suppliers are required to provide information to the tax administration quarterly on the number of services provided, classified by type of services and their price, as well as number of recipients and they to keep the appropriate records. When requested by their business customers in Mexico, foreign suppliers are required to issue proof of the payment made by these customer to the supplier with explicit and separate reference to the amount of VAT paid (to support these business customers’ claim to input-VAT deduction).
European Union. Since 2003 (for non-EU suppliers) and 2015 (for intra-EU suppliers) foreign suppliers of B2C telecommunication, electronic and broadcasting (TBE) services are liable to account, collect and remit the VAT on those supplies in the Member State where the consumer has his residence. Under the VAT MOSS (Mini-One-Stop-Shop scheme), EU and non-EU businesses that are not established in the Member State where the consumer is resident can opt to register and account for the VAT due on those supplies in only one Member State. Whereas EU business have to choose their Member State of establishment, the non EU business can choose any Member State. This simplification measure avoids the need to register for VAT in all the Member States where the foreign supplier has B2C customers. From July 2021 onwards, this system will be adjusted. It will no longer be limited to TBE services and will become applicable to all B2C supplies of services and to cross border distance sales of goods. In addition, digital platforms (“marketplaces”) will become liable to collect, report and remit the VAT on the inbound B2C supplies they facilitate. These platforms will have the possibility to register and account for VAT through the OSS.
Australia. From 1 July 2018, foreign suppliers shipping low-value goods (i.e. with a value of AUD 1 000 or less) to consumers in Australia are required to register, collect and remit the GST on those supplies if the volume of such supplies (and any other taxable supplies) exceeds the GST registration threshold of AUD 75 000 per annum. Digital platforms (Electronic Distribution Platforms) and “redeliverers” are liable to collect GST on such supplies made through them. Foreign suppliers/ Electronic Distribution Platforms/redeliverers can register for GST under the simplified “pay-only” registration procedure. B2B supplies follow the same principles as for services and intangibles. The GST is only collected by the customs authorities at the border for low-value goods where they are also subject to excise duties (i.e. alcohol and tobacco products) and for other goods with a value exceeding AUD 1 000.
Canada. From July 1, 2020, the threshold is CAD 40 for goods that are imported by courier from Mexico or the United States. The threshold is CAD 20 for all other courier and postal importations.
France. An exemption threshold of EUR 22 applies for imports of low-value goods that are imported outside the conditions of the distance sales (mail order).
Iceland. This exemption threshold applies only to the importation of goods via "express deliveries". An exemption threshold of ISK 1 500 applies to imports of goods by importers registered for VAT purposes in Iceland.
Israel. The threshold is given in USD in national legislation. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities.
Korea. The threshold is given in USD in national legislation. Postal parcels and express consignments are exempt if their value does not exceed USD 150 and the quantity is such that the customs authorities recognise the goods as for personal use.
Mexico. The threshold is given in USD in national legislation. The threshold of USD 50 applies to imports by the postal service or by courier services.
New Zealand. From 1 December 2019, foreign suppliers shipping low-value goods (i.e. with a value of NZD 1 000 or less) to consumers in New Zealand are required to register, collect and remit the GST on those supplies if the volume of such supplies (and any other taxable supplies) exceeds the GST registration threshold of NZD 60 000 per annum. Digital platforms (online marketplaces and platforms) are liable to collect the GST on such supplies made through them. Foreign suppliers/online marketplaces and platforms can register for GST under the simplified “pay-only” registration scheme. For goods whose value exceeds NZD 1 000 the GST is collected by the customs authorities at the border.
Norway. From 1 April 2020, foreign suppliers of low-value goods (i.e. goods with a value below NOK 3 000) that are imported and delivered to consumers in Norway are required to register, collect and remit the VAT on those supplies in Norway, if the volume of such supplies exceeds the VAT registration threshold of NOK 50 000 per annum (the same threshold as for locally established traders). Foreign suppliers whose volume of relevant supplies exceeds the threshold must register and account for VAT from the first supply. Digital platforms (Marketplaces) are liable for collecting the VAT on such supplies made through them. Foreign suppliers/online marketplaces can register under a simplified “pay only” registration scheme (VOEC). Imports of goods with a value at or above NOK 3 000, foodstuffs, restricted goods, and goods subject to excise duties are outside the scope of the VOEC. These goods will be subject to collection of VAT at the border, along with applicable other duties (such as excise and customs duties).
