Issue 1 | September 2010

Indirect Tax Briefing

A review of global indirect tax
developments and issues
Issue 1 | September 2010

In this issue
Welcome to the inaugural issue of Ernst and Young’s
Indirect Tax Briefing. The aim of our briefing is to
highlight some of the topical indirect tax issues
around the world and provide useful insights from our
community of tax and customs professionals.
2010 is shaping up to be an unprecedented year for
indirect taxation. We are witnessing a move toward
higher VAT and GST rates (not to mention a broadening
of the base), accelerating in the short term the
underlying trend toward higher taxes on consumption.
Couple this with significant tax reform in a number of
countries and the introduction of the VAT package in
the European Union (EU) earlier in the year, and it is not
surprising that indirect tax is higher on the tax agenda
than ever before.
Philip Robinson
Global Director — Indirect Tax
Ernst & Young

Indirect Tax Briefing 2

VAT and GST: Multiple burdens for multinational companies
Governments around the world need to balance their books and are increasingly looking to indirect
taxes on consumption to make up the shortfall. What does an increased focus on VAT compliance and
enforcement mean for tax administrators and taxpayers? 06
Malaysia’s indirect tax reform
The government sets out new objectives of the deferral of GST and education of the business community. 14
GST in India: Current issues and emerging trends
India seeks to introduce a country-wide GST structure in April 2011. What issues need to be addressed to
ensure a successful implementation? 18
Japan’s consumption tax reform setback
The consumption tax regime for Japan has long been a challenging subject for politicians and the recent
elections in the upper house of the Diet has delivered another twist in the journey towards reform. 22
Five federal lessons from California’s near-VAT experience
Speculation on the possible introduction of a VAT or GST regime in the United States continues. A lesson
from California’s near-VAT experience is that there are major political issues that will require significant
debate before any such system could be introduced. 24
Amended legislation in Germany impacts intra-Community distance selling
German tax authorities introduce a requirement to appoint a tax representative in Germany to facilitate
sales of excisable goods to private customers. What impact does this requirement have on the affected
businesses? 32
Thai Customs Voluntary Audit Program: A rare opportunity to reduce customs
and VAT liabilities
Thai Customs offers amnesty from penalties and interest charges for a limited period to companies invited
to participate in the Voluntary Audit Program. 34

Indirect Tax Briefing is published by Ernst & Young.

Editors
To learn more about Ernst & Young’s global Indirect Tax
network, please go to www.ey.com/indirecttax or sign
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www.ey.com/emailmeindirect.
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Mary O’Hare Ros Barr
mohare@uk.ey.com ros.barr@uk.ey.com
+44 (0)28 9044 5472 +44 (0) 20 7980 0259

Indirect Tax Briefing 3

Welcome
Welcome to the inaugural issue of Ernst and Young’s Indirect
Tax Briefing. Currently there are in excess of 140 countries that
operate a value-added tax (VAT) or goods and services tax (GST)—
with additional countries either considering the implementation of
such taxes or actively in the process of introducing an indirect tax
regime. The aim of our briefing is to highlight some of the topical
indirect tax issues around the world and provide useful insights
from our community of tax and customs professionals.
2010 is shaping up to be an unprecedented year for indirect
taxation. We are witnessing a move toward higher VAT and GST
rates (not to mention a broadening of the base), accelerating
in the short term the underlying trend toward higher taxes on
consumption. Couple this with significant tax reform in a number
of countries and the introduction of the VAT package in the
European Union (EU) earlier in the year, and it is not surprising
that indirect tax is higher on the tax agenda than ever before.
In this issue of Indirect Tax Briefing, we provide an overview of the
global VAT and GST rate increases in 2010 and beyond together
with the major VAT and GST reforms that are planned or already
under way (pages 12 to 13). In particular, we have focused on
anticipated indirect tax reforms in Malaysia and India. Malaysia is
looking to replace existing sales and service taxes with a new GST
regime, while India is seeking to implement a country-wide GST
Indirect Tax Briefing
Philip
Robinson
regime to encompass all Indian states and replace the multiplicity
of taxes that currently apply. We also look at the role that the
debate regarding the future of consumption tax in Japan may
have had on recent political developments.
The United States is currently the only OECD country without a
country-wide indirect tax regime. However, those of you following
the VAT newswires will be aware that there has been much
speculation regarding if, when and how such a regime might
be introduced. Commentators have called for the introduction
of a federal general consumption tax, and the California state
legislature recently considered a tax reform package that
included a proposal to replace the corporate income tax and
the state general fund sales tax with a business net receipts tax
similar to VAT. Given the importance and potential impact of the
introduction of a country-wide indirect tax regime in the United
States, we have included an article focused on the lessons to be
learned from the “near VAT” experience in California.
Even well-established VAT and GST systems are not immune to
significant change. 1 January 2010 saw the introduction of the
VAT package in the EU. The VAT package measures represented
the most far-reaching changes since the introduction of the
single market on 1 January 1993. The changes were intended to
simplify, modernize and harmonize cross-border trade in services.
4
However, in a number of cases, adapting to the new rules has We hope that you enjoy Indirect Tax Briefing and find it useful for
caused considerable technical and IT problems for business. In your business. We will endeavor to bring you articles that provide
this edition, we include details of our EY RAP (Risk Assurance and useful insights and provide you with an idea of how the indirect
Planning) survey which will help you assess and benchmark the tax landscape is changing around the world. Please tell us what
implementation of the VAT 2010 rules across your organization you think of our new publication and let us know what issues you
and the level of risk you may face from errors or gaps. would like to see more of in future editions. We would welcome
the opportunity to work closely with you to develop and enhance
The article “VAT and GST: Multiple burdens for multinational
this publication so that it continues to remain relevant to you. I
companies” provides an executive summary of a global study
would be delighted to understand your wishes either by email or
recently published by Ernst & Young. The summary addresses the
telephone on +41 58 289 31 97.
VAT compliance burden borne by multinational enterprises and
suggests ways in which VAT could be improved for the benefit of
MNE taxpayers and tax administrations.
It is sometimes overlooked that indirect taxes are closely
connected to the world of customs and international trade. In
this issue, we consider the new requirement to appoint a tax
representative in Germany in order to sell excisable goods to Philip Robinson
private customers and also highlight an opportunity in Thailand to Global Director — Indirect Tax
reduce customs and GST liabilities. philip.robinson@uk.ey.com

Indirect Tax Briefing 5

VAT and GST
Multiple burdens for Philip
multinational companies Robinson

This is an executive summary of a global study by Ernst & Young

that has recently been released and is downloadable at
www.ey.com/vatburden.
Can governments and MNE taxpayers ever aim for — let alone
achieve — the same VAT compliance goal? Following the global
financial crisis, governments around the world are increasingly
looking to indirect taxes on consumption to balance their books.
Consumption taxes include value-added taxes (VAT), goods and
services taxes (GST) and similar sales taxes, referred to in this
article collectively as VAT.
What does an increased focus on VAT compliance and
enforcement mean for tax administrations and taxpayers? Will
it inevitably result in more administrative requirements, stiffer
penalties for errors and an increase in the compliance burden?
If so, multinational enterprises (MNEs) will likely face increased
costs and resource requirements as they are called on to adapt
their business and enterprise resource planning (ERP) systems
to comply with the many and varied obligations imposed by
different tax administrations. But as VAT obligations multiply, full
compliance becomes harder, increasing the likelihood of taxpayers
making errors and incurring penalties. That, in turn, diverts tax
Governments around the world need to administrations’ efforts toward catching technical errors and away
from detecting VAT fraud.
balance their books, and they are increasingly
looking to indirect taxes on consumption to But is this situation inevitable? We believe that by developing an
approach based on cooperation rather than confrontation, and
make up the shortfall. What does an increased by focusing on simplification and harmonization of key concepts,
focus on VAT compliance and enforcement MNE taxpayers and tax administrations could meet their
mean for tax administrations and taxpayers? obligations, using their scarce resources, more effectively.

Will it inevitably result in more administrative In the recently issued paper, titled VAT and GST: Multiple burdens
for multinational companies, we consider the VAT compliance
requirements, stiffer penalties for errors and
burden borne by MNEs and suggest ways in which the VAT system
an increase in the VAT compliance burden? could be improved for the benefit of MNE taxpayers and tax
If so, multinational enterprises (MNEs) will administrations. The paper is based on research covering the VAT
system in 90 countries1 and subjective feedback from our Indirect
likely face increased costs and resource
Tax network of VAT professionals in 40 leading countries,2 as
requirements as they are called on to adapt well as selected interviews with corporate tax directors and tax
their business and enterprise resource administration officials.
planning (ERP) systems to comply with the
many and varied obligations imposed by
different tax administrations around the world.

1
Algeria, Angola, Argentina, Australia, Austria, Azerbaijan, Bangladesh, Barbados, Belgium, Bolivia, Brazil, Canada, Chad, Chile, China, Colombia, Congo, Costa Rica, Croatia, Cyprus, Denmark,
Dominican Republic, Ecuador, Egypt, El Salvador, Equatorial Guinea, Finland, France, French Guiana, Gabon, Germany, Ghana, Greece, Guatemala, Honduras, Hungary, India, Indonesia, Ireland, Israel,
Italy, Ivory Coast, Jamaica, Japan, Jordan, Kazakhstan, Latvia, Lebanon, Luxembourg, Malaysia, Mali, Mexico, Morocco, Namibia, Nepal, The Netherlands, New Zealand, Nicaragua, Nigeria, Norway,
Pakistan, Panama, Peru, Philippines, Poland, Portugal, Puerto Rico, Romania, Russia, Senegal, Singapore, South Africa, South Korea, Spain, Sri Lanka, Surinam, Sweden, Switzerland, Taiwan, Tanzania,
Thailand, Trinidad and Tobago, Tunisia, Turkmenistan, Turkey, United Kingdom, Uruguay, Venezuela, Virgin Islands, Yemen.
2
Argentina, Austria, Barbados, Belgium, Botswana, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Indonesia, Italy, Japan, Kenya, Latvia,
Lithuania, Luxembourg, Malta, Namibia, Netherlands, Norway, New Zealand, Pakistan, Portugal, Romania, Russia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Trinidad and Tobago, United Kingdom,
Zambia.

