The VAT system in Belgium was introduced in 1971, which will be 50 years ago in January 2021. On this memorable anniversary, KPMG Tax & Legal Belgium and Wolters Kluwer jointly publish a series of articles that reflect on the current VAT system in the context of our changing business and social environments. In each article, KPMG tax experts address a specific aspect of VAT and related challenges of the system and offer predictions on future evolutions by 2025. When you read the articles, you may also want to consider the issues and contemplate how VAT will or should look like in 2025. Will you concur with the predictions?
In recent decades, growing attention has been paid to the relationship between taxpayers and the tax administration. The underlying idea is that a less hierarchical and more service-oriented attitude on the part of the tax administration promotes the compliance of taxpayers.
Loss of tax revenue is not only caused by fraud and tax evasion, but also by differences in the interpretation of regulations, differences in the interpretation of facts, and a lack of insight into business processes and rules.
A possible solution to this could be, as recommended by the OECD, an evolution towards co-operative tax compliance, which promotes an open dialogue between companies and governments and is characterized by justisified trust, transparency and faster legal certainty.
The Belgian VAT system is a consumption tax collected in fractions, as opposed to a sales, where tax is only levied at the last link in the chain. The latter brings a lighter administrative burden, but it is also more susceptible to fraud. Technologies, such as blockchain, offer promising solutions to strengthen the chosen VAT collection process. Each supply of goods or services in the production or distribution chain could be assigned a register to which all parties involved are linked.
This transparency and traceability would make it possible to digitally match the transactions and the underlying invoicing between taxpayers in the chain, with VAT being levied only at the last link, i.e. on the supply to the final consumer. With this in mind, the question can be asked: will VAT evolve towards a sales tax?
While the VAT deduction mechanism ensures the neutrality of the system by allowing most businesses to recover VAT invoiced to them by their own suppliers, it can also cause many difficulties. The main reason for this is that VAT paid on purchases that are attributable to non-business use or to VAT exempt supplies is, in principle, not deductible.
Consequently, the calculation of deductible VAT, has become so complex for most taxable persons today that it represents not only a real additional workload but also results in almost inexhaustible discussions with the tax authorities in the event of an audit.
With more data and payments being processed and reported electronically, VAT authorities see an advantage in using new technology to make tax collection more efficient. However, investment in automated systems is an expensive proposition for one-man businesses and sme's.
When introducing mandatory compliance technology, the government and VAT authorities should take into account the implementation costs for entrepreneurs and the proportionality of the measures in relation to the objectives to be achieved.
This means that before we reach the point where automated VAT compliance can be fully achieved, there are still a number of obstacles to overcome.
The periodical VAT return, as we know it today, has seen little or no change over the past 25 years. The loss of VAT revenue and the fraud sensitivity of the VAT system cannot be solved by merely giving the VAT return a thorough facelift. Perhaps the legislator should consider changing the current system of VAT reporting to a system of "real-time" reporting instead.
Financial services are generally exempt from VAT. However, as the digitalization of the financial sector changed the nature of financial services, making the difference between IT services and IT-driven financial services smaller and establishing if a service is VAT-taxable or VAT-exempt increasingly challenging, we should consider if the VAT-exemption of financial services should be reevaluated?
VAT refunds are inherent to our current VAT system. This principle of neutrality is embedded in the right to deduct input VAT by VAT taxable persons. However, the difficulties faced by tax administrations in the context of VAT refunds are numerous. VAT administrations must be vigilant when refunds are made because they are susceptible to fraud and there is a significant risk of loss of VAT revenue.
Due to the rapid rise of digitalization in our society and business environment, the use of electronic invoices is growing in practice. E-invoicing and certified solutions can increase efficiency and help in the fight against VAT evasion, but they also entail additional costs for businesses as well as additional challenges for international companies with regard to the centralization and outsourcing of their invoicing, accounting and reporting.
In any future-proof fiscal policy at national and European level, VAT as a reliable source of revenue is essential. By collecting VAT on consumption in a more efficient and less fraud sensitive manner, the government can count on a robust source of revenue. At the same time, by adapting the levying of VAT in view of for example new environmental policies, VAT can be an instrument to stimulate environmentally friendly consumption, advance CO2-reduction and thus fight climate change.