Business Advantages and Challenges from the VAT 2010 Changes
To continue our exploration of the VAT 2010 changes outlined in previous posts, I thought I would highlight the business advantages and challenges from the 2010 Changes:
Business Advantages from the 2010 Changes
The most prominent advantage of these changes is their potentially positive impact on a company’s cash flow. For example, a business that presently is required to pay VAT to service-providing vendors located in other countries is able, under the new rules, to apply the reverse charge on those services. In some cases, it will turn out that VAT does not need to be charged, thus avoiding the need to apply for a VAT refund.
The challenges of complying with the 2010 VAT changes are spread out across an organization’s people, processes and systems. An indirect tax collected fractionally, there is nothing intrinsically simple about managing VAT. And while the latest changes are wrapped in rhetoric regarding simplification and modernization, the complexities are still there, and have been joined by new ones, and they all have to be addressed.
• The 2010 VAT changes will “tax” a company’s tax decision makers. Because of the new changes, there are numerous new determinations to be made (B2B or not-B2B? Taxable person or not?) and new steps to take. For example, services that are taxable in the country of a buyer will now need to go on an ESL. This means having to ask if this is a taxable service in that particular country. The seller has to make that determination, and it is an extremely difficult question, especially when you need to keep track of thousands of customers across numerous countries.
• The 2010 VAT changes will “tax” a company’s business processes. Key business processes will have to be updated. For example, buyers and sellers will have to collaborate on correctly identifying reverse charge status and treatment. Will this happen through invoice messages on the PO? Perhaps. But one way or another, it will have to happen.
• The 2010 VAT changes will “tax” a company’s financial systems. Systems will have to be modified to perform the proper calculations, run the right reports and put the right entities on ESLs. As companies try to modify their current systems – which are typically ERP implementations, self-built solutions, or packaged accounting applications, depending on a company’s size – they will have to spend substantial time and effort to get it right. For example, a SAP ERP system has the nominal capacity for managing VAT, but you have to put the rules and rates into the system and build the proper logic. And then it is still up to a person to make the tax decision and assign the proper tax code. Further, with the new changes, companies will have to create new tax codes for supply of international services, while previous codes will have to be maintained for credits, auditing and the like. But SAP only supports a limited number of tax codes, and is thus offering customers the option to increase the number of digits in their codes from 2 to 4 – a major system change. Then there is all the tax logic to rework, the condition tables to change, and so on. The work is substantial, costly, open to risk and, of course, subject to having to be repeated over and over in the future as new VAT changes are mandated.
• The 2010 VAT changes will “tax” a company’s patience. The 2010 changes, while agreed to and adopted on the EU level, still have to be passed into law by Member State legislatures. This could potentially result in 27 different implementations of various key rules, and thus more complexities to be heaped onto an already overloaded plate. But all variances have to be digested and complied with.
In short, complying with the 2010 VAT changes is a major undertaking, and if not approached properly, the efforts and costs involved can potentially offset the projected advantages of these changes. The next section of this paper outlines the optimal approach to low-risk implementation of the 2010 changes, lock-in of their cash flow advantages, and ensured continual, cost-effective VAT compliance.