Indirect Tax Briefing 6

The business burden of VAT
The burden of multinational VAT compliance is the additional cost to MNEs of adopting,
operating and adapting their accounting processes and reporting systems to account for
indirect tax accurately, over and above what they would spend for their own commercial
purposes. It includes the cost of obtaining information, training staff and dealing with
VAT audits, inquiries and disputes. The VAT burden borne by MNEs also includes the
cost of financial penalties (which are not generally deductible against profits for direct
taxation), the cost of VAT related to legitimate business expenditure that is not recovered
(e.g., in foreign jurisdictions) and the cost of financing VAT cash flow (e.g., related to bad
debts or late VAT refunds).

Why 100% VAT compliance is an elusive goal

What is 100% VAT compliance? Our definition is “paying the right amount of tax, at the
right time, to the right tax administration.” This may seem a simple goal, but in practice it
can be hard to achieve.
Issues that complicate VAT reporting for MNEs include the following:

Real-time reporting
One of the biggest compliance challenges for MNEs is capturing the information they
need to comply with their VAT reporting obligations accurately within tight deadlines.
The time limit for issuing a tax invoice illustrates the problem. Many jurisdictions impose
penalties for individual invoices that are not issued on time or that contain errors, but
taxpayers have little or no time to decide on the correct VAT treatment of transactions.
In the 90 countries we surveyed, 59 require VAT invoices to be issued on the day the
transaction takes place. In all but three countries, invoices must be issued within one
calendar month after a taxable event.

Deadline (in days) for issuing a VAT invoice3

70

60
Number of countries

50

40

30

20

10

0
0 5 7 10 14 15 21 28 29 30 180 365

Number of days
3
Ernst & Young — a survey of the VAT system in 90 countries.

Indirect Tax Briefing 7

Filing monthly VAT returns is another
task that requires complete accuracy
within a limited time period, which can
prove challenging for complex business
organizations. In the 90 countries
we examined, the most common VAT
reporting deadline is between 15 and 30
days, and in four countries (El Salvador,
Germany, Honduras and Mali), the
deadline is 10 days.
Foreign VAT recovery
Most MNEs incur foreign VAT on
business costs, but few recover these
costs in full. The Organization for
Economic Co-operation and Development
(OECD) recently reported on problems
experienced by business taxpayers in
recovering VAT paid in other countries.4
It concluded that although most member
countries have implemented foreign
VAT relief procedures, these procedures
are frequently complex and difficult to
comply with. More than 80% of businesses
surveyed by the OECD said that they
cannot recover all their foreign VAT, and
more than 20% reported that they are
unable to recover any foreign VAT at all.
The “flat world” effect
Business models are constantly evolving,
and VAT systems are struggling to keep
pace. In most countries, the basic VAT
legislation was adopted many years
ago, before, for example, the advent of
e-commerce and when fewer companies
engaged in cross-border trade. Each
change in how or where an MNE does
business has far-reaching implications for
its VAT compliance. As businesses evolve,
they must constantly review their VAT
reporting obligations, including the impact
on their financial situation and working
capital requirements.
VAT is a moving target
VAT legislation is also a moving target,
with an elevated volume of legislation
4
VAT/GST relief for foreign businesses: the state of play, OECD, 2010
5
OECD international VAT/GST Guidelines, OECD, 2010
in this area reflecting the fact that
many governments are moving toward
consumption taxes as a source of
additional revenue. Keeping up to date
“Our major VAT
with developments around the world can compliance reporting
become a full-time task, and it poses a issue is capturing
major challenge for all global companies
in meeting their real-time VAT reporting
data in the time limits
obligations. allowed. In the UK,
for example, we have
Cross-border transactions
Tax administrations struggle with applying
a complicated VAT
the tax to cross-border and international recovery method.”
transactions, for example, which can
The Global VAT Director of a
lead to double taxation and uncertainty.
The OECD notes that businesses may
large financial institution
be dissuaded from making investment
or trading decisions because of these
uncertainties. As a result, the OECD
is developing draft international VAT
guidelines5 setting out how international
transactions should be taxed for VAT
purposes, which it hopes will benefit
taxpayers and tax administrations alike.
Multinational company, multinational
burden
Not only do MNEs need to deal with
complex VAT laws in individual countries;
they also have to deal with different
rules in multiple jurisdictions. Individual
countries’ systems are not aligned. Major
differences apply around the world in
terms of when reports are due and what
must be reported which in turn has a
significant impact on ERP systems. Each
tax administration expects complete
compliance with its requirements —
irrespective of what any other country
might require. So, even if each country’s
own VAT system could be made simpler,
MNEs would still experience complexity
arising from dealing with multiple
“simple” systems. This factor alone
greatly increases tax risk and the need for
investment in compliance processes and
resources.
Indirect Tax Briefing 8

“In practice, these local
differences, which
often stem from local
accounting laws, make
it virtually impossible
for a global company
to design something
as fundamental to its
day-to-day business
operations as a tax
invoice that works all
over the world.”
The VAT Director of an
MNE based in more than
100 countries
“The data we need
for the quarter is not
always available within
the 30-day period for
doing the returns. In
other countries it’s
even worse, with 10-
day deadlines in some
cases.”
Global VAT Director of a
large financial institution
Two areas illustrate this issue:
• A working sales invoice
A simple and telling example of the problem faced in negotiating multiple detailed
national rules is the sales invoice. As the basic business document that accompanies
all business-to-business (B2B) transactions, an invoice plays a vital role in accurate
financial reporting. The 90 countries we surveyed for VAT requirements reported
widely differing national rules for VAT invoices, including the invoice formats,
the details required, whether the invoice must be signed or stamped and who
may print the invoice. In practice, these local differences, which often stem from
local accounting laws, make it virtually impossible for a global company to design
something as fundamental to its day-to-day business operations as a tax invoice that
works all over the world.
• VAT returns and payments
Companies that are registered for VAT in a number of jurisdictions or MNE groups
that use shared services centers must also contend with different VAT reporting
dates and widely different VAT return formats. These variations can add greatly
to the practical difficulties of submitting accurate, timely VAT returns in multiple
jurisdictions, with many companies needing to add local layers of supervision before
reports can be filed.
Complex, voluminous transactions seed controversy
Accurate VAT reporting may be complicated by the difficulty of applying the existing
rules to all the activities that multinational organizations undertake. Even with the best
efforts, honest errors may arise. Uncertainty may lead to errors and disputes with tax
administrations, and matters can quickly escalate.
In a survey of Ernst & Young VAT professionals in 40 countries, 22 reported that their
countries impose a penalty when errors are made but there is no tax loss. In 2 countries,
no penalty or interest applies to errors voluntarily disclosed by taxpayers; in 4 countries,
a penalty applies but no interest is due; while in 18 countries, no penalty applies but
interest is charged. In 16 countries, a penalty plus interest applies under the legislation,
which seems to provide little incentive for taxpayers to disclose errors voluntarily
(although mitigation may apply in practice).
We also asked the Ernst & Young VAT professionals we surveyed to rate the quality of
the relationship between large corporate taxpayers and the tax administrations in their
countries, using a scale of 1 to 10 — with 1 being “very poor” and 10 being “excellent.”
The average score was just under 6 and more than half of the respondents answered
5 or higher. Generally, Ernst & Young’s VAT professionals feel that there is a good
relationship between taxpayers and tax administrations in their countries, which is
encouraging. However, as only one country earned a rating of 9, and several countries
were given a mark of 3 or 4, there still seems to be room for improvement. Factors that
seemed to subjectively influence the relationship included the frequency of VAT audits
(with countries with frequent audits tending to lower relationship ratings) and the length
of time it takes for disputes to be resolved (with countries where disputes were resolved
quickly tending to higher relationship ratings).
Indirect Tax Briefing 9
“Our contracts are complex and decisions are made very fast. A cargo may set out
destined for sale and delivery to one buyer, but, while it’s in transit, it may be sold to a
different purchaser or it may be split, so the VAT treatment changes. It’s hard to keep up
from a compliance point of view and if VAT is suddenly added to the price and it can’t be
passed on, there may be no profit.”
VAT manager of a European oil company

How might the burden be • Extension of the EU “one-stop-shop” Flexibility

reduced? VAT registration concept beyond
• A more pragmatic and realistic approach
electronic services (to reduce the
The paper suggests ways that the VAT by tax administrations
number of VAT registrations)
compliance burden could be reduced for • Greater use of technology for
MNEs, based on feedback from the Ernst Certainty and simplicity multinational VAT obligations (such as
& Young Indirect Tax network of VAT • Simplified VAT systems (e.g., fewer increased use of e-filing and electronic
professionals, from selected tax directors payment)
exceptions, fewer rates)
of multinational companies and from tax
administration officials. Grouped according • Consultation before legislative changes • Acceptance of alternative forms of
to the OECD’s Taxation Framework documentation as evidence (such as
• Clearer VAT legislation
Conditions6 (sometimes referred to as the commercial documents rather than
Ottawa Framework), suggestions include: • More published guidance formal invoices)

Neutrality • Greater legal certainty through clearer,

simpler legislation, advanced rulings
• Extension of arrangements for refunding
foreign VAT • Clearer, more consistent EU policies and
fewer derogations from EU Directives
• Simplified foreign VAT refund
procedures • More dialogue between taxpayers and
tax administrations
• Faster foreign VAT refunds
• Changes announced well in advance
• Harmonization of VAT rules for to allow taxpayers sufficient time to
cross-border trade to avoid double implement them (e.g., contractual
taxation changes, educate staff and business
Efficiency partners, adapt ERP systems)

• Harmonization of VAT rules • Fewer formal VAT requirements

• Harmonization and standardization of • Simplified procedures for chain

VAT reporting obligations (including a
single EU VAT return)
• Harmonization and standardization of
VAT invoicing obligations and invoicing
format
• Consistent VAT treatment between EU
countries
• Longer filing deadlines to allow
taxpayers to “get it right the first time”
• Adoption of monthly invoicing and
e-invoicing regulations
• Increased use of reverse charge
accounting to avoid foreign VAT
registrations and VAT cash flow impacts
transactions involving more than
three parties to reduce foreign VAT
registrations
Effectiveness and fairness
• More training for VAT auditors
• The development of a closer taxpayer/
tax authority relationship through
programs based on open disclosure
• Lower VAT penalties, especially for
voluntary disclosure
• No penalties for no VAT loss
• Light touch