Poland. The threshold does not apply to goods imported on mail order.
Sweden. The threshold does not apply to goods imported on mail order (including via digital platforms).
Switzerland. The importation of goods in Switzerland is exempt from VAT when the amount of the VAT due on such imports is CHF 5 or less per declaration. For ease of comparison, the equivalent threshold under the standard VAT rate is shown in the table above, i.e. CHF 65 x 7.7% VAT = CHF 5. For goods taxed under the reduced rate of 2.5 % (e.g. books) CHF 5 threshold is reached only for supplies of CHF 200 or above. However, anyone shipping such goods to consumers in Switzerland for an annual value of CHF 100 000 is considered as making taxable supplies of goods in Switzerland and must register, collect and remit the VAT on those supplies.
United Kingdom. There is no low value consignments relief on imports of goods into the UK from the Channel Islands purchased as part of a mail order/distance sale transaction. As a result of the UK’s departure from the European Union, changes will be introduced from the end of December 2020 to remove low value consignment relief on imports of goods. Foreign suppliers and online marketplaces making supplies of goods not exceeding GBP135 in value imported and delivered to UK customers will be required to register, collect and remit the VAT.
European Union. From July 2021, the VAT exemption threshold for the importation of low-value goods will be removed. Foreign suppliers or digital platforms (marketplaces) selling low-value goods (i.e. goods with value below EUR 150) that are imported and delivered to consumers in the EU will be required to register, collect and remit VAT on those supplies. There will be no registration threshold and foreign suppliers will have to register and account for VAT from the first supply. Foreign suppliers/online marketplaces will be able to register under a simplified “pay only” registration scheme (One-Stop-Shop – OSS) in the Member State of their choice. This simplification measure avoids the need to register for VAT in all the Member States where the foreign supplier delivers low-value goods to customers. Imports of goods with value above EUR 150 and goods subject to excise duties are outside the scope of the OSS. These goods will be subject to border collection of VAT, excise and customs duties.
Australia. Electronic transaction information may be required from the taxpayer only when a risk assessment of activities reveals a need for further information. This may be simply a copy of invoices (possibly in pdf format), other substantiating document, or an electronic spreadsheet of transactions. It is rare for the Australian Tax Administration to access the actual electronic records within the business system.
Austria. Electronic transaction information: from 2000, there is an obligation to provide transaction data on data carriers at the request of tax authorities (in the course of an audit). From 2009 data transmission under the SAF-T format is allowed. Electronic cash registers: the use of electronic cash registers is mandatory for taxpayers with a net annual turnover of EUR 15 000 or more, provided that the cash turnover exceeds EUR 7 500 per year. The applicable annual turnover is of EUR 30 000 for businesses in the following areas: outdoor sales; sales of alpine – mountain ski and refuge hunts; sales in specific kinds of wine taverns (“Buschenschank”); sales in canteens of non-profit organisations. General exemption from the cash register obligation applies to non-profit organisations, charitable and ecclesiastic bodies; self-service automates with single sales of less than EUR 20. As from 1 January 2020, a special reporting obligation applies to platforms, in respect of goods and services of other suppliers facilitated by the platform.
Belgium. Electronic cash registers: the obligation to issue cash receipts delivered by a cash registered system (CRS) is imposed on taxpayers supplying meals or catering services on a regular basis when their annual turnover, excluding VAT, related to the restaurant and catering services, exclusive of the supply of drinks, exceeds EUR 25 000. If the threshold is exceeded, CRS cash receipts must be issued for all their supplies relating to the provision of meals and drinks (supplied during the meal or not), including all sales of food and drinks.
