Multinationals put the UK at the top of the VAT-friendliness league and three quarters of major global businesses believe that governments will rely more on indirect taxes (such as VAT or general sales taxes) in the future according to a worldwide survey of senior finance professionals at over 500 large corporations in 22 countries around the world commissioned by KPMG International.

The research, some of the most extensive KPMG has ever commissioned on this subject, helps to provide further evidence of the increasing importance of VAT and other indirect taxes globally. It also provides evidence on the level of VAT which global organizations are struggling to manage every day, with 82 percent of those who responded indicating that their organization’s annual VAT throughput was between US$200m and US$1bn per annum.

Niall Campbell, KPMG’s Global Head of Indirect Tax and partner in the Irish firm, said: “This survey, one of the largest and most comprehensive we have ever commissioned on large multinationals’ views on indirect tax, helps to confirm what we have been seeing on the ground in recent years, namely that indirect tax is becoming increasingly important for global businesses as corporate tax rates decline.

“The levels of VAT which global businesses are now handling are quite staggering and are clearly causing finance directors and tax directors real concern. As the cost of getting VAT wrong is so material, it makes sense that errors in VAT compliance have now been identified as the biggest tax risk for these businesses – quite a shift in attitudes away from the traditional focus on corporate and income taxes.”

Within the UK, 70 percent of respondents forecast that government’s reliance on indirect taxation is set to increase in the next five years, just slightly below the overall sample’s 75 percent.

Commenting on the UK results, Gary Harley, Head of Indirect Tax at KPMG in the UK, said: “British businesses predicting a swing towards indirect tax is not surprising given both the efforts that HMRC have gone to in recent years to combat missing trader fraud, through a combination of legislative change and high profile litigation both here and in Europe, and the need to maintain the tax yield at a time of uncertain economic outlook and an increasingly uncompetitive tax environment.”

The concerns over VAT compliance reflect what KPMG has heard anecdotally. Gary Harley continued: “It is interesting that half of the global finance directors surveyed saw VAT compliance as their top global tax risk and certainly echoes what we are seeing on the ground with many organizations starting to think very objectively about how they manage their transaction tax obligations. Taking Europe as an example, despite having a common VAT code, the rules concerning VAT differ significantly from member state to member state, making compliance a real challenge.”

League table of VAT-friendliness

When asked which jurisdictions the respondents had found it most easy or most difficult to do business in from a VAT perspective, the UK came out as the most VAT-friendly with a net 10 percent of the sample saying it was easy. Italy was cited as the most difficult with the respondents remaining relatively neutral on other countries, according to the sample.

Gary Harley said: “The fact that the UK scored so highly is no doubt in large part due to the tax authorities’ approach to dealing with VAT errors. However this could be set to change as, on 1 April 2007, Her Majesty’s Revenue and Customs introduced a new, stricter, penalty regime which will be applied to VAT returns from April next year.

“If a company makes a mistake on a VAT return but tells the tax authorities first, pays any outstanding tax and takes steps to fix the problem, HMRC is usually quite reasonable and understanding. However, this could well change under the new penalty regime as HMRC seem to be adopting a harsher approach whereby they will levy a penalty unless the taxpayer can demonstrate that they acted with reasonable care.

“Given the likelihood of increased penalties in the UK and the global concerns over VAT compliance, minimizing the risk of VAT errors needs to be a priority for British businesses,” Gary Harley concluded.

Other Key Findings

• Complex VAT legislation is the number one issue for global businesses in the next five years, concerning two thirds of those interviewed, closely followed by compliance obligations (55 percent concerned) and the threat of penalties (45 percent concerned).
• Investment in training and technology key priorities for effective VAT management: 66 percent of global businesses believe that their organizations need to invest in training to raise employee awareness of VAT and 42 percent believe that investment should be made in improved VAT systems and technology.
• Low level of awareness of opportunities presented by VAT: only 11 percent of finance directors identified VAT as a potential source of competitive advantage.

Niall Campbell continued: “Our research indicates that while businesses are now becoming increasingly aware of the scale of their global VAT risks and obligations, there is still a gap between awareness and actually investing in effectively managing the issues on a global basis. The results deliver a very strong message that if businesses want to adequately deal with the challenges which VAT is expected to present over the next five years, they will need to seriously engage and invest in areas such as employee VAT awareness training, VAT systems and technology, additional internal resources and relationship building with tax authorities and regulators.

“There are also significant opportunities which more effective global management of VAT can produce for businesses. However, our research shows that there is currently a low level of awareness of those opportunities, especially amongst the finance directors in the sample group. Combined with the strain on internal resources within many organizations, this may be causing significant savings to be lost to many organizations.

“In addition, our research shows that the majority of businesses view VAT as purely a compliance obligation. However there appears to be a growing number of businesses that see VAT in a more external, market focused way. There is a clear competitive advantage to be gained by those businesses that can achieve an optimal VAT position when making a range of business decisions from product pricing, outsourcing and new business locations. As shareholders continually challenge management to improve business performance, finance directors who now engage and invest in managing VAT risks and realizing VAT opportunities can deliver real shareholder value.”