6
Electronic Commerce: Taxation Framework Conditions, OECD, 1998

Indirect Tax Briefing 10


“No penalties if there’s
no tax loss. That
would be heaven if
we could get to that
situation.”
The Indirect Tax Director
of a tobacco company with
operations in more than
130 countries
Philip Robinson
Tel: +41 58 289 3197
Email: philip.robinson@uk.ey.com
Where to from here?
The complexity of VAT legislation and local rules leads to uncertainty, errors, disputes
and increased costs for MNE taxpayers. The current situation, based heavily on local
rules, is also damaging to tax administrations, which are experiencing unprecedented
calls on their scarce resources in collecting vital tax revenues and preventing tax fraud.
100% VAT compliance seems at best very costly and at worst impossible. But we believe
that reducing the compliance burden can improve VAT compliance performance by the
largest VAT taxpayers, thereby protecting vital tax revenues as governments address
budget deficits.
All parties have a role to play: MNEs need to take their multinational VAT compliance
obligations seriously; multinational VAT compliance must become and remain a
management priority. MNEs must continue to devote resources to keeping abreast of
developments that affect their VAT position, training staff and adopting adequate VAT
accounting processes and controls, in recognition of the large volumes of VAT revenues
that flow through their accounting systems. At the same time, tax administrations need
to address MNEs’ legitimate concerns about the burden of multinational VAT compliance,
which increases costs, creates high levels of tax risk and has an adverse effect on
business operations. We believe that individual tax administrations, trading blocs such as
the EU and international organizations such as the OECD should make multinational VAT
reform a priority. This is a pressing issue as globalization continues apace.
We applaud the work of the OECD in producing draft VAT Guidelines aimed at bringing
clarity and consistency to the VAT treatment of cross-border activities. We also
commend the continuing efforts at harmonization and simplification undertaken by the
EU, including programs related to e-invoicing and the extension of the “one-stop-shop”
regime for foreign VAT registrations. We hope that other countries in Europe, such as
Switzerland and Norway, will continue to align their VAT legislation with the EU where
practicable. We would also encourage greater regional cooperation on VAT legislation
and administrative practice in other regions of the world, such as the Americas, Africa
and Asia Pacific.
We would also like to see MNE taxpayers and tax administrations enter into closer, more
open relationships based on trust and transparency. This may be achieved both through
informal changes in attitude and through formal programs that encourage taxpayers
to adopt robust processes and disclose errors in return for reduced penalties and “light
touch” oversight, such as “horizontal monitoring” in the Netherlands and the ACA
program in Australia.
MNE taxpayers and tax administrations all have much to gain from greater multinational
simplicity, harmonization, clarity and fairness in the VAT system — reduced costs, less tax
controversy, better use of scarce resources and improved VAT compliance performance.
Achieving 100% VAT compliance may no longer be an unattainable dream.
Indirect Tax Briefing 11
Recent VAT rate changes Czech Republic
and major VAT/GST Standard VAT rate increased to 20%
(from 19%) on 1 January 2010
reforms — global update
United Kingdom
Standard VAT rate increased to 17.5%
(from 15%) on 1 January 2010 and will
increase to 20% on 4 January 2011

Iceland
Standard VAT rate increased
to 25.5% (from 24%) on
1 January 2010

Switzerland
Canada Standard VAT rate will increase
to 8% (from 7.6%) from
HST implemented in
1 January 2011
Ontario and British
Columbia on 1 July 2010
Portugal
Standard VAT rate
increased to 21% (from
St. Kitts & Nevis 20%) on 1 July 2010

VAT to be introduced on Spain

Mexico 1 November 2010
Standard VAT rate
Standard VAT rate increased increased to 18% (from
to 16% (from 15%) on 16%) on 1 July 2010
1 January 2010
St. Lucia
Panama VAT introduction agreed
Standard VAT rate increased upon; no implementation
to 7% (from 5%) on date given
1 July 2010

Grenada
VAT system introduced
on 1 February 2010
Greece
Standard VAT rate increased
23% (from 21%) on 1 July 20
 Belarus
Standard VAT rate increased
Finland to 20% (from 18%) on
1 January 2010
Standard VAT rate increased to
23% (from 22%) on 1 July 2010

China
Major revision of VAT system
planned for 2013

Malaysia
GST introduction delayed
Romania until late 2011/early 2012
Standard VAT rate
increased to 24% (from
19%) on 1 July 2010

India
GST expected
in April 2011

d to
010

New Zealand
Standard GST rate will increase to 15%
(from 12.5%) on 1 October 2010

Indirect Tax Briefing 13

Malaysia’s indirect
tax reform
The government sets out new objectives
of deferral and education of the business
community
The GST will be a broad-based
consumption tax levied on most
goods and services supplied in
Malaysia. It will also apply to
goods and services imported
into Malaysia.
Indirect Tax Briefing
Yeoh Cheng Bhupinder
Guan Singh
For several years, Malaysia has been anticipating a major
reform of its indirect tax system, which will involve replacing
the country’s current sales and service taxes with a goods and
services tax (GST). In this article, we give an update on the
progress of the reform and an overview of the likely provisions of
the new tax.
GST introduction delayed
The GST Bill 2009 was introduced in Parliament on 16 December
2009 for its first reading. The second reading of the Bill, which
was originally scheduled for March 2010, has been deferred to
the second half of this year. Although no date has been set for the
introduction of the new tax, Malaysia’s Second Finance Minister
has said that the private sector will be given at least
12 months to get ready for GST. This comment would indicate a
likely start date for GST in late 2011 or early 2012.
In this deferment period, the Government is embarking
on educational road shows across the country with a view
toward raising the level of GST awareness among the business
community and the wider public.
Expected features of the new GST
The GST will be a broad-based consumption tax levied on most
goods and services supplied in Malaysia. It will also apply to
goods and services imported into Malaysia. In common with other
GSTs and value-added taxes levied around the world, the new
tax is designed as a multistage tax that will apply to transactions
at each stage of the supply chain. Suppliers of taxable goods
and services will account for output tax but will receive a
corresponding input tax credit for GST paid at an earlier stage.
GST rate
It is anticipated that the GST rate will be 4% when the tax comes
into force. This rate is lower than the current sales tax and service
tax rates that apply in Malaysia. It is thought that this rate is
aimed at stabilizing the government’s finances without burdening
lower-income groups. In addition, certain goods and services will
be classified as exempt and zero rated (taxed at 0%). Examples of
goods charged at each rate are listed in the table on the following
page.
GST registration threshold
The GST registration threshold is expected to be RM500,000
(roughly $154,000) of turnover a year.
14
 Type of supplies Examples
Standard rated Local supply of goods and services
Zero rated • Agriculture products [paddy and vegetables], foodstuff [rice,
sugar, plain flour, cooking oil], livestock supplies [live animals
and unprocessed (fresh and frozen), meat of cattle, buffaloes,
goat, sheep and swine, poultry [live and unprocessed (fresh
and frozen) meat of chicken and duck], egg (fresh and salted)
and fish, supply of the first 200 units of electricity per month
to domestic users, supply of the first 35 cubic meters of water
per month to domestic users
• Exports of goods
• International services
Exempt • Mass domestic public transport (e.g., LRT, KTM, ERL, Monorail,
express bus, taxi)
• Toll highways
• Sale/lease/rental of residential land/property
• Land for agricultural purposes and land for general use
(e.g., government building, cemeteries)
• Private health care and education
• Certain financial services
Out of scope • Transfer of a business as a going concern
• Sales of property outside Malaysia
• Third-country sales

Implications of GST for For example, GST will be accounted for on

businesses operating in
Malaysia
Budgeting for implementation
activities
Businesses operating in Malaysia will
need to plan and budget across the whole
business for the implementation of GST.
Implementation activities will result in
a range of additional costs, including
adapting IT, accounting and reporting
systems, reviewing contracts, introducing
new processes and documentation and
providing training to staff and information
to customers.
Cash flow
In addition to the costs of implementing
GST, businesses will need to be aware of
the possible impact of GST on cash flow.
an accrual basis, based on supplies made,
not cash received. Therefore, a business
that makes taxable supplies will need to
account for GST on all standard-rated
supplies made during a GST reporting
period, regardless of whether it has
received payment from its customers.
Financing VAT due can have a substantial
impact on a company’s cash flow and
borrowing requirements.
On the other hand, a GST-registered
business will be able to claim input tax
credits on receipt of a valid tax invoice,
regardless of whether it has paid its
suppliers. To take full advantage of the
availability of input tax credits, businesses
may want to alter their accounts payable
processes to track and post supplier
invoices in a timely manner.

Indirect Tax Briefing 15

Irrecoverable GST
While most GST paid on inputs will be
reclaimable as input tax, the GST paid on
certain purchases, such as motor vehicles
and club memberships, will be blocked.
In addition, businesses that make
GST-exempt supplies will not be able to
claim input tax in full. If a business makes
both taxable and exempt supplies, it will
be entitled to claim some of the GST paid
related to its taxable activities.
Reviewing and adapting accounting
systems
Managing the new tax will require
businesses to have appropriate accounting
systems to charge, track and capture
GST amounts accurately, issue valid GST
invoices and submit accurate and timely
GST reports. To correctly recover input
tax, accounting systems will also need to
recognize distinctions between recoverable
and irrecoverable GST paid on purchases.
Current reporting systems will need to be
reviewed to determine if they are capable
of handling GST effectively. New systems
and processes may be required to ensure
compliance with the GST legislation — and
they will need to be fully operational on
the date of implementation.
Documentation
Businesses that make taxable supplies will
be required to provide valid tax invoices to
customers. The contents of a tax invoice
will be provided in the GST legislation.
Once the details are known, businesses will
need to adapt invoice formats to comply
with the new rules.
A valid tax invoice will also be required
as proof that a registered business is
entitled to claim input tax. To ensure that
input tax credits are claimed on business
costs incurred by employees, businesses
should also review their travel and expense
reimbursement policies to ensure that
claims are supported by valid tax invoices.
Grouping
The GST legislation is expected to Businesses operating in
contain specific rules that will allow Malaysia will need to plan
related companies to form a GST group
for reporting purposes. GST grouping
and budget across the
will provide cash flow relief to the group whole business for the
entities, as they will not have to charge implementation of GST.
GST on intra-group supplies. Each of the
group members will need to register for
GST in its own right, and any supplies
made for non-group entities will be
subject to the normal GST rules. Certain
other conditions regarding which type
of businesses can form a group will be
clarified once the GST legislation has been
released.
Impact on pricing
Businesses will need to consider the GST
impact on pricing of goods and services.
Due to the availability of input tax credits,
and the removal of the current sales and
service taxes, business costs will decrease.
As such, businesses will need to consider
such cost savings in their post-GST pricing.
The Government is proposing an
Anti-Profiteering Bill 2010 to be passed in
the current session of Parliament. The Bill
is aimed at curbing indiscriminate price
increases after GST implementation.
Transitional issues
GST issues may arise for supplies of
goods or services that span the GST
implementation date. Businesses will
need to consider their contracts carefully
to determine how to apply the GST rules
correctly in the transitional period.
Another factor to consider is the timing of
purchases. In many cases, business costs
will be lower after the introduction of GST,
as the tax charged will be deductible as
input tax. However, for “blocked goods”
that do not give rise to an input tax
credit, it may be more expedient to make
purchases before GST is introduced.
Indirect Tax Briefing 16

