The periodical VAT return, as we know it today, has seen little or no change over the past 25 years. The changes resulting from the introduction of the VAT package in 2010, however, were an exception to this. The question we can rightly ask ourselves is: "Doesn't the VAT return need a thorough facelift?" or more broadly "Hasn't the current method of VAT reporting become obsolete?"
VAT return and reporting
The VAT return and the related reporting, more specifically the periodic intra-Community recapitulative statement and the annual sales listing, are a source of information for the VAT administration. This information is used to check the accuracy of the VAT paid and thus limit the loss of VAT revenue for the State. The VAT administration indeed does not leave this source of information untouched. On the contrary, it uses this information to carry out targeted checks. After all, most of the VAT audits conducted today are the result of logical checks (data mining) to which VAT returns and related reports are subjected by the VAT-administration. This is a technological process that requires little human intervention and makes it possible to detect anomalies, including fraud, more quickly.
The current method of VAT reporting is not entirely free of fraud. Although more targeted checks are carried out and anomalies are detected more quickly, the data mining system starts from “historical transactions” and the VAT administration lags partly behind the facts. After all, the VAT return is no more than a consolidated reporting of transactions that have taken place in the “recent” past. An anomaly, now detected by the data mining system, occurred thus in the past (months or even years ago). Malicious parties exploit this time interval, resulting in a loss of tax revenue for the State. In a study by the European Commission, the VAT loss (also known as the VAT gap) in Belgium is estimated for 2018 at 10.4 percent of the VAT revenue that can be expected.
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, for example, by extending it with additional reporting grids. Even then, the VAT-administration will continue to lag behind the facts to some extent and the data mining system will remain limited to the detection of historical anomalies. Perhaps the legislator should consider changing the current system of VAT reporting to a system of "real-time" reporting instead. This is, of course, a fairly drastic move, but certainly not an insurmountable one.
A real-time reporting system means that relevant documentation is shared with the VAT authorities in real-time. In Spain, for example, certain categories of taxpayers are already obliged to report their transactions in "real-time" (so-called SAF-T reports, based on OECD principles). In return, these taxable persons receive certain advantages, such as additional deferrals in submitting their periodic VAT returns and the abolition of certain VAT reporting obligations. As a result, the Spanish tax administration will be able to react more rapidly in detecting and combating anomalies, including fraud. This type of “real-time” system usually concerns invoice details, but can also apply to other tax-relevant documentation. In the longer term, they may also render the current VAT return system superfluous.
The introduction, over time, of a "real-time" system in Belgium seems likely to us, partly in view of the global trends in this area. This will require far-reaching digitalization on the part of both the VAT taxpayer and the VAT administration, although the Belgian tax authorities have already gained some experience in this field with e.g. the widely known Tax-on-Web platform that is already being used by millions of taxpayers for filing their personal income tax returns. However, we do not expect the implementation of a real-time reporting system in the near future. Nevertheless, it seems advisable to us that anyone considering an update today of their current ERP system or a switch to a new ERP system should ask themselves whether this ERP system is future proof. In other words, will this ERP package be able to cope with the future "real-time" VAT reporting challenges?
While it cannot be excluded that many taxpayers will be skeptical about "real-time" reporting, such a system can also create significant benefits for them if properly implemented. For instance, what if as a result of this "real time" reporting:
- The monthly VAT and Intrastat reporting were abolished?
- The relationship with the VAT administration was transformed from a controlling and penalizing relationship to a real cooperative relationship?
- VAT fraud was really being curbed, whereby the "additional income" generated by the State was being used for other fiscal (e.g. ecological) incentives that benefit bona fide parties?
VAT reporting by 2025
A thorough facelift of the VAT return will not be the ultimate solution in preventing loss of VAT revenue and fraud. Given the global developments in the field of "real-time" reporting systems, we expect a "real-time" system to be introduced in Belgium in the near future. Although this will make the current method of VAT reporting obsolete, it will probably not be in place by 2025.
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Author: Jean-Philippe Roux, Director.