Niall Campbell, VAT Partner and Head of Innovation at KPMG Ireland, provides his insight into Ireland’s Indirect Tax policy, how it compares to the rest of Europe, and why communicating at an early stage with Irish Revenue can help companies reduce interest and penalties and ultimately avoid bankruptcy.
How does Ireland’s Indirect Tax policy compare to the rest of Europe?
All EU member states are bound by the rules of the European Directive. Accordingly, the scope for very significant and material differences is limited, although there are certain choices and degrees of flexibility which individual Member States can exercise. When assessing these choices, Ireland has a differing perspective from many Member States as we are a small country which is heavily reliant on inward investment and the export of goods and services. As a result, we tend to take tax policy decisions in a manner which supports economic development within the country. When considering VAT policy choices, we also tend to look at the overall impact of a particular policy measure on the Irish exchequer and total tax revenue - not just in isolation. The reduced 9% VAT rate in the hospitality sector is a perfect example.
The other difference I would note is the relationship between business practitioners and tax authorities in Ireland, which is pretty open and collaborative. There are many examples where very positive tax policies and practices have been developed through collaboration between all stakeholders - this type of system simply doesn’t exist in many other countries.
What services does KPMG Ireland offer to ensure companies remain compliant with indirect tax in their operations?
Our approach is to serve our clients’ needs at every stage of the process. It starts with policy - assisting clients to navigate and, where possible, to input into the formulation of rules which apply in their sector.
We can then help with the practical application of the rules to their business, Ireland and overseas. We go beyond the traditional technical advisory role but also provide implementation support - which includes advice on tax processes and technology. As VAT is a transaction-based tax, getting the transaction processing right is a critical component of good VAT compliance. Then comes outsourced VAT compliance services where we take control of the VAT return and filing process. In response to client demand for compliance outsource capability, we have invested heavily in this area.
Finally, we provide support to clients in relation to Revenue VAT audits. This can include preparation of voluntary disclosures to handling e-audit requests, which are becoming more prevalent.
The other dimension to what we offer is the international piece. Clients don’t just want an Irish answer if they are trading internationally; they want a single answer across all markets. Increasingly, they are looking for someone who can give an international view, and we can deliver that.
This “internationalisation” of our approach is also driven by the concentration of regional headquarters in Ireland. One of the trends with indirect taxes is increased centralisation so you have tax functions increasingly centralised in Ireland. We offer an international solution for these clients, not just a local one.
Indirect taxes are based on sales and are therefore liable regardless of profitability. What happens if a company is unable to meet its indirect tax obligations?
Before it gets to that stage, we can help clients implement processes to ensure that VAT collected on sales, less VAT paid on purchases, is segregated and not used for other purposes.
If the cash just isn’t there at tax payment date, for whatever reason, then the best advice is to engage early with the Revenue. Given the difficult economic times which we’ve all gone through, our tax authorities are well used to that and have procedures to assist taxpayers in genuine financial difficulty. We can talk to them and put in place a payment solution, such as payment by instalments. The key point is not to ignore it, which can run up substantial additional default interest and penalty liabilities. This can dig a hole that is increasingly difficult to get out of and which ultimately can result in Revenue enforcement proceedings and bankruptcy.
What is the distinction between goods and services that are exempt from VAT and those that are subject to 0% VAT?
Exemption is where there is no charge to VAT but no entitlement to VAT recovery on related costs, whereas zero-rating is where no tax is chargeable but you can recover VAT on related goods and services procured.
Income tax is seen as very progressive in Ireland, while indirect taxes such as VAT are regressive. Do you share this view?
Not fully. I think our income tax regime is very progressive, perhaps too much so. Our marginal income tax rate of 55% is very high and kicks in at a very early stage. It is a disincentive to work and needs to be reformed.
Whether indirect taxes are regressive is a somewhat philosophical question - probably one for another discussion! One point to bear in mind is the efficiency of the VAT system, which has a very low cost of collection for the tax authorities per euro collected.
Ireland made an adjustment to tax deductibility in relation to unpaid consideration for VAT in 2014. What challenges is this raising for companies operating in Ireland?
And has it helped speed up payments for goods to within the six months specified? The challenge is tracking it. Quite a lot of companies don’t automatically pick out the date of payment as part of their VAT return process so doing that is adding unnecessary complexity. The other point that is causing concern is in relation to intercompany charges - i.e. transfer pricing – a lot of that can remain unpaid throughout a financial period and is only settled at year end. Inadvertently, there is a liability that companies are not aware of.
Has it speeded up payments?
No. It is still seen as quite a technical tax adjustment that hasn’t made any impact on the real is less than a year in force.
What are the grounds, if any, for a company not making an adjustment?
The main ground is if there is a bona fide commercial reason for the non-payment of the invoice. In our experience, there can be many good commercial reasons why payment isn’t made within six months. While you can request Revenue clearance to preserve the VAT reclaim in those circumstances, this must currently be done in advance. I suggest Revenue amend the rules to allow companies to do this on a self-assessment basis, subject to defined conditions.
You are a member of the EU VAT Expert Group. What does that entail and what is the main aim of the group?
The EU VAT Expert Group meets every two months or so to act as a third party sounding board to the European Commission on a broad range of VAT policy matters. Up until now the European Commission comes up with proposals and negotiates with the relevant countries. The EU VAT Expert Group is designed to get input from business, tax practitioners and academics about policy as it is being formed so that improvements can be built into the system from a much earlier stage, with the aim of having better law. More collaboration also leads to better buy-in and enhanced compliance from business.