ContentsPart I

Introduction………………………………………………………………. 2

1. General principles of taxation……………………..………………….3-5

2. Value-Added Tax………………………...………………………….5-112.1 General notions ……………………….…….……………………..5-62.2 Features of VAT in modern states……….…….…………………6-113. Excise duties……………………………….……………………11-133.1 General notions……………...……………………………………..113.2 Features of excise duties in modern states……...….…………..11-134. Custom duties…………………………….…………………………134.1 General notions ……………………….………………………..13-144.2 Determination of a custom duty value for a product………………14

Part II

1. Analysis of indirect taxes in dynamics in the contemporary states……….15-211.1 The share of indirect taxes in total taxes……………………….………….151.2 Comparison of indirect taxes rates in the contemporary states and their

dynamics………..………………………………..…………………….15-171.3 Comparison of excise rates of EU countries…………..…..………….17-191.4 The share of indirect taxes in the GDP of countries…………………..19-212. The increasing role of indirect taxation around the world………….…21-25

Conclusions……………………………………………………………..26-27

Annex……………………..…………………………………………….28-29

Bibliography……………..…………………………………………………30

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Introduction

Taxes are really important for the state governance. Taxes are necessary for the development of the country. They are the most important source of public revenue. The revenue is allocated in various productive sectors in the country for increasing the overall growth of the country. Tax revenues may be used to encourage less developed areas where most investors are not willing to invest.

The taxation system ensures the social welfare, developing of education and medicine in the country. Through reducing inequalities in income and wealth by using an efficient tax system, government can encourage people to save and invest in productive sectors.

Tