In the aftermath of the financial crisis, governments in many countries still have a strong need for cash. Whether the need is to finance targeted stimulation programs for the economy, or whether it is to generally make up for the gaps left behind by a shrinking economy, indirect taxes have proven to be the first choice for generating revenue for a number of years. And they continue to be.
This trend can be explained with the large number of prominent advocates who all promote the shift from direct to indirect taxes, such as the International Monetary Fund, the Organization for Economic O and Development and the European Commission, EY Tax Insight reported.
A number of international studies have indicated that value-added taxes have the least impact on growth, while corporate income taxes have a negative impact on growth, according to the OECD’s “Economic Policy Reforms 2013: Going for Growth” report.
An equally strong reason for this ongoing development is that international tax competition and the weakened economy simply do not allow for ever-increasing corporate or personal income taxes. Indirect taxes, which by their definition are borne by the consumer and do not rely on profits, are much less affected by these changes.
In practice, we can see three main ways that indirect taxes are used to generate more revenue.
VAT/GST Systems Spreading
According to the OECD’s “Consumption Tax Trends 2014,” 164 countries in the world levied a VAT as of January 1, 2014: 46 in Africa, 1 in North America, 18 in Central America and the Caribbean, 12 in South America, 28 in Asia, 51 in Europe, and 8 in Oceania. As a result, only a minority of countries now apply retail sales taxes, i.e., single-stage taxes on goods and services (GST) supplied by final consumers.
Furthermore, the number of “VAT countries” continues to grow, especially in emerging economies. Effective January 1, 2015, VAT was introduced in the Bahamas. Effective April 1, 2015, a GST will be implemented in Malaysia to replace the existing sales and services tax. Egypt is introducing a VAT law that will replace the existing general sales tax system. Suriname is also expected to replace the current turnover tax with a VAT system from January 1, 2016.
VAT/GST Rates Rising
In countries where a VAT/GST already exists, average VAT/GST rates have increased in recent years, and those increases seem set to continue. This upward rate trend is particularly true for Europe and the OECD countries, where the average standard VAT rate has now reached 21.6% (EU member states) and 19.2% (OECD member countries) compared with 19.5% and 17.5% average rates, respectively, before the crisis in 2008.
However, there have been some increases. Luxembourg raised its standard rate from 15% to 17%, which is also the reason why the average EU standard rate is still increasing. And new rate increases are likely on the horizon: Italy is considering a rise and Portugal may also follow suit.
For the OECD countries, the main reason for the increased average is because of the consumption tax rate increase in Japan from 5% to 8% in April 2014. Again, this trend is likely to continue, with the already scheduled next increase in Japan due in 2017. Other than Europe and the OECD countries, the VAT rate development is more stable. In contrast to Europe, Angola, Peru and Sri Lanka all lowered their standard rates.
Excise Taxes Increasing
A truly global trend that leads to higher indirect tax revenue is the increase of excise taxes. Excise taxes on tobacco have increased or will soon increase in many countries, including Denmark, Ecuador, Finland, Ghana, Ireland, Malta, the Netherlands, Norway, Russia, Slovenia, Sweden and Tanzania. And mineral oil excise taxes have been increased in China, Estonia, Finland, Gambia, Hungary, Norway and Russia.
Not only are the rates increasing, but governments are being creative in inventing new taxes. In many countries, these taxes may be linked to spending on health and welfare, and they may become more widespread as populations age and the pressures on government spending in these areas increases.
However, the plan of 11 EU countries to introduce a common transaction tax on the exchange of shares and bonds and on derivative contracts is further delayed. The 11 participating member states have now agreed to launch the tax on January 1, 2016.