Chile. The obligation to use electronic invoicing and to provide B2B transaction information electronically to tax authorities started in 2003. In 2017, this obligation was extended to the provision of other accounting data to an electronic record kept by the tax authority. Transaction data must be transmitted to tax authorities in real time. Invoicing data must be cleared by tax authorities to be considered as a valid accounting document (incl. for the right to deduct input VAT). This obligation is imposed on all taxpayers. Cash registers can be used by any VAT taxpayer. Prior authorization of the tax authority is required when vouchers replace non-electronic VAT receipts. In this case, the tax authority requires the model of the cash register to be certified according to certain criteria. Authorization is issued on a per-case basis, upon request of the taxpayer. As from January 2021, the Law 21210 (as modified by Law 21256) has introduced the obligation to issue B2C invoices electronically. The electronic invoice can be sent through any electronic method (cell phone, email, etc.) provided that it is accessible to the consumer and the business. Some minor exceptions may apply where no internet connection neither electricity exist, but an authorization by the tax authority is needed.
Denmark. Legislation has been passed to require taxpayers to use electronic cash registers when they belong to a category considered at risk. The implementation date is still to be decided.
Estonia. Transaction data must be systematically transmitted to the tax authority at the time the VAT return is lodged for all transactions above EUR 1000 per business partner (below the threshold, transactions data can be reported as an aggregate amount). Reporting format: X-road by sending a VAT return directly from the business software; in online self-service environment using formats XML, CSV.
France. Electronic invoicing is not mandatory, except for B2G supplies. Electronic invoicing should become mandatory for all B2B supplies by 2025 at the latest. Electronic transaction information: taxpayers keeping electronic accounts must provide them in the form of digital files upon request by tax administration for control purposes (these files should meet specific standards). Electronic cash registers: VAT registered taxpayers making sales to final consumers, which record payments using electronic cash registers must use certified software meeting several technical conditions (inalterability, security, preservation) for tax control purposes. However, the use of electronic cash registers is not mandatory.
Greece. Issuance of retail receipts through electronic cash registers (“tax machines”) is mandatory, except for those listed by the tax administration regulation (e.g. solicitors, accountants, farmers, etc.). All entities subject to the provisions of the Greek Accounting Standards have to digitally transmit to the tax administration’s e-books platform named myDATA (my Digital Accounting & Tax Application): (1) a summary of issued and received sales documents (invoices, retail receipts etc.); (2) the characterisation of the transactions covered by these sales documents classifying them to revenue and expenses categories; (3) data of the additional adjustment accounting entries (e.g. payroll, depreciation) that form their accounting/tax base for the export of the accounting/tax result of each fiscal year. Such data shall be transmitted through: an interoperable accounting/commercial software, special Data Entry Form, connected Electronic Tax Register Machines (ETRMs) for retail sale transactions (Online Cash Registers, OCR) or Electronic Invoicing through Licensed Providers. Furthermore, apart from the above-mentioned obligation, businesses-petrol stations have to report on-line each purchase/sale regarding fuel (petrol, oil).
Hungary. Invoicing information for invoices emitted by an invoicing programme (for invoices from HUF 100 000) must be transmitted to the tax authorities at the same time the invoice is emitted by the taxpayer (real time reporting). Information on ‘paper invoices’ must be provided to the tax authorities within a 1 or 5 days deadline (depending on whether the value of VAT figuring in the invoice surpasses – respectively – HUF 500 000 or HUF 100 000). The customer who wishes to deduct VAT has certain reporting obligations too. Further reporting obligations apply for the modification or cancellation of invoices, as well. As of 1 July 2020, the HUF 100 000 threshold is eliminated and information must be provided concerning all invoices emitted in respect of domestic supplies to taxable persons registered in Hungary (B2B). Such reporting must be either real time (invoicing programme) or must be accomplished within a 1 or 4 days deadline (‘paper invoices’, depending on the value of VAT figuring in the invoice). Detailed rules apply for the modification or cancellation of invoices and for the reporting obligation of the customer, as well. These reporting rules do not apply to invoices emitted in relation to exempt Intra-Community (i.e. within the EU) supply of goods.
Israel. Transaction data transmission: taxpayers (“licenced dealers”) whose turnover exceeds ILS 2 500 000 or that are obliged to implement the double-entry bookkeeping system; or those whose turnover exceed ILS 1 500 000 and are required by law to prepare balance sheets and to appoint an auditor must transmit invoicing information every month (i.e. by the 23rd of the following month) to the tax administration under the prescribed format (PCN874). Certified electronic cash registers: the obligation to use certified electronic cash registers is imposed on/available to certain taxpayers depending on their activity and turnover. For example, all retailers must use certified electronic cash registers (no threshold applies but under ILS 350 000 annual turnover, the retailer can choose to use sales book instead). Wholesalers with turnover up to ILS 10 100 000 can use certified electronic cash registers as an option for cash transaction up to ILS 710 instead of invoices. Transportation service providers can use certified electronic cash registers (no threshold). For other services, electronic cash registers can be used (no threshold); if a transaction is recorded with a receipt, the receipt replaces the electronic cash registers.