Managing the new tax
will require businesses
to have appropriate
accounting systems to
charge, track and capture
GST amounts accurately,
issue valid GST invoices
and submit accurate and
timely GST reports.
Bhupinder Singh
Tel: +603 7495 8205
Email: bhupinder.singh@my.ey.com
Yeoh Cheng Guan
Tel: +603 7495 8408
Email: cheng-guan.yeoh@my.ey.com
Specific GST transitional rules will be • If taxable goods have been purchased
available that should assist businesses from a non-licensed manufacturer
in correctly understanding and applying and the invoice for the goods does not
the GST to supplies made during the show that sales tax has been charged,
implementation period. The Malaysian a special GST refund may be claimed.
government has announced transitional A refund equal to 20% of the amount
provisions for the following situations: shown on the invoice multiplied by the
applicable sales tax rate may be allowed,
• Non-reviewable contracts that span
subject to the following conditions:
introduction — a supply made under a
non-reviewable contract will be treated • The applicant is registered for GST on
as a zero-rated supply to the extent that the appointed date
it is made before the earlier of either of
• The claimant holds the goods for the
the following dates:
purpose of making taxable supplies
• Five years after GST implementation
date Conclusion
• When a review opportunity arises At 4%, the GST rate in Malaysia is expected
to be low compared with similar taxes
Other conditions apply, including that
in other countries. However, businesses
the supplier and the recipient must be
must not underestimate the importance
registered for GST and that the supply is
of the new tax. GST will have an impact
a taxable supply
on all areas of the business, including
• Refund of sales tax for goods held at operations, contracts and pricing,
the date of introduction — there will be accounting and reporting processes and
a special refund equal to the amount systems, documentation and cash flow.
of sales tax of goods held by a business
when GST is introduced, subject to all of
the following conditions being met:
• The applicant is registered for GST on
the appointed date
• The claimant holds the goods for the
purpose of making taxable supplies
• Sales tax has been charged or paid
• The claimant holds a document
proving that sales tax has been
charged on the goods
Indirect Tax Briefing 17
GST in India
Current issues and emerging trends
The basic objective of
GST reform is to establish
a new tax system that is
economically efficient and
neutral in its application,
distributionally attractive
and simple to administer.
Indirect Tax Briefing
Satya Shalini
Poddar Mathur
The introduction of a goods and services tax (GST) is seen as the
single most important tax initiative in India since independence.
Given the impetus that GST could provide to the country’s
economy, the current focus is on achieving an acceptable GST
design and structure that can be implemented at the earliest
opportunity.
The basic objective of India’s indirect tax reform is to establish
a new tax system that is economically efficient, neutral in its
application, and simple to administer. The proposed GST, which
will replace a host of indirect taxes, is a consumption-based
value-added tax, levied at all points in the supply chain with credit
allowed for any tax paid on inputs acquired for use in making
the supply. It is proposed that GST will apply to both goods and
services in a comprehensive manner, with exemptions restricted
to a minimum.
The present constitutional division of tax powers in India between
the center and the states contributes to the inefficiency and
complexity of the current indirect tax system. At present,
indirect taxes do not apply comprehensively and the tax
structure suffers from a number of issues, including definitional
issues, classification disputes, a narrow base, the existence of
exemptions and multiple rates, and the irrational structure of
the levies. GST, as a simple, rational and neutral tax levied at a
low rate and on a comprehensive base, could be instrumental in
minimizing the tax litigation and controversies that surround the
indirect tax systems in India.
GST is also being eagerly awaited for its economic benefits. The
multiple taxes that currently apply to both business transactions
and consumption increase costs and discourage investment and
economic growth. One major concern is the “tax cascading”
that occurs under both center and state taxes when tax charged
at one stage in the supply chain is not recovered and instead is
included in the taxable base at a subsequent stage in the chain.
Tax cascading results in increased costs of production, making
businesses uncompetitive. The introduction of a GST could help
minimize such distortions.
As developments regarding the implementation of GST unfold,
many important aspects about the design of the new tax still need
to be addressed to ensure its successful implementation.
Fiscal autonomy
The fiscal autonomy of the center and of the states remains
a delicate subject. The proposed GST envisages the adoption
of a uniform tax base and tax rates across all states. However,
the states are hesitant to embrace this homogeny, perceiving
it as a curb on their fiscal autonomy that would tilt control over
taxation in favor of the center. The states would prefer to have
some degree of control over tax rates and the tax base to achieve
their social, economic and fiscal policy objectives. However,
harmonization of important elements of the tax system such
as the tax base, rates, administration and compliance systems
18
 The GST structure would need to provide for appropriate
rules to determine the place of supply or consumption
(of intangibles) and ensure that interstate and intrastate
transactions in intangibles are taxed at only one level.
and tax laws is likely to be critical to the
success of GST. Any variation in these
elements will be likely to bring distortions
in the system and undermine India as a
common market.
Proposals have been made to create a
mechanism whereby neither the center
nor the states would have the power
to unilaterally change the design and
structure of GST once it has been agreed
upon. Under this proposal, a permanent
constitutional body, the GST Council,
would make collective decisions about any
changes in the GST base or rates. If this
proposal is accepted, it will fundamentally
alter the face of fiscal federalism in India.
GST rate structure
While both the center and states agree
that GST rates must be revenue neutral,
views diverge as to the level of those
rates. Recently, the Finance Minister of
India proposed a triple-rate structure
consisting of a standard rate of 20% for
goods, a low rate of 12% for essential
commodities, and a separate rate of 16%
for all services. Such high rates could
seriously compromise the simplicity and
efficiency of the design of the new tax.
High rates would be likely to create a
vicious circle of base erosion through
exemptions and the need for multiple
rates, as well as increased complexity and
lower compliance, all leading to yet higher
rates to meet the tax administrations’
revenue goals.
Moreover, the separate rate for
services would perpetuate the present
inefficiencies of the system and would give
rise to classification disputes in the case
of mixed supplies of goods and services,
for instance, whether restaurant meals,
construction contracts, or the leasing
of machinery is a supply of goods or a
service.
To minimize these complexities, an
alternative approach could be to keep the
standard rate for both goods and services
at a reasonable level of 12 percent, with
no lower rate and a higher rate applicable
to limited luxury goods. Such a structure
would reduce the demands and pressures
on the governments to give preferential
treatment to various items. Since almost
two-thirds of indirect tax revenue is
currently derived from the lower rate
category products, the alternative
structure would not have any significant
revenue impact for the governments.
Real estate
Real estate is currently subject to multiple
taxes at both central and state levels, such
as the service tax applied to construction
and the state VAT levied on the works
contract for the building materials used.
state levies on real estate also include
stamp duty and a registration fee on
the purchase of a property. While the
center allows credit for inputs used for
making supplies of services, there is a
blockage of input tax credit at the state
level. This irrecoverable tax forms part of
the taxable base for other indirect taxes,
leading to significant tax cascading. Tax
cascading has a significant impact on
the commercial and industrial sectors as
well as on the housing sector the latter
of which constitutes a large proportion of
personal expenditure for final consumers.
Moreover, in its current form, the system
incentivizes transactions made without an
invoice.
Under the Constitution of India, the
taxation of land and buildings is
the exclusive domain of the states,
giving rise to numerous constitutional
challenges about taxation by the center
of transactions related to immovable
property. These definitional and
interpretational controversies could
be addressed by integrating the real
estate sector into the GST framework.
Internationally, the more “modern”
VAT and GST systems, such as those in
Australia, New Zealand, Canada and South
Africa, tax real estate supplies in the same
way as other goods and services. A similar
practice could be adopted in the Indian
context. The inclusion of real estate in the
GST system would reduce the cascading
effect of real estate taxes and significantly
improve reporting and compliance.
Indirect Tax Briefing 19
Petroleum sector
The petroleum sector accounts for a
significant portion of revenue for both
the center and the states. The current
system, however, means that tax
cascading is also an issue for companies
in this sector, as they suffer from the
blockage of credits for input taxes that
go into the production and distribution of
petroleum. For instance, costs incurred
in the exploration and development of
petroleum attract service tax but, in the
absence of any output CENVAT liability on
crude oil and natural gas, the service tax
incurred on exploration and other services
by upstream companies is not available as
a CENVAT credit. This tax thus becomes
embedded in the cost of production.
While the center has advocated the
inclusion of petroleum and natural gas in
the GST framework to allow credits for
taxes on capital goods and input services,
the states are in favor of keeping them out
of the GST net, lest they lose control over
this revenue base. Indications are that
even electricity could be kept out of the
scope of the GST.
Conclusion
GST is also being eagerly
The states and center governments remain
substantially committed to ushering in GST
awaited for its economic
in India in April 2011. Several fundamental benefits. The multiple taxes
issues still need to be resolved concerning that currently apply to
the design of GST. In addition, the states
and center must establish the essential
both business transactions
administrative infrastructure needed for a and consumption increase
successful implementation of the new tax. costs and discourage
Businesses now await an early consensus
on these issues in order to prepare for this
investment and economic
major tax reform. growth.
While both the center and
states agree that GST
rates must be revenue
neutral, views diverge as
to the level of those rates.

