The current Covid-19 crisis is reshaping the economic order. Customers are (fundamentally) changing their behavior and jurisdictions are implementing all kinds of (temporary) measures to combat the crisis. These will be drivers for businesses to decide on change, which immediately presents challenges for the way businesses comply with value-added tax (VAT).
Why the Post-Crisis Period Presents Challenges for VAT
Many businesses are now in survival mode, which means that lots of items that were previously placed high on the agenda are now no longer a priority. Although that is a completely understandable natural reaction, businesses need to think about how they are going to position themselves in the post-crisis period. Like any other crisis, the Covid-19 crisis will (ruthlessly) reshape society in lasting ways.
Businesses will need to think through how to adapt in the economic order that is currently being restructured. No one knows exactly what will come, but one thing is for sure. We are not going back to normal. We are heading to the “new normal” instead, a new period in which business assumptions once so indisputable are coming into question.
Preparation for this post-crisis period requires focus on what may remain and what may change for businesses, their customers and the sectors they operate in. From a tax perspective, businesses will face many challenges. Especially from the perspective of VAT, a tax that is placed on a good or service at each stage of production where value is added.
What Will the “New Normal” be Like?
As said, no one knows exactly what will come. For sure though, businesses will need to make changes as a consequence of customers changing their behavior as well as jurisdictions implementing new (VAT) legislation in response to the Covid-19 crisis.
The crisis will also change the way businesses (and their investors) think about risk. As a result of the Covid-19 crisis, businesses are expected to reduce their exposure to volatility and to bring the business back where they can control it. That can have a massive impact on how supply chains are structured.
One of the biggest influences in supply chain management has been the explosion of manufacturing in Asia. For decades the focus has been to serve a mass market, with products produced at a high pace in countries with low labor costs.
It is only quite recently that sustainability is becoming a factor of importance. On one hand the Covid-19 crisis will accelerate this shift. On the other hand there will be a turning point in thinking about “distance.” Pictures of planes kept on the ground make us realize that, although one can fly in a few hours to another part of the world, distance will never die. The expectation is that businesses will keep looking for ways to run their supply chains faster and more efficiently with a minimal carbon footprint and, at the same time, make them less reliant on distance by carrying out activities more locally.
While businesses may now have started to look into restructuring their supply chains, a rapid return of the virus will remain a real threat as long as there is no vaccine or effective treatment available. Furthermore, it cannot be ruled out that in the near time we have to battle other viruses with a drastic impact on people’s health as well as the functioning of the economy. Even the medieval plague still makes occasional, unwelcome appearances around the globe. That means that the likelihood that businesses overnight have to deal with radical changes and new (temporary) VAT measures from jurisdictions will only increase.
How the “New Normal” Will Impact How Businesses Manage VAT
Up until recently there was a trend of thought that, with robotics and artificial intelligence becoming more prevalent in the workplace, technology would reduce the manual work around VAT compliance. Since the outbreak of the Covid-19 crisis many jurisdictions, if not all, have turned overnight to emergency VAT measures to support their stuttering economies. Occasionally these measures work retroactively.
Overnight, businesses have had to accommodate the (temporary) changes in VAT legislation. As changes in VAT legislation generally require an impact analysis, businesses are generally not able to implement these in their systems in the short term, certainly not with retroactive effect.
Also, as the measures are only temporary, the question arises whether implementation in the systems is actually worth the effort. By the time the measure is successfully implemented in the systems, the measure may already have been withdrawn or changed again. It underlines that, despite the promises of innovation, manual work around VAT compliance may still be required and may even increase due to (extreme) volatility.
Apart from the increase of the manual workload around VAT compliance, changes in supply chains require analysis in order to assess for instance whether:
- registrations need to be added or canceled;
- rulings with (local) tax authorities need to be revisited;
- VAT licenses may need to be applied for or can be canceled; or
- contracts with suppliers, customers and other third parties need to be modified.
What Businesses Should do in Response to the “New Normal”
Responding to the “new normal” from a VAT perspective starts with being organized. The post-crisis period will show that businesses not only should make efforts to adapt, but also that they need to tie in extra precautions in their business continuity plans to be in a position to act quickly in the event of new unforeseen sudden (radical) changes. VAT, that is so connected with many business processes, should be at the table when these business continuity plans are being reworked.
Also, the existence of a well-designed tax control framework, that many businesses over the years have developed, becomes more than ever crucial when businesses enter the post-crisis period. A tax control framework is an internal control instrument—and part of an overarching business control framework—aimed at the tax function within a business. The added value of a tax control framework lies in its ability to provide a verifiable assurance that enables businesses to be fully aware and “in control” of all the positions and issues. A well-functioning tax control framework helps businesses to identify, assess, understand and undertake the appropriate respond to mitigate the impact of (potential) risks.
As part of such a framework, businesses should keep a list of legislative actions in jurisdictions they operate in to see whether their activities are impacted and action is required. In order to be able to make a judgment, the professionals looking after VAT should be fed by the relevant stakeholders within their organization so that they have an up-to-date, complete and accurate view on the supply chain(s) as well as current sales and those still in the pipeline.
In particular, businesses that over the recent years have been caught by the “digital waves,” i.e. jurisdictions extending their VAT regimes to nonresident business selling online, could build on their experience with monitoring legislative actions in countries all around the globe as well as continuously analyzing the taxability of their products. They may have developed best practices and already rolled out processes to ensure that:
- the relevant stakeholders are timely informed on legislative actions impacting the VAT position of the business; and
- the relevant stakeholders in return timely inform professionals looking after VAT on developments in relation to the supply chain as well as the product portfolio.
Other businesses can learn from this and are therefore recommended to connect with these businesses or their advisers, so they can look out for best practices and pitfalls.
In the run-up to the post-crisis period businesses are recommended to:
- Ensure that VAT is at the table when business continuity plans are being reworked.
- Ensure that professionals looking after VAT proactively and the relevant stakeholders (sales, finance, IT, procurement, etc.) liaise with each other on a frequent basis, which will help running supply chains efficiently from a VAT point of view.
- Raise internal awareness of restrictions around technology.
- Connect with “experienced” businesses and their advisers to learn from best practices and pitfalls.
Jan Sanders is a VAT Partner and Michelle Rang is a VAT adviser at PKF Netherlands.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.