Italy. All VAT-registered businesses established in Italy are obliged to accept and issue invoices in electronic format through the Italian Revenue Agency’s e-invoicing platform, Sistema di Interscambio (SdI), for the operations that take place between taxable persons established on the Italian territory, excluding those carried out by taxable persons subject to VAT exemption regimes. For businesses engaged in the retail trade and similar activities, the issuance of the invoice is not mandatory if it is not requested by the customer no later than at the time of the supply. With regard to these taxpayers, from 1 January 2020 and with a few exceptions, taxpayers engaged in the retail trade and similar activities must register their supplies electronically and transmit them to the Italian Revenue Agency, regardless of their turnover.
Korea. Transaction data transmission: all business operators and individual businesses whose total value of supplies of goods and services for the immediately preceding taxable year is at least KRW 300 million are required to issue electronic invoices under a prescribed format for all B2B supplies. The tax administration must have a direct automated access to invoicing information (only) 1 day after the invoice is emitted through the Electronic Tax Invoicing System. The invoicing information must be available to the tax administration for clearance before it can be considered as a valid accounting document, including as a supporting evidence for deduction of input VAT. Electronic cash receipts: individual businesses who supply goods or services mainly to final consumers must issue electronic cash receipts and transaction data must be transmitted daily to the tax authority.
Latvia. Transaction data transmission: if a taxpayer maintains accounting registers in electronic form, it must, at the request of the tax administration, provide access to any information related to its economic activities, stored in electronic form. The accounting computer programme shall ensure the recording of accounting data in such formats: MS Excel, dBase/FoxPro, Text Report files, Flat files, Excel, Access, PDF, Adobe PDF, XML or ODBC data sources. Electronic cash receipts: in street trading venues, taxpayers shall use a cash register stipulated by law if the combined value of its supplies of goods and services does reach EUR 150 000 within the period of previous 12 months. For passenger transport activities, taxpayers shall use cash-register systems stipulated by law if the combined value of transactions performed in a particular structural unit or passenger transport vehicle exceeds EUR 1 500 000 during the period of previous 12 months. The use a cash register stipulated by law is mandatory for taxpayers registered with the Value Added Tax Payers Register of the State Revenue Service, petrol stations and taxi.
Luxembourg. The transaction information transmission obligation was implemented for the fiscal year 2011. The requirement to make transaction information available to the tax administration under the SAF-T format is not imposed on taxpayers who: are not liable to the plan comptable normalisé (standardised chart account); or benefit from the simplified regime; or whose turnover is below EUR 112 000; or having no reasonable volume of booking transactions (under +/- 500).
Mexico. Electronic invoicing is mandatory since 1 January 2014. The transmission of transaction data to the tax authority is mandatory since 1 January 2015. Invoicing information must transmitted to tax authorities at the time the invoice is emitted (real time transmission). This obligation applies to all taxpayers and covers the domestic supplies of goods and services for both B2B and B2C transactions. Periodic transmission of transaction information is also imposed to all taxpayers. Federative entities, municipalities, trade unions and entities of the parastatal public administration; certain small taxpayers and non-profit legal persons are relieved from that obligation.
Norway. Transaction data transmission: the Norwegian Bookkeeping Regulation includes a requirement to disclose accounting data in the SAF-T format for all businesses with annual turnover of NOK 5 million or more. This requirement also applies to businesses with an annual turnover of less than NOK 5 million if they have bookkeeping information available electronically. The companies subject to bookkeeping obligations are only obliged to submit accounting information in SAF-T format on request by the tax authorities. Cash registers: from 1 January 2017, cash register systems must meet the requirements laid down in the Norwegian Cash Register Systems Act and regulations. Suppliers must declare the systems to be in compliance with the new rules. Companies subject to a bookkeeping obligation must start using new cash register systems from 1 January 2019.