Treatment of services and

intangibles
In the present environment, the tax
treatment of services and intangibles
is prone to conflicts relating to the
appropriate jurisdiction for levying
taxes (e.g., whether they are taxable
by the states as goods or by the center
as services). Due to a lack of clarity,
intangibles are often subjected to both
taxes.
To address such issues, the GST structure
will need to provide appropriate rules
to determine the place of supply or
consumption and to ensure that interstate
and intrastate transactions in intangibles
are taxed at only one level. Significant
progress has been made in this area and Satya Poddar
rules have been framed for the proper Tel: +91 124 4644750
taxation of intangibles. Consensus Email: satya.poddar@in.ey.com
has emerged about the treatment of Shalini Mathur
intangibles as services as opposed to Tel: +91 124 4644217
goods. Email: shalini.mathur@in.ey.com

Indirect Tax Briefing 20

Access the latest views and
analysis from Ernst & Young’s
tax professionals

Tax Policy and

Controversy Briefing
Tax Policy & Controversy Quarterly Briefing
A quarterly review of global tax policy
and controversy developments
The global tax landscape is shifting at an unprecedented rate, with multiple drivers of change
in play: stimulus, climate change, fiscal austerity, windfall taxes, a shift to consumption taxes,
international tax changes healthcare reform and tax competition on the policy side and an
increased focus on enforcement, increased sharing of taxpayer information, rapid replication
of tax administration leading practices and an increased risk of tax examination all meaning
that the tax function needs to stay as connected as possible to the shifts and changes. Our
Tax Policy & Controversy Quarterly Briefing provides a timely update on the key trends and
issues at play today.

Download at www.ey.com/tpc

Research incentives in the new tax landscape

In early 2010, Ernst & Young surveyed our international network of R&D tax and incentive
practitioners in order to understand the current state and recent trends in R&D incentives around
the world, particularly as governments and companies are making changes to react to and take
the opportunities which arise over the re-balancing following the financial crisis. In this report we
look at the changing face of incentive use around the world, what steps companies should take
to manage their incentives claims most efficiently, and how tax administrations, in common with
many other areas of taxation, are increasing the enforcement focus on incentives to make sure
the right funds reach the right people.

Download at www.ey.com/researchincentives

VAT and GST: multiple burdens for multinational companies

With many countries turning to VAT to balance their books, what will an increased focus on VAT
compliance and enforcement mean for tax administrations and taxpayers? In this new Ernst
& Young thought leadership, we consider the multinational VAT compliance burden borne by
companies and look at ways in which the VAT compliance system could be improved to help
benefit everyone.

Download at www.ey.com/indirecttax

Managing today’s global workforce: Elevating talent

management to improve business
Global organizations are meeting the demands of today’s economy by taking a more
sophisticated approach to their talent management programs. According to our report,
leading companies have developed a strategically aligned and integrated way of managing
talent on a global level, using these programs to successfully execute their overall business
strategy and ultimately drive revenue.

Download at www.ey.com/humancapital

Indirect Tax Briefing 21

Japan’s consumption
tax reform setback
With the onset of global
recessionary conditions,
many had concluded that a
rate rise was seen as all but
inevitable.
Indirect Tax Briefing
Marc
Bunch
Masaaki
Ishida
The consumption tax regime in Japan has long been a challenging
subject for politicians, and the recent elections in the upper house
of the Diet has delivered another twist in the journey toward
reform.
The rise in likelihood of reform
Just over a year ago, the likelihood of significant consumption tax
change looked low, with the August 2009 elections for the House
of Representatives delivering historic gains for the Democratic
Party of Japan (DPJ). This resulted in the appointment of a new
prime minister, Yukio Hatoyama, of the DPJ, who had made a
manifesto commitment that the DPJ would not raise the rate of
consumption tax for the first four years of its government. This
commitment appears driven by concerns stemming from the
widely accepted belief that the introduction of VAT in 1989 (and
its increase in 1997 from 3% to the current rate of 5%) caused
Japan to return to recession.
Following the election, however, many commentators were calling
that commitment into question, given Japan’s vast public debt
(which at 200% of GDP is the highest of any developed economy)
and its welfare, pension and health care burden, which is set to
rise as the population ages. With the onset of global recessionary
conditions, many had concluded that a rate increase was seen as
all but inevitable.
The opportunity for debate
The resignation of Mr. Hatoyama, the appointment of Naoto
Kan as Prime Minister in June 2010 and the formation of a new
cabinet just prior to the Diet upper house elections provided the
DPJ with an opportunity to revisit the commitments made in the
lower house election. Mr. Kan, like other international leaders,
began making the case for fiscal reform and the reduction of
government debt. The cabinet endorsed the government’s new
strategy for fiscal management, which defines basic policies for
financial rehabilitation through fiscal 2020 and a medium-term
fiscal policy framework for the next three years.
Under this new strategy, a key objective was to reduce the
primary budget deficit to half the current level in terms of its
ratio to GDP in fiscal 2015, with the ultimate goal of turning the
primary deficit into surplus in fiscal year 2020. This strategic
view paved the way for Mr. Kan to explicitly state that increasing
consumption tax had to be considered as a possible option in
the overall fiscal strategy. It was believed that this openness was
timely and fitted in with the more general global austerity debate
and would be understood and accepted by the electorate as a
painful but necessary move.
Upper house elections
It seems that the mood of voters was misjudged. The Diet upper
house elections on 11 July delivered poor results for the DPJ. In
the postmortem, there was a consensus among commentators
22

There will be a greater
requirement to reform the
structure of consumption tax
to make it more palatable to
voters.
Marc Bunch
Tel: +81 3 3506 3893
Email: marc.bunch@jp.ey.com
Masaaki Ishida
Tel: +81-3-3506-2679
Email: masaaki.ishida@jp.ey.com
that the stance on consumption tax had
been a key factor, if not the key factor, in
the DPJ’s weak performance.
However, external pressure remains high
and, following the election results, the
International Monetary Fund (IMF) on 14
July 2010 urged the Japanese Government
to push ahead with increasing the rate of
the consumption tax gradually, starting
with fiscal year 2011, in order to reduce
the Japanese public debt.
Next steps
The outcome of the upper house elections
will affect the future of consumption tax in
Japan in two ways:
• In the short term, the election defeat
means that the DPJ has lost its control of
the upper house and will be hard-pressed
to pass bills through the Diet unless it
can recruit willing coalition partners.
Accordingly, this will likely delay the
reform of consumption tax.
• Secondly, there will be a greater
requirement to reform the structure
of consumption tax to make it more
palatable to voters. Such considerations
may include introducing multiple rates
to mitigate the impact on necessities,
tightening rules regarding cross-border
services, changing registration threshold
requirements and adopting a more
European VAT-style invoice-based system
to reduce leakages. Alternatively, there
may be additional direct government
spending to compensate vulnerable
or lower-income members of society.
Whichever tactic or combination of
tactics is adopted, it appears certain that
the overall package of taxes will need to
be creative, given the general public view.
Conclusion
Japan has significant public debt and
welfare challenges, all of which point to
an increase in consumption tax being part
of the overall solution. However, given the
upper house election result, garnering the
political will and developing a tax package
that will be acceptable to the electorate is
as difficult a challenge as it has ever been.
Indirect Tax Briefing 23
Five federal lessons
from California’s
near-VAT experience Robert
Cline
Tom
Neubig

As discussions of a federal value-added tax (VAT) start again in

While new to California,
value-added taxation
is not a new concept in
other states.
Washington, D.C., it would be helpful to consider some lessons
from US states’ experience with value-added taxes, and in
particular California’s 2009 near-VAT experience.
This article will address some of the key questions raised in
California; similar questions will be raised in any serious federal
VAT discussion. The questions include:
• How would you know a VAT if you paid one?
• Why should a company pay a VAT if it is losing money?
• Is a broad-based VAT politically sustainable over time?
• Which business taxpayers are winners or losers under a VAT?
• Does today’s dire fiscal future overcome the traditional
objections to a federal VAT?
The California Commission on the 21st Century Economy
(California Commission), appointed by the governor and the
legislature to recommend fundamental long-run changes to
modernize California’s state tax system, issued its final report last
September. The report included recommendations for significant
reductions and restructuring of California’s personal income tax,
the elimination of most of the state sales tax, and the complete
elimination of the corporate income tax. The tax reductions would
be paid for by a new, entity-level business tax, the business net
receipts tax (BNRT).1
While new to California, value-added taxation is not a new
concept in other states. The BNRT is a variation of a value-added
tax that was first adopted in Michigan in 1953 and continued in a
different form, the single business tax (SBT), until 2008. Another
version of a value-added tax, the business enterprise tax (BET),
has been used in New Hampshire since 1993. In concept, these
state taxes and the proposed BNRT are similar to the value-added
taxes used in over 140 countries around the world, although they
are quite different in operation.
The California Commission’s analysis of the BNRT and the public
discussion of the proposal provide important practical lessons on
the challenges of designing and adopting a value-added tax at the
state or federal level in the United States.2 This paper discusses
five key lessons from the state experience.

1
For a description of the full package of recommendations and the details of the BNRT, see
Report of the Commission on the 21st Century Economy, California Commission on the
21st Century Economy, September 2009
2
For a high-level overview of the VAT concept and policy issues related to the adoption of
a federal VAT, see Robert Carroll and Alan D. Viard, “Value Added Tax: Basic Concepts and
Unresolved Issues,” Tax Notes, 1 March 2010, pp. 1117-1126.

