U.S. value-added tax expected within five years
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More than half of senior business executives surveyed by the Tax Governance Institute (TGI) expect some type of value-added tax (VAT) to be introduced in the United States within five years.
Acknowledging the need for additional revenue to help address the growing chasm between the country’s existing revenue flows and its built-in expenditure obligations, 57 percent of the executives in the TGI survey said they believe VAT legislation will be introduced in the United States within five years, while 18 percent expect it within 10 years.
“The survey responses underscore a recognition that the short- and long-term outlook for the U.S. fiscal deficit is bleak unless some combination of spending cuts and additional revenue is implemented within the next decade or sooner,” said Hank Gutman, KPMG tax principal and director of the Tax Governance Institute, and former chief of staff of the U.S. Congressional Joint Committee on Taxation.
“The United States is the only G20 country without a federal VAT or Goods and Services Tax. The executives we surveyed clearly believe that VAT legislation is likely to be proposed as a means to raise much-needed revenue to reduce the deficit,” Gutman said.
Biggest VAT challenge for companies
When asked to identify the biggest challenge they foresee for their companies if a VAT is adopted in the United States, 24 percent of the executives cited compliance-related issues, according to the TGI survey. Other executives saw major challenges in data collection and analysis (18 percent), management and monitoring (16 percent), and tax technology software system changes (16 percent).
“Executives are wise to focus on compliance. VAT touches many different parts of the supply chain, and tracking and collecting all the required information is critical,” said Tom Boniface, partner-in-charge of KPMG LLP’s VAT practice. “To help ensure VAT compliance, many companies will need to deploy new VAT software or update existing platforms to properly manage the requirements of a new U.S. VAT regime. If not implemented correctly, this could result in incorrectly calculated and remitted VAT amounts and potentially significant liabilities for the company.”
According to the TGI survey, 34 percent of executives said their companies would need 12-18 months to prepare for compliance with a U.S. VAT. Twenty-one percent said they would need two years or more.
Coordination with state and local taxes
TGI survey respondents were split over how state and local taxes should be collected and administered alongside a federal VAT. Nearly one-third (32 percent) of the TGI survey respondents said that if a U.S. VAT is implemented, state and local sales taxes should be collected in tandem with the federal VAT and distributed back to states and localities. Twenty percent said that if a U.S. VAT is implemented, states and localities should tax the same goods and services as the federal VAT, but continue to have separate rates and be administered by the states as they are now. Only one-quarter of the TGI survey respondents said that if a U.S. VAT is implemented, state and local sales taxes should be collected and administered separately as they are today without regard to the federal VAT requirements.
“Around the world, there are many different examples of how a federal VAT works in concert with sales taxes in a country’s provinces or states,” said Harley Duncan, State and Local Tax managing director with KPMG LLP’s Washington National Tax practice. “If a federal VAT is adopted, a harmonized approach -- where the states piggyback on the federal VAT -- could result in cost-savings for the federal, state and local governments and provide a better tax base, but it’s certainly not the only solution. What is clear from the survey is that many of the business executives believe that state and local sales tax should be coordinated in some fashion with a federal VAT.”
The TGI executive survey results discussed above reflect the responses of more than 600 members of the Tax Governance Institute, including board members, chief financial officers, and tax directors.
The Tax Governance Institute currently comprises more than 17,000 members. Launched in 2007, it provides a forum for board members, corporate management, stakeholders, and government representatives to share knowledge regarding the identification, oversight, management, and appropriate disclosure of tax risk.