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Bo Harald

Good for society at large

Bo Harald - ZEF, Transmeri, Real Time Economy Program

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Innovation in Financial Services

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

Not a 966bn business case?

17 February 2011  |  4783 views  |  7

We have learned that there are doubts about some of the assumptions in the PWC report in the EC Green Paper on VAT collection released on the December 2nd 2010.

As it is obvious that the next important Single Market step is harmonization of VAT collection it is important to get all facts on the table – and then choose the best and probably also the boldest move. As any change will take time, it would be unfortunate if a small improvement seriously postpones the much needed big improvement.

We (the Real Time Economy Program) have focused on developing the Split payment model. The latest version – based on the near-future scenario where electronic invoicing is the default option – is simple: when an e-invoice is sent the tax authority automatically gets the VAT-codes of buyer and seller, the VAT rate and the VAT amount. When the buyer pays the invoice (or a card acquirer the purchases to merchants) the VAT amount is automatically paid to Tax (where it is coupled to the waiting pre-received information) and the net amount to the seller (several SMEs have stated that this is to prefer as it may be difficult to track what money received actually belongs to Tax) . Possible refunds can be handled automatically at the same time (reverse VAT would make the whole system even more efficient).

I now hear that some businesses take a negative view because VAT paid automatically when the buyer pays his invoice will mean that enterprises cannot enjoy a free loan of the VAT to be reported and paid later by them. Another argument is that the recent financial crises in Denmark was eased by the government giving enterprises one extra month to pay VAT – and in the split payment case such financing would be difficult. It has also been said that the black economy uses cash and cannot be reached by this – but still if these are the only counterarguments we think that businesses should support this model in their own interest and naturally also look at the benefits for society at large (including rule of law) and how they can benefit by speeding up progress towards a true Single Market.

The full picture should include analysis of:

1. Tax payers’ interest:  Summing up (i) how much more VAT can be collected, (ii) how much cost can be saved by tax collection becoming more efficient, (iii) how much can be saved by smaller need for VAT audit, (iv) what is the value of stronger rule of law and less cost for criminal processes (v) what is the value for economic policy makers when invoicing figures can be automatically accumulated per sector, region, country, EU and eventually globally at the moment of invoice issuing – and the changes in payment delays can be measured in the same automatic way etc

These items should then be weighted against the cost for tax authorities to implement the change. We believe that with loosely coupled cloud services the IT investments can be moderate.

2. Business interests: Summing up (i) cost savings from not having to report VAT, (ii) cost savings from VAT payments being automated, (iii) less need for VAT auditing, (initial studies from the above by the accounting profession arrived at 40-60 million workdays depending on degree of reverse VAT.  A bigger benefit than cost saving would probably be that these freed up resources could engage in income creation and higher value support (instead of only driving cost in manual processes)  (iv) legal certainty x-EU, (v) not having to invest in or maintain VAT-reporting systems and (vi) not having to suffer from black-grey economy competitors evading VAT.

These items should be weighted against the negative effects of not having access to 2-3months mostly interest free loan of the VAT to be paid. And as there would be no investment needs by enterprises (as they by this time have migrated to electronic invoicing for other reasons – like trading partners and the public sector having made it mandatory) pure and direct self-interest – especially in the SME-sector (65% of turnover in EU) should call for this model – and it must also be in business interest to help the public sector to lower its cost and thus create space for lowering taxes.

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Comments: (18)

Friso De Jong
Friso De Jong - EEI Platform - Amsterdam | 18 February, 2011, 10:27

Hello Bo,

I think that SME's are not fond of this idea:
1. a SME at a regular EU levelis is just not ready for this kind of realtime payments and deduction.

2. Though it might seem likeable, this model would create a kind of dependency with their banks that SME's really are not fond of.

Didn't PWC develop the Split Payment Model? I might be wrong though: http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/future_vat/vat-study_en.pdf  (page 144 and onwards)

 

 

 

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Bo Harald
Bo Harald - ZEF, Transmeri, Real Time Economy Program - Helsinki Region | 18 February, 2011, 14:47

Please read the arguments.

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Friso De Jong
Friso De Jong - EEI Platform - Amsterdam | 18 February, 2011, 16:05

I did and then commented:

I think that SME's are not fond of this idea:
1. a SME at a regular EU levelis is just not ready for this kind of realtime payments and deduction.

2. Though it might seem likeable, this model would create a kind of dependency with their banks that SME's really are not fond of.

Didn't PWC develop the Split Payment Model? I might be wrong though: http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/future_vat/vat-study_en.pdf  (page 144 and onwards)

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Bo Harald
Bo Harald - ZEF, Transmeri, Real Time Economy Program - Helsinki Region | 18 February, 2011, 17:32

If you read it and also looked into the timetable in the PWC paper you would not make these comments. Invoices are paid by bank transfers - and a split payment does not change the relationship.

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Friso De Jong
Friso De Jong - EEI Platform - Amsterdam | 18 February, 2011, 19:16

If you read it
- check.

and also looked into the timetable in the PWC paper
- check.

you would not make these comments.