Indirect Tax Briefing 24

Lesson No.1: Value-added
taxation comes in many
designs and with different
labels.
The challenging first step in adopting a
value-added tax is understanding what it
is, and what it is not. In simple terms, a
VAT is a consumption tax that operates
like an indirect retail sales tax. A VAT
is designed to tax final consumption of
goods and services by households, but is
paid by businesses over the course of the
production and distribution of the product
or service.
A critical operational difference between
a VAT and a retail sales tax is that a VAT
is collected from all firms in the economy,
not just retailers. A VAT would be paid
by producers of raw materials all the
way through to the retailer at the end of
the chain of production and distribution.
Total collections under a comprehensive
VAT would equal, in theory, the amount
of taxes collected from a retail sales
tax imposed only on purchases by final
consumers. In addition to taxing all
industries, a VAT is imposed on all forms
of doing business (C corporations,
S corporations, partnerships and
proprietorships).
State VATs in Michigan and New
Hampshire, and the BNRT proposed in
California, differ from state retail sales
taxes and European-style VATs, by being
calculated from a firm’s books and records,
rather than at the individual tranaction
level. The tax is calculated on the net of
aggregate business receipts less aggregate
purchases from other businesses, rather
than a tax (or refund) on individual
transactions.
The BNRT, for example, defined the tax
base as gross business receipts minus
the purchase of goods and services from
other firms.3 The BNRT provided a full
subtraction for all purchases from other
firms. This distinguishes the BNRT from
the gross receipts tax in Ohio (CAT) and
modified gross receipts tax base in Texas
(margin tax).
The way a VAT is administered, or what
it is called, does not determine what type
of tax it is in operation. Some critiques of
the BNRT proposal asserted that it was
not a VAT because it was not constructed
as a credit-invoice, European-style VAT. In
fact, the BNRT was designed as a tax on
the value added of all taxable firms. There
are a number of ways of imposing a VAT
at the state (or federal) level, including
the additive approach (Michigan’s SBT and
New Hampshire’s BET), the subtraction
approach (the BNRT proposal) or the
credit-invoice approach (typical country-
level VAT or goods and services tax (GST).
In the United States, prior federal value
added tax proposals have used labels such
as Business Activity Tax (BAT), Growth and
Investment Tax (GIT), Business Transfer
Tax (BTT) or business cash-flow tax.
The definition of the tax base determines
what type of tax is being imposed on
business, not the label attached to the tax
or the way it is administered. This basic
fact was lost in the initial debate on the
BNRT proposal.4

3
Michigan experimented with both a subtraction method VAT (business activity tax) and an addition VAT(single business tax).
Under the addition approach, a firm calculates the tax base as the sum of all the payments to labor (wages and salaries and fringe
benefits) and to capital (rents, royalties, interest and profits). This sum is value added by the firm and, in theory, equals gross
receipts minus purchases from other firms, the subtraction approach. Under the BNRT proposal, multistate taxpayers would
apportion the national VAT base to California using a destination sales factor.
4
It is true that a state-level VAT, due to constitutional limits on state taxation of multistate firms, cannot be constructed with the full
border adjustments provided in country-level VATs. However, as states have shown, a business tax base can be constructed that uses
value added, not profits, as the tax base concept. For a detailed description of how the Michigan SBT operated, see Robert J. Cline,
“Should States Adopt a Value-Added Tax?” in Steven D. Gold, ed., The Unfinished Agenda for State Tax Reform, National Conference
of State Legislatures, November 1988, pp. 235-254.

Indirect Tax Briefing 25

Lesson No.2: VAT is not an
income tax because it is
paid by all companies, even
unprofitable ones.
While economists may describe the
BNRT (and VAT more generally) as
equivalent to an indirect retail sales tax,
the perspective of business taxpayers
(especially for non-retailers) is often
quite different. Businesses viewed the
entity-level BNRT as similar to the current
corporate income tax, not as a multistage
alternative for collecting sales taxes from
final consumers. US business taxpayers
will think about and analyze a VAT from
their corporate or individual income tax
system perspective. When taxpayers “ran
the numbers” to determine the impact
of a VAT on their tax liabilities, they used
income and expense information from
their current income tax returns and
compared the BNRT taxes to their income
tax liabilities. The fact that the proposed
BNRT in California replaced the corporate
income tax (as did the SBT in Michigan)
encouraged this taxpayer perspective.
One way to know, however, that the BNRT
is not an income tax is that taxpayers with
little or no income tax liability may have
a substantial VAT tax liability. This is the
case because the VAT base is equivalent to
payments to capital (including interest and
profits) and payments to labor. A labor-
intensive business with significant interest
expense that is currently losing money still
has value added. Under Michigan’s additive
form of a VAT, labor compensation
accounted for approximately 70% of the
aggregate tax base across all industries.
You also know that a subtraction VAT
is not an income tax because there
is no subtraction of interest paid or
compensation in determining the base
because they are components of value
added.
5
Although economists believe that a broad-based consumption tax would reduce the real income of consumers through higher prices
or lower real wages, businesses should be concerned about additional costs of a consumption tax, including compliance costs,
non-recoverable tax on purchases from other businesses, partial coverage of the tax base or taxable business entities, and cash-flow
considerations.
The initial response of many taxpayers will
be that they should not be paying taxes A VAT is designed to tax
on their business operations if they are
final consumption of goods
not making any profit. While an economist
would argue that the VAT is a tax on final and services by households,
consumption or the “incomes” of all labor but is paid by businesses
and all capital, not just the income of
over the course of the
equity capital (profit), taxpayers will have a
hard time accepting these interpretations production and distribution
given their income tax frame of reference. of the product or service.
The fact that economists may conclude
that a national VAT is likely, in the long
run, to be passed on to consumers through
higher prices, may not overcome this
fundamental objection.5
To successfully advance the VAT concept,
proponents will have to convince skeptical
business taxpayers that it is “fair” for them
to pay VAT even if they have no profits.
Another way to think about this is that
business taxpayers will have to accept
the view that the VAT is similar to local
property taxes paid on business property
or to retail sales taxes paid on business
purchases. These non-income-based taxes
are owed regardless of the taxpayer’s
current level of profit.
Politically, this is a hard sell, as
demonstrated by the negative reaction of
many businesses to the BNRT proposal,
and Michigan’s 50-year experience
trying to defend the VAT against intense,
ongoing pressure to add profit-sensitive
income tax adjustments to the SBT. Those
experienced with the SBT have pointed out
that the tax base inexorably shifted over
time from a relatively pure VAT to a hybrid
value-added and income tax system. Given
this history, it is not surprising that the
new Michigan business tax that replaced
the SBT in 2008 is a package of separate
taxes on income and modified value
added.
Indirect Tax Briefing 26
 Lesson No.3: It will be difficult
A critical operational to maintain a broad value-
difference between a VAT added base.
and a retail sales tax is that
The California BNRT debate shows the
a VAT is collected from all difficulty in adopting and sustaining a
broad value-added tax base, without
business operating in an
“carve-outs” that reduce revenue and
economy, not just retailers.
create economic distortions.
The BNRT proposal defined value added
as the difference between a taxpayer’s
total non-financial revenue and all of its
purchases from other firms. Late in the
California Commission’s deliberations,
the question was raised as to whether
payments to health insurers would be
allowed as a subtraction in determining
the VAT base. Some members of the
Commission argued forcefully that
these payments are “purchases” from
other firms and should be subtracted in
determining the BNRT base.
Fringe benefits, including health care
premiums, purchased by an employer
are a form of compensation “paid” to
employees. As such, they would be treated
under a subtraction VAT like wages and
salaries with no subtraction from the
base. This is clear if you think of a VAT
base as including all payments to capital
and labor (the additive approach) where
compensation includes wages and salaries
and all fringe benefits.
The Commission could not reach
agreement on the definition of employee
compensation for the BNRT and “punted”
the issue to the Legislature, noting that:
“Wages and salaries have been excluded
as deductions from gross receipts,
together with health benefits, pension
contributions, other employee benefits
and payroll taxes. Such treatment may
warrant examination especially with
respect to health benefits if such coverage
is mandated by future changes in federal
law.”6
This is a clear example of the challenge
in explaining what a VAT is and how
to think about its construction. A pure
VAT would not allow subtractions for
alternative forms of compensation. The
tax base is designed to tax value added
by labor and capital, and that includes
all forms of payments to labor. Without
a clear understanding of the concept of
a VAT base, members of the California
Commission had a hard time thinking
about what should or should not be
subtracted in defining the BNRT base.
When adopted in 1975, the Michigan
SBT included all forms of compensation
in the tax base. The broad definition of
compensation was maintained for two
decades before unemployment insurance,
workers’ compensation and Social Security
taxes were excluded from the base. It was
another 10 years before the legislature
agreed to phase in a 50% deduction for
health and welfare plan contributions.
While the Michigan experience suggests
that the subtraction of health care
payments from the BNRT may have been
inevitable, the fact that the door was
opened before the California legislature
began debating the proposal should warn
advocates of a VAT of the difficulties of
explaining and defending the concept in
the legislative arena.

6
Report of the Commission on the 21st Century Economy, California Commission on the 21st Century Economy,
September 2009, p. 45.

Indirect Tax Briefing 27

Once a value-added tax is adopted, the
challenges in defending the VAT tax base
from steady erosion over time will be
just as great, if not greater, if the VAT
is viewed as an indirect sales tax. As is
clear from the state experience with the
sales tax, one can expect continuous VAT
legislative changes over time that provide
full exemption or reduced tax rates on a
growing list of goods and services.
The experience with the credit-invoice
form of national VATs also demonstrates
that a VAT base will fall far short of a
comprehensive consumption tax base.
According to recent estimates, the
percentage of potential consumption that
is taxed under the VATs in OECD countries
averages only 58%.7
Lesson No.4: A VAT would
cause a major redistribution of
business tax liabilities.
While there has been extensive discussion
about the distributional effects of a VAT
on households, it is likely that an entity-
level VAT would involve debate about
the distribution of statutory business tax
liabilities by industry and form of doing
business. At least in the short run, many
businesses would not assume that all of
a value-added tax could be passed on to
their customers through higher prices.
7
Consumption Tax Trends 2008: VAT/GST and Excise Rates, Trends and Administration Issues, OECD, p. 69. This is an unweighted
average of the VAT revenue ratios presented in Table 3.14. They measure the ratio of actual VAT collections to the revenue that
would be raised at a standard rate on total consumption (before VAT).
The above discussion has emphasized that
an entity-level VAT (administered as either
an addition or subtraction type) would be To successfully advance
evaluated by business taxpayers using the VAT concept,
their corporate income tax perspective.
It is also likely that another state VAT or
proponents will have
a new federal VAT would be considered to convince skeptical
partly or fully as a substitute for the business taxpayers that
corporate income tax. In this situation,
business taxpayers will first focus on the
it is “fair” for them to pay
change in their tax liabilities if a VAT is VAT even if they have no
adopted. profits.
Michigan’s experience with the SBT, as
well as estimates of the distribution of
the BNRT base by industry prepared by
Ernst & Young LLP for the California
Commission, provide insights as to how
the distribution of business taxes would
change if the corporate income tax is
replaced with a VAT. The key insights are:
• A VAT would redistribute business taxes
from C corporations to pass-through
entities. A VAT would apply an entity-
level tax to all forms of doing business.
As a result, a revenue-neutral
switch from a corporate income to a
value-added tax base would impose
new taxes on pass-through businesses
and lower taxes on C corporations. This
redistribution would be characterized
as a shift in taxes from large businesses
to small businesses, although it is a
function of the type of business, not
size.
Indirect Tax Briefing 28
 • Among C corporations, profitable
capital-intensive industries, such as
Many businesses would manufacturing, would generally pay
not assume that all of a lower taxes, while labor-intensive
industries, such as professional
value-added tax could services firms, would pay higher taxes.
be passed on to their This occurs because capital-intensive
customers through industries tend to have higher ratios of
profits to value added.
higher prices.
• The combination of shifting taxes
to pass-through entities and labor-
intensive industries would result in
a significant increase in the share of
business entity taxes imposed on service
industries compared with manufacturing
industries. Because of this result,
proponents of state-level VATs have
argued that the VAT is an effective,
indirect way of extending consumption
taxes to services, something that has
been difficult to do using the retail sales
tax. Proponents of a national VAT also
view it as an indirect way to tax the final
consumption of goods and services.
The important lesson here for both
business taxpayers and legislators is
that business taxpayers will focus on the
industry-by-industry distribution of the
VAT payments, as well as the payments
by different types of businesses. This
information is critical in evaluating a VAT
proposal. One of the criticisms raised
by opponents of the BNRT is that the
Commission did not provide industry
distributional information when the BNRT
was debated.8 While economists argue
that a VAT would, in the long run, be
shifted forward to consumers in the form
of higher prices or backward primarily to
labor in the form of lower wages, the initial
change in the distribution of the legal
liabilities on businesses would be part of
the focus of the political debate.