Poland. Transaction data provision: taxable persons must provide transaction data to the tax authorities under the SAF-T format on a monthly basis. Taxable persons carrying out only supplies exempt from VAT or those benefiting from the VAT exemption for the small enterprises whose annual turnover does not exceed PLN 200 000 (the registration threshold), are exempt from this obligation. The tax authority can also obtain electronic transaction information on request only from taxpayers who keep accounting books using computer programs. This obligation also applies to stock movement, invoicing and bank statement programs. As of 1 October 2020 the SAF-T contains new fields to include VAT return data previously submitted in different separate files. Electronic cash registers: taxable persons whose annual turnover on B2C supplies, exclusive of VAT, does not in the current tax year exceed PLN 20 000 and did not do so in the course of the preceding tax year are exempt from the obligation to use certified electronic cash registers (the exemption does not apply to certain categories of goods /services). Are also exempt certain categories of supplies e.g. when an invoice is emitted and/or the payment is made by bank transfer. Online cash registers have been gradually introduced for industries recognised as particularly vulnerable to fraud and non-compliance: for fuel suppliers, car repair services as of 1 January 2020; restaurants and catering services, supplies of coal, short-term accommodation services as of 1 January 2021; hair and beauty salons, construction services, private medical practice, legal services, fitness clubs and gyms as of 1 July 2021. Cash registers in the form of software (the so called virtual cash registers) are a type of online cash registers not requiring hardware equipment or any external devices and they are available for taxpayers conducting activity in specified sectors (e.g. transportation).
Portugal. Transaction data transmission: taxpayers with a permanent establishment in Portugal providing supplies subject to VAT must systematically (at the latest 12 days after the end of each month) transmit invoicing data to the tax administration. This can be done in real time (via web-service) or on a monthly basis through a structured file based on the SAF-T format or by filing it directly in the Tax Authority Web portal. The tax administration can request a SAF-T file for audit purposes, which includes accounting and invoicing data. Taxpayers with a turnover above EUR 50 000 during the previous taxation period are required to use, exclusively, computer invoicing programs previously certified by the Tax and Customs Authority (AT). Common Simplified Report (IES): accounting and financial reporting information to different government bodies is provided through one single common declaration. Electronic cash registers: the use of certified ECR it’s not mandatory but given the obligation to issue an invoice for any transaction and the obligation for taxpayers to use certified invoicing programs, most taxpayers use certified invoicing software instead of electronic cash registers.
Slovak Republic. Transaction data provision: all taxable persons registered for VAT purposes in the Slovak Republic are obliged to submit a special VAT Control Statement, together with their VAT returns to the Financial Administration (FA). VAT listings are submitted separately and are not dependant on the VAT return. Some crosschecking between VAT listings and VAT returns are built into the analytical system. Electronic cash registers: the use of certified cash registers is mandatory for all suppliers that receives payments in cash or by other payment methods replacing cash at the point of sale and those providing sole services listed in the law. Data from these electronic cash registers must be transmitted to the tax authorities in real time.
Spain. Transaction data provision: taxpayers registered in the monthly VAT refund register; those whose annual turnover exceed EUR 6 million and company groups for VAT purposes are required to provide the tax administration with invoicing data in XML format within four calendar days after the invoice is issued or received (Immediate Supply of Information – SII). Information on investment goods should also be provided within the submission deadline of the last settlement period of the year.
Sweden. Electronic cash registers: the use of certified electronic cash registers is mandatory for taxpayers above the annual turnover threshold of SEK 182 000. It is not imposed on certain taxpayers such as taxi drivers and sales from vending machines. Taxpayers can apply for an exemption of the obligation to use certified electronic cash registers.
Switzerland. Electronic cash registers: data on individual transactions must be transmitted to the tax administration on request or during an audit.
Turkey. From 1 January 2020 paper invoices are no longer legally valid. All invoices must be sent under electronic format via the e-arşiv fatura system. Every time an electronic invoice is issued, the recipient receives a notification by email. All businesses must file a daily statement with a summary list with all the e-arşiv fatura and send it to the tax administration.
United Kingdom. Under the Making Tax Digital initiative, VAT registered businesses with taxable turnover above the VAT registration threshold need to keep digital records and submit VAT Returns to HMRC using functional compatible software.
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