The Belgian VAT system is based on the European VAT system and is a consumption tax that is collected in fractions. This means that the tax is levied on the added value at each link in the production and distribution chain. It also explains the name “value added tax” (VAT). Every participant in the chain who is a VAT-taxable person collects the output VAT from its customer, but in principle also has the right to deduct the input VAT he has paid. Only the balance, i.e. the VAT on its share of the added value, is paid by the participant VAT-taxable person to the Treasury. As a result, the VAT only taxes the final consumer and the economic neutrality of VAT in the production and distribution chain is guaranteed.
Unlike the VAT system, a sales tax (i.e. a sales/retail tax) is only levied at the last link in the chain, i.e. by the final consumer's supplier. This system involves a lighter administrative burden than a VAT system, but it is also more susceptible to fraud because the full amount of VAT due is immediately lost in case of fraud at the last link in the chain. This aspect was therefore one of the important reasons for the introduction of the current VAT system. Nevertheless, our VAT system also suffers from fraud and loss of VAT revenue due to shortcomings in the VAT collection process. Collecting the correct amount of VAT therefore remains a challenge for VAT administrations and policymakers.
Strengthening the VAT collection process
The collection of VAT is inextricably linked to mechanisms that ensure that the correct amount of VAT is collected. This is particularly difficult in cross-border transactions and has been the subject of discussions at an international level for many years. In particular, controlling the supply of services and intangible items is far from straightforward and therefore poses a challenge to the collection process, as highlighted by the OECD. In general, the OECD sees four theoretical approaches to strengthen the VAT collection process: (i) collection through the supplier; (ii) collection through the customer; (iii) use of intermediaries and (iv) use of automated systems.
In order to strengthen the VAT collection process in cross-border transactions, it is possible to make the supplier responsible for collecting the VAT, but to do that the supplier has to register in the country of his customer, which creates an additional administrative burden. As an alternative solution, the customer could be made responsible for collecting the VAT (reverse charge), but this only works if the customer is also a VAT-taxable person. It is not realistic to make private customers responsible for collecting VAT.
Another potential reform to improve the VAT collection process is to place certain obligations with any intermediaries in the transaction. Also for these reasons, the European Commission proposed in July 2020 a directive that requires operators of digital platforms ("digital intermediaries") to share certain information with EU tax administrations (the so-called "DAC7" proposal). This information concerns the revenue generated by sellers of services and goods via their platform and will be exchanged among Member States.
In addition to the above, technology and automated systems offer promising solutions to strengthen the chosen VAT collection process. It goes without saying that each additional link in the chain entails an additional risk of tax being collected incorrectly or not being collected, either consciously or unconsciously. With a view to more efficient collection of VAT, while, above all, strengthening the fight against VAT fraud, several European Member States have already taken various initiatives in recent years. Examples include the introduction of mandatory e-invoicing in Italy, the split-payment mechanisms in Poland and Romania and the Immediate Supply of Information (the almost real-time VAT declaration) in Spain. Although such systems have had a proven positive effect on the fraud figures, one of the main pain points remains that they involve an a posteriori control of the transaction. Even with real-time reporting systems, data on purchases and sales are reported to the competent tax authorities only within a – albeit limited – number of days after the transaction has taken place. Moreover, these measures are taken at a national level, allowing fraud to move to countries where such measures have not (yet) been taken.
Blockchain technology can solve many of the problems of the VAT collection process described above. Using digital register blockchain technology, each supply of goods or services in the production or distribution chain could be assigned a register to which all parties involved are linked: for example, the seller, the buyer, the bank and even the VAT administration. At each step of the chain, all parties would have to validate, on the basis of a consensus mechanism, the validity of the transaction. Each validated transaction is then added to the chain as a block and forms the building block for the next block in the chain – hence the term blockchain. Blocks are connected to each other in such a way that an adjustment in an earlier block breaks the chain and is thus detected. Adding foreign parties to the blockchain would also greatly simplify intra-Community transactions and eliminate complex reverse charge rules and exemptions.
Moreover, this approach would make it possible for each transaction, before it was carried out and the invoice issued, to be validated by the VAT administration, which would have all the information necessary to detect irregular transactions (e.g. carousel fraud). In this way, it is also possible to prevent VAT being deducted as input tax without this VAT having been paid to the Treasury. However, for a large-scale application of the blockchain technology, the VAT regulations must be "technology-proof" and legal concerns must be taken into account (e.g. data protection). Strong cooperation among policymakers, legislators and IT experts is required for this. In addition, the costs of development and implementation must be reasonably bearable by all taxpayers involved.
The full transparency of the blockchain and the traceability of the transactions would, in theory, make it possible to digitally match the transactions and the underlying invoicing between taxpayers in the chain, with VAT being levied only at the last link, i.e. on the supply to the final consumer. In this way, VAT could actually evolve from a consumption tax to a sales tax. However, in light of the European foundations of our VAT system, international developments and the existing limitations of a broad application of blockchain technology in practice, there is no reason to believe that VAT will evolve towards a sales tax by 2025.
KPMG’s Indirect Tax Team
KPMG’s Indirect Tax Team consists of highly qualified tax professionals with a specialization in indirect taxes, including value added tax, customs and excise duties, as well as indirect environmental taxes and levies.
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Author: Kris Eeckhout, Executive Director.
The VAT system in Belgium was introduced in 1971, which will be 50 years ago in January 2021. On this memorable anniversary, KPMG Tax & Legal Belgium and Wolters Kluwer jointly publish a series of articles that reflect on the current VAT system in the context of our changing business and social environments. In each article, KPMG tax experts address a specific aspect of VAT and related challenges of the system and offer predictions on future evolutions by 2025.