8
The California Legislative Analyst’s Office (LAO) did provide limited distributional information to legislators in testimony presented
to the Assembly Revenue and Taxation Committee on the BNRT proposal on 13 January 2010. Using 2007 tax return data, the LAO
estimated that only 55% of the BNRT would be paid by C or S corporations.

Indirect Tax Briefing 29

Lesson No.5: Proponents of
a new tax have the burden of
proof.
While tax policy economists tout the
economic efficiency of a broad-based VAT
relative to alternative tax designs, the
BNRT debate shows that there are many
reasons for opposing a VAT. Redistribution
of the California tax burden was a major
reason for opposition to the BNRT. A VAT
without specific low-income relief would
be a larger share of low-income families’
income, due to their lower saving rate
and different consumption patterns. The
California tax reform proposal increased
the focus on the potential redistribution
across income groups by significantly
lowering the top personal income tax
rates.
Perspectives of both supporters and
opponents on a VAT will likely depend on
how its revenue will be used. For example,
support for a federal VAT as an add-on
tax to reduce future deficits may be quite
different from support to use the tax to
replace the corporate income tax or a
portion of the individual income tax or
payroll taxes. In California, the BNRT rate
was proposed at 4% in order to be revenue
neutral. At this a rate, most businesses
were concerned that even with repeal of
the corporate income tax and a reduction
in sales taxes, the BNRT would be a
significant tax increase for them, and that
they could not pass all of the tax on to
their customers.
Unlike a federal VAT, which could tax
imports and exclude exports to achieve a
consumption tax on domestic households,
the California BNRT could not fully tax
imports in California or fully exempt
exports from California. Opponents argued
that this would place California businesses
at a potential competitive disadvantage
in the national and global marketplace. At
the federal level, more complete border Perspectives of both
adjustments under a destination VAT
supporters and opponents
would overcome this problem, but result
in significant tax refunds to exporters. on a VAT will likely depend
This refund mechanism has generated on how its revenue will be
compliance problems in countries with
used.
VATs.
Finally, the BNRT was considered a
new and untried state tax. Despite
the long experience of Michigan and
New Hampshire, and countries with
value-added taxation, legislators and
many policy analysts had significant
concerns about the proposal. Although
people are familiar with the transaction-
based, credit-invoice VATs and GSTs in
other countries, many of the US proposals
for a VAT are for a subtraction method
tax calculated at the aggregate entity
level, similar to the corporate income
tax. A VAT variant, the Bradford X-Tax
proposed as part of the 2005 President’s
Advisory Panel on Tax Reform Growth and
Investment Tax, which allows a deduction
for labor compensation, is even closer to a
corporate income tax.
If the design of a new tax confuses people
about its effects, it is less likely that the tax
will gain widespread support. If businesses
think the burden of a VAT will reduce their
profits, while consumers think they will
pay the VAT through higher prices, there
will be few supporters of the new tax as a
viable way to raise additional federal taxes.
Confusion about the economic effects of
an existing tax, such as who really bears
the burden of the corporate income tax, is
a different matter. Proponents of a new tax
have the burden of proof.
Indirect Tax Briefing 30
 Conclusion
The proponents of a
Federal tax policy makers do not have to
US VAT, whether as a travel to other countries to learn about
replacement tax or an value-added taxes. A trip to Michigan,
New Hampshire or California could
add-on tax, will have
provide important insights to the coming
the burden of proof to debate on value-added taxes. The recent
convince the public, near-VAT experience with the California
Commission’s tax reform proposal can
business taxpayers and
provide some important lessons for the
Congress that the net federal VAT debate.
benefits of a national A value-added tax can come in many
VAT are now sufficient different designs and with different names.
Confusion about what the new tax actually
to make it politically
is would make it more difficult to adopt. A
appealing. VAT is not an income tax, so proponents
need to prepare unprofitable corporations
and pass-through businesses for remitting
additional taxes to the government. The
confusion about the tax base, and any
resemblance to the corporate income tax,
will make it less likely to achieve a broad,
non-distortionary and sustainable tax
base. The distributional consequences
(in terms of who ultimately bears the tax
burden) of a VAT will be important, and an
entity-level VAT will cause debate about
the industry distribution of tax liabilities.
Robert Cline
Tel: +1 202 327 7829
Email: robert.cline@ey.com
Tom Neubig
Tel: +1 202 327 8817
Email: tom.neubig@ey.com 9
Henry Aaron, “Consumption Taxes: Revenue, Structural and Equity Effects,” Tax Analysts Tax Notes, 17 May 1982, p. 527.
Indirect Tax Briefing 31
The California debate over the BNRT
focused on a replacement consumption
tax to reduce or eliminate other taxes.
At the federal level, a VAT may be
considered as an add-on to reduce the
deficit or finance additional spending, in
addition to consideration as a complete
or partial replacement of existing taxes.
The California BNRT had a 4% tax rate,
which was high by US state standards,
but low compared with VAT rates in other
countries and at the federal level. The
California debate did not focus on the full
range of transition issues, which will be
important in any federal consumption tax
debate.
Finally, there are many reasons different
groups will find to oppose a federal
VAT. As the respected public finance
economist Henry Aaron said almost
three decades ago in commenting on
a federal VAT: “The value added tax
belongs to a class of issues sufficiently
interesting and attractive never quite to
die, but not sufficiently appealing ever
to be adopted.”9 The proponents of a US
VAT, whether as a replacement tax or an
add-on tax, will have the burden of proof
to convince the public, business taxpayers
and Congress that the net benefits of a
national VAT are now sufficient to make it
politically appealing.
Amended excise
legislation in Germany
impacts intra-Community
distance selling Robert
Böhm
Nadia
Sayeed

In the European Union (EU), Council Directive 2008/118/EC

(16 December 2008), concerning the general arrangements
for excise duty and repealing Directive 92/12/EEC, has brought
about extensive changes for trade in goods subject to excise
taxes. While the main objective of the Council Directive was the
implementation of the new computer-based Excise Movement and
Control System, other areas of excise tax law were also affected,
including the rules for distance selling.

Distance selling in Germany

Commercial transactions are referred to as “distance selling”when
goods that are in “free circulation” in the EU country of dispatch,
are sold by a commercial seller in one EU member state to a
private individual in another EU member state. Distance selling
includes mail order sales as well as goods transported by couriers
and parcel companies.
In essence, the Council Directive does not change the general
system of distance selling. In principle, any excise duties must
be paid at the time of delivery in the country of destination
and the excise duties must be guaranteed before the goods are
dispatched.

As of 1 April 2010, a
distance seller based in
another member state must
appoint a tax representative
in Germany in order to
sell (excisable) goods to
customers in Germany.
In the past, the distance seller vending excisable goods to a
private individual in Germany was generally the debtor of the
excise duties. Optionally, the distance seller could nominate a tax
representative, but this was not mandatory (except in the coffee
tax legislation, which is not harmonized). As a consequence,
in addition to payment of the excise duties, the distance seller
was also responsible for various legal requirements in Germany
(e.g., submitting the preliminary report of each shipment to the
responsible customs authorities and filing of the relevant excise
tax declarations).

New requirements
As of 1 April 2010, a distance seller based in another member
state must appoint a tax representative in Germany in order
to sell goods to customers in Germany. The tax representative
becomes the debtor with respect to the payment of the excise
duties and fulfilment of various formal requirements. However,
the distance seller is ultimately liable for any non-compliance.
The new legislation affects the German excise laws for spirits,
sparkling wine and intermediate products (e.g., sherry), alcohol,
beer, coffee and energy products. The German excise laws for
wine, tobacco and electricity do not offer special rules for the
legal concept of distance selling from other member states.
Prior to the initiation of any distance selling to Germany, the
distance seller of another member state must first notify the
German customs authorities. Additionally, the nominated tax
representative must obtain an authorization from the responsible

Indirect Tax Briefing 32


Businesses engaged in
intra-Community distance
selling to other EU
countries should check
the local rules.
Robert Böhm
Tel: +49 211 9352 10529
Email: robert.boehm@de.ey.com
Nadia Sayeed
Tel: +49 211 9352 17904
Email: nadia.sayeed@de.ey.com
German customs authorities to act on the
distance seller’s behalf.
The tax representative performs the
following responsibilities on behalf of the
distance seller:
• maintains a receipt book and records of
the shipments to Germany
• files a report, which provides details
decisive for excise tax purposes, to
the responsible customs authorities in
advance of each shipment
• files the appropriate tax declarations
for the shipments (simplifications in this
context may apply)
• accounts for and pays the excise duty
due in the name of the distance seller
We emphasize that the distance
seller is ultimately liable when the tax
representative fails to comply with these
requirements, and may be subject to
administrative penalties for any non-
compliance.
The amendments to the German excise
duty legislation pursuant to the Council
Directive have changed the way in which
the distance selling of excise goods
is conducted in Germany. Affected
businesses need to understand the new
rules and responsibilities, nominate an
approved tax representative and establish
procedures to ensure compliance. In
this context, compliance with existing
national VAT requirements should also be
considered.
Additionally, we note that businesses
engaging in intra-Community distance
selling to other EU countries should
check the local rules of those countries,
considering that national excise tax laws
have undergone amendments pursuant to
the Council Directive.
Indirect Tax Briefing 33
Thai Customs Voluntary
Audit Program
A rare opportunity to reduce customs and VAT
liabilities
The implications of non-
compliance identified by
the customs authorities can
be severe. In addition to the
underpaid duty, companies
can be assessed penalties
of up to four times the
aggregate value of the
goods and duties involved.
Indirect Tax Briefing
Sukasem Phil Bell Aschara
Triwittayakun Toopsuwan
The Thai Customs Voluntary Audit Program (VAP) is now
available until 30 September 2010. VAP is a rare and limited
opportunity to minimize customs and VAT liabilities.
In Thailand, the customs clearance of goods is based on the
principle of self-assessment, whereby the importer is responsible
for accurately and completely filing customs declaration forms
and assessing customs duties and related taxes. In turn, the
shipments are cleared with minimal customs intervention. To
regulate compliance with the customs laws and regulations, the
Thai customs authorities conduct audits, which can occur many
years after the goods are imported/exported.
The implications of non-compliance identified by the customs
authorities can be severe. In addition to the underpaid duty,
companies can be assessed penalties of up to four times the
aggregate value of the goods and duties involved. Furthermore,
the customs authorities can go back 10 years to recover
underpaid duty and impose penalties up to 15 years from the
date of import. Additionally, companies are subject to underpaid
VAT, VAT penalties equal to the underpaid VAT, and interest on
VAT underpayments (1.5% per month, capped), as well as interest
on customs duty underpayments (1% per month, uncapped).
Similar to the VAP introduced in 2007, the new VAP
provides a limited opportunity for companies that have
inadvertently underpaid customs duties and VAT to undertake a
self-examination and settle any underpayments. The company
is then not subject to customs/VAT penalties and customs duty
interest charges. VAP offers greater benefits than the standard
voluntary disclosure process, which does not protect companies
from the VAT penalties and customs duty interest.
In theory, the Customs Audit Bureau invites companies that it
believes have compliance issues to participate in the program. In
practice, however, it may be possible for a company to proactively
request to participate in the program. In both cases, a formal and
clear acceptance from the company is required.
34
 The following circumstances are excluded
Companies concerned from VAP:
about past non- • Issues disclosed under a previous VAP
compliance should • Issues relating to smuggling or bad faith
consider proactively (with clear evidence) in relation to duty
avoidance
taking advantage of the
VAP benefits. • Issues relating to the import of
prohibited/restricted goods or goods
infringing intellectual property rights
• A company subject to an ongoing
post-importation audit/investigation or
prosecution by relevant government
authorities (e.g., Department of Special
Investigation) with respect to customs
offenses
Companies concerned about past non-
compliance should consider proactively
taking advantage of the VAP benefits. The
first step is to undertake a self-review of
import/export activities, particularly with
respect to verifying the correctness of
duty and VAT payments, and assess the
potential customs liabilities. Depending on
the customs exposure identified, the VAP
may be an advantageous strategy — but
time is of the essence.

Sukasem Triwittayakun
Tel: +66 2 264 0777, ext. 21040
Email: sukasem.triwittayakun@th.ey.com

Phil Bell
Tel: +66 2 264 0777, ext. 77035
Email: phil.bell@th.ey.com

Aschara Toopsuwan
Tel: +66 2 264 0777, ext. 21046
Email: aschara.toopsuwan@th.ey.com

Indirect Tax Briefing 35

Reviewing your 2010
VAT implementation
How well has your organization implemented the new
value-added tax (VAT) rules that came into force in the European
Union (EU) on 1 January 2010? And what could it mean if there
are errors or gaps in your implementation?
In one of the most significant change in EU VAT rules since the introduction
of the single market, the 2010 VAT reform introduced new place-of-supply
rules for services. However, the implementation was complicated and some EU
countries did not have their domestic legislation in place by 1 January. This was
partly due to uncertainty about the interpretation of elements of the new rules.
Added to that, the reform posed many practical issues. For example, it was not
clear how the new tax point rules should be applied for cross-border services,
and the requirement for service listing (and, in some cases, service acquisition)
reports also caused confusion. Some of these issues are still present.
While it is hoped that EU tax administrations will apply a light touch during the
introductory period of the new rules, the lack of clarity over the interpretation of
much of the new rules and the level of detail required leave plenty of scope for
getting it wrong — with the resulting risk of assessments, penalties and interest.
Our EY RAP (Risk Assurance and Planning) survey will help you assess and
benchmark the implementation of the VAT 2010 rules across your organization
and the level of risk you may face from errors or gaps. We can then assist you
in implementing remedial action based on our knowledge of leading practices
employed by business. The scope of the questionnaire is explained in
more detail here.

Indirect Tax Briefing 36

What is EY RAP?
• EY RAP is a web-based survey designed by EY
professionals with many years experience in VAT and
accessed through Ernst & Young Online.
• EY RAP is an efficient and cost-effective process
designed to provide information — including risk —
about particular aspects of the business (in this case,
connected to the implementation of the VAT 2010
changes).
• The survey questions are multiple choice. For some
questions, it is only possible to select one of the optional
answers. For others, it is possible to select a number
of the options as answers. Depending on your selected
answer, you may be asked to provide further explanation
in a text box. It is also possible to attach files to the RAP
survey.
• Each answer is weighted and compared with a norm and
thus provides you with a risk assessment.
• An automatic survey report is generated following
submission of the responses. It includes bar graphs
showing the weighting of the response to the norm —
i.e., it gives an immediate visual risk guide.
• It is an effective and cost-efficient means of reviewing
indirect tax aspects of your business.
What does the Post VAT 2010 Implementation
Review survey cover?
The EY RAP Post VAT 2010 Implementation Review survey covers
the following key areas in managing and accounting for VAT on
these new rules:
• General background and overview: This determines the areas to
be addressed in the following sections.
• Accounts receivable: This covers the design and application
of systems codings, determination of the place of supply and
verification of the VAT status of customers, invoices, global or
regional contracts, inter-company transactions, tax points, and
the completion of EC service listings.
Indirect Tax Briefing
• Accounts payable: This covers the design and application of
systems codings, determining the establishment receiving
services (where you have more than one) including where
you may have entered into a global/regional contract, and EC
service acquisition listings.
• Eighth Directive refunds: This covers the identification of
“foreign VAT” and the processes to file claims under the new
procedures.
What are the benefits to you in running this
survey?
• It enables you to benchmark the degree of implementation of
the VAT 2010 rules across your businesses, and assists you
in reporting to management on this aspect of the indirect tax
function.
• It will help you to identify areas of 2010 VAT risk and may, for
example, help support a business case for additional resources
for managing this area of the indirect tax function.
• The survey is designed so that you should not have to
undertake any research or preparation. In comparison with
more traditional ways of assessing VAT risk across businesses,
the survey is a cost-effective approach in terms of cost and
time.
• It provides a basis for determining risk management priorities
where gaps are highlighted, enabling us to team together to
help you in resolving these issues based on our knowledge of
leading practices.
Further information
Your local Ernst & Young VAT contact, or any member of our
EMEIA Tax Center VAT team, will be able to provide you with
more details on our 2010 VAT questionnaire, including our fee
structure. They will also help you get started and explain the
process for accessing and completing the survey via
Ernst & Young Online.
37
Indirect Tax Briefing 38
Contacts
Philip Robinson Global Director —
philip.robinson@uk.ey.com
+41 58 289 3197
Indirect Tax

Jeffrey N. Saviano
jeffrey.saviano@ey.com Americas
New York +1 212 773 0780
Boston +1 617 375 3702

Robert Smith
robert.smith@cn.ey.com Asia-Pacific
+86 21 8882 2328

Robin Maxwell (VAT)

robin.maxwell@ie.ey.com
+353 1 221 2972

Paul van Leeuwen (VAT)

paul.van.leeuwen@nl.ey.com
+31 (0) 8840 78383
EMEIA Tax Center
Neil Byrne (CIT)
neil.byrne@ie.ey.com
+353 1 221 2370

Adrian Hextall (VAT)

ahextall@uk.ey.com
+44 20 7951 1642

Marc Bunch
marc.bunch@jp.ey.com Japan
+81 3 3506 3893

William M. Methenitis Customs and

william.methenitis@ey.com
+1 214 969 8585
International Trade

Indirect Tax Briefing 39

 Ernst & Young

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About Ernst & Young Indirect Tax services About Ernst & Young
Ernst & Young is a global leader in
Indirect taxes, ranging from VAT and customs duties to environmental levies, affect the assurance, tax, transaction and advisory
supply chain and the financial system. They pose unique challenges to multi-national tax services. Worldwide, our 144,000 people
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Thanks to our network of dedicated indirect tax professionals, who share knowledge
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and ideas, we can provide a seamless, consistent service throughout the world and deal achieve their potential.
effectively with cross-border issues. These include advising on the VAT treatment of new
and complex transactions and supplies and helping resolve classification or other disputes Ernst & Young refers to the global
and issues with the authorities. organization of member firms of
We provide assistance in identifying risk areas and sustainable planning opportunities for Ernst & Young Global Limited, each of
indirect taxes throughout the tax life cycle. We provide you with effective processes to help which is a separate legal entity.
improve your day-to-day reporting for indirect tax, reducing attribution errors, reducing Ernst & Young Global Limited, a UK
company limited by guarantee, does
costs and ensuring indirect taxes are handled correctly.
not provide services to clients. For more
We can support full or partial VAT compliance outsourcing, help identify the right partial information about our organization, please
exemption method and review accounting systems. Our customs and international trade visit www.ey.com
team help you manage customs declarations, audit and review product classifications
and evaluate import/export documentation. Our globally integrated teams give you the
perspective and support you need to manage indirect taxes effectively. It’s how
Ernst & Young makes a difference.

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