- You might want to elaborate on this to the audience, otherwise it’s a bit of a void statement.

Invoices are paid by bank transfers - and a split payment does not change the relationship.
- I believe otherwise.

We did a small calculation and we found out that split payment will quadruple what I have to pay to my bank for using their services. We also calculated that we receive less interest (quite important). And (also quite important) we found out that in some cases it enhances the need for financing (in times of a financial crunch....)

So, from a financial services perspective I believe in the model, especially in mentioning the 'VAT argument'. However from a SME perspective, it is my opinion that this is not beneficial.

Looking forward to your opinion.

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Bo Harald
Bo Harald - ZEF, Transmeri, Real Time Economy Program - Helsinki Region | 19 February, 2011, 05:49

The target for us in the Real Time Economy program (in Finland) is to raise the EC target of cutting enterprise administrative costs with 25% by 2012 to 50% by 2015. There is a long list of actions - most of them based on using structured data in e-invoicing. Split payment of VAT is one of them and was developed some time ago already and has been refined since.

The experts engaged in our work have come to the conclusion that the benefits for enterprises are much bigger than disadvantages and naturally enterprises will want to contribute to the building of the Single Market, more efficient collection of VAT, cost savings in the public sector and better rule of law - in return tax payers can expect a lower tax burden.

The 1,5 months that the VAT is on loan is not a sound form of financing and does not have much impact in an SME. Crisis financing can be organized in other ways if needed.

 

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Bo Harald
Bo Harald - ZEF, Transmeri, Real Time Economy Program - Helsinki Region | 19 February, 2011, 07:16

When analysing the negative cash flow aspects for enterprises - and positive for tax (= all tax payers) - it would be useful to calculate how big the VAT-loans are - and how much alternative financing would cost. In the 500k, 1m, 5m, 10m, 100m and 500m turnover cases. You probably have these figures Friso?

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Bo Harald
Bo Harald - ZEF, Transmeri, Real Time Economy Program - Helsinki Region | 19 February, 2011, 07:19

If this would not be all-in-all beneficial for SMEs - then we should find ways to compensate - instead of shooting down something that is so beneficial for society at large.

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Bo Harald
Bo Harald - ZEF, Transmeri, Real Time Economy Program - Helsinki Region | 26 February, 2011, 04:15

Looking forward to figures from Friso - and a confirmation frome enterprises in general that Single Market harmonised - and full - collection of VAT is important also for them.

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Bo Harald
Bo Harald - ZEF, Transmeri, Real Time Economy Program - Helsinki Region | 26 February, 2011, 04:18

Looking forward to figures from Friso - and a confirmation frome enterprises in general that Single Market harmonised - and full - collection of VAT is important also for them.

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A Finextra member
A Finextra member | 27 February, 2011, 20:04

I endorse this idea already for a long time for the simple reason that is it straighforward and will reduce administrative work on both the sender and receiver side. 

Having said that, how do we take the next steps to make this a reality?

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Bo Harald
Bo Harald - ZEF, Transmeri, Real Time Economy Program - Helsinki Region | 28 February, 2011, 11:49

Thank you Tonnis!

I suggest that we:

1. Interact actively with enterprise organizations to get all the pros and cons on the table (I fear that they may comment negatively for marginal cash flow reasons)

2. Interact with national governments and the EC to make sure that they are driving the Single Market very hard (and if needed suggest a refund to enterprises - should their savings fall short of change in cash flow - when free borrowing of VAT-funds fall away)

It would be a disaster if such a good-for-society-and-EU idea would fall or be delayed for marginal reasons..

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Friso De Jong
Friso De Jong - EEI Platform - Amsterdam | 28 February, 2011, 11:56

Alternative steps could be:

1. Focus on the SME's, like TradeShift did, and you cover 99% of the business population

2.Wait 10 years

Done.

 

 

 

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Bo Harald
Bo Harald - ZEF, Transmeri, Real Time Economy Program - Helsinki Region | 28 February, 2011, 13:05

Still waiting for estimates from Friso..

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Friso De Jong
Friso De Jong - EEI Platform - Amsterdam | 28 February, 2011, 13:14

Send me a PO (I prefer UBL) and I'll send them to you...

 

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Bo Harald
Bo Harald - ZEF, Transmeri, Real Time Economy Program - Helsinki Region | 28 February, 2011, 13:19

I do not need them - this discussion does

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Friso De Jong
Friso De Jong - EEI Platform - Amsterdam | 28 February, 2011, 13:53

No problem, I'll post them here as soon as I received payments.

In the meantime, I received these 2 tweets:

"@einvoicing I think that @boharald is completely transparent in his attempt to milk every last cent out of SME's using forced scenarios"

"For a more detailed answer on invoicing and banks look at this http://ts.tt/w slide 5 and onwards"

From: Christian Lanng - @christianlanng

Worth reading

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Bo Harald
Bo Harald - ZEF, Transmeri, Real Time Economy Program - Helsinki Region | 28 February, 2011, 14:01

So much for Friso

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