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BRICs Update: Is VAT Reform Coming Off the Rails?

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Sep 18th 2015
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It's been almost 15 years since Goldman Sachs' Jim O'Neill got us all excited about the stellar growth prospects of the BRICs countries: Brazil, Russia, India, and China. However, ongoing turmoil in these emerging economies is showing us that markets can go down, as well as up!

It isn't just the market indices that are looking poorly; key value-added tax (VAT) reforms, at the heart of economic restructuring, are also being blown off course. Here's an update:

Chinese VAT reform delay to slow consumer “pivot.” China launched its VAT reforms in 2012 and has proven ruthlessly efficient at implementing a world-class regime across telecom and service sectors. Yet, the recent costly stock market interventions by the government now look certain to delay the next phase: retail VAT reform. The potential cost of simplifying shopping taxes now looks too excessive for 2015, so a delay is expected to be announced very soon. Crucially, this will set back China's goals to “pivot” its economy away from low-cost export manufacturing to internal consumption, casting doubts on the market growth potential for United States and other foreign consumer-goods manufacturers.

Brazil enters into recession and VAT complexity. In the second quarter of 2015, Brazil entered into a steep recession, with growth down by 2 percent on the first quarter. So, to have a chance to hit 2015 budget deficit targets, the country has rushed through new VAT-like taxes on financial transactions instead of plowing through the planned reforms of its highly complex indirect tax regime. Many of these taxes, such as the CPMF (provisional tax on financial transactions) on bank withdrawals, have been previously abandoned due to the calamitous distortions they produced in the economy.

India VAT reform succumbs to old political rivalries. India's plans to replace its hugely bureaucratized and double-taxing VAT system with a new Goods and Services Tax held the brightest hope at the start of 2015 for one of the BRICs, showing how tax reforms could open up investment opportunities for foreign companies. However, deep-seated animosity between the Bharatiya Janata Party government and Congress opposition party will almost certainly delay the changeover until 2017. This not only means that the promised boost of up to 2 percent of Indian gross domestic product will be stalled, but also that the costs of foreign companies looking to invest in India will remain relatively unattractive to many other Asia-Pacific countries.

Recession in Russia means importer VAT costs. The halving of the global oil price in the past year has sent Russia into a deep contraction. This means reforms to its VAT regime have also stalled. In particular, the ongoing risks for US companies to suffer unrecoverable VAT on importing into Russia make it an expensive investment destination.

While the emerging markets, in general, enter the sixth year of slowing growth, the BRICs face some of the biggest risks. This has put VAT reforms on the back burner for at least the next 12 months and will take the sheen off the investment opportunities in the region, especially for importers and consumer-goods businesses.

About the author:
As the leader of Avalara's Global Tax Alliance, Richard Asquith helps businesses understand and manage their tax-compliance obligations as they enter or expand into new markets. Previously, he was with TMF Group, where he founded and led its global VAT practice for nearly 10 years. He began his career at KPMG in the United Kingdom and later joined Ernst & Young, working in Russia, Hungary, and France, assisting companies entering new markets. Contact Richard at [email protected].

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