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Daily Tax Report: International

INSIGHT: VAT—Fiscal Tool of Choice in Coronavirus Downturn

March 12, 2020, 7:00 AM

Countries are turning to value-added tax (VAT) measures to provide instant stimulus to businesses and consumers as economies slow amid Coronavirus (Covid-19) outbreak concerns. Measures include wholesale rate cuts, targeted benefits for sensitive sectors such as tourism or payment holidays.

So far, most measures have come from the hardest hit Asia-Pacific region, but they are now also appearing in Europe. However, the region may face some restrictions resulting from EU state aid rules. This does also highlight the U.S.’s lack of a federal VAT which it can quickly cut to underpin market confidence.

VAT—the Crisis Tax

VAT is operated in around 170 countries around the world, and is a popular economic stimulant as it can be adjusted overnight and can boost business cashflows and consumer spend immediately. Corporate and personal income taxes generally take months to work through the economy.

There are a number of VAT measures available to countries looking for a swift fillip for their economies:

  • rate cuts which grab the headlines, but have limited net benefit, particularly on consumer spending. The temporary VAT cuts during the 2008/09 financial crisis were shown to have been neutral overall in economic terms.
  • payment holidays; allowing companies longer to remit VAT they have collected. This has proven an effective way to leverage governments’ low cost of borrowing in favor of businesses.

Countries Reach for VAT Stimulus Measures

VAT measures already announced include:

  • China has cut VAT on medical services, catering and accommodation services, sundry personal services (e.g. hairdressing, laundry) and public transport. There is also a cut on masks and protective clothing. VAT has also been reduced from 3% to 1% on the cash accounting scheme for small businesses until the end of May.
  • Japan has delayed Consumption Tax filing deadlines and payments by one month until April.
  • South Korea has cut VAT taxes for small businesses, given tax boosts for consumers replacing their cars early, and introduced tax deductions on personal credit card spend.
  • Vietnam is proposing cutting VAT for restaurants, hotels, transport and tourism companies.
  • Greece has given a four-month extension to pay VAT that falls due at the end of March in the most affected regions.
  • Indonesia has said it will waive taxes on hotels and restaurants in Bali and nine other tourist destinations for the next three months.
  • Thailand has exempted face masks from import VAT.
  • Nigeria is considering suspending its recently introduced VAT regime.
  • Denmark will temporarily postpone by one month payment deadlines of VAT for companies.

  • Italy is considering a suspension of VAT remittance deadlines.

Navigating EU State Aid Rules

The 27 members of the EU, plus the U.K. in its Brexit transition period, will have to keep state aid rules in mind. These aim to prevent distortions of the Single Market via unfair subsidies to particular companies or sectors. VAT cuts outside of the normal EU VAT Directive rules would require approval from the EU’s Commission in Brussels.

In particular, deferred tax payments for only a select group of businesses could constitute state aid. However, it is likely that this would be granted for companies suffering from “exceptional occurrences.” EU officials are said to be drawing up a list of acceptable measures, to include VAT measures, for next week.

U.S. Hampered with no Federal Sales Tax Regime

The U.S.’s challenge is that it does not have a federal VAT. A further fiscal challenge for the U.S. is that tax cuts require the approval of Congress, which could delay their impact.

The U.S. is likely to turn to payroll tax cut or relief, with help for hourly-paid workers. In the mid-term it could look at corporate income tax, with a possible cut in the federal rate from 21% to 20%, and making permanent those provisions of the Tax Cuts and Jobs Act that are due to expire in 2025 or sooner. Indexing capital gains to inflation could be another option.

Richard Asquith is Vice President of Global Indirect Tax, Avalara.

The author may be contacted at: richard. asquith@avalara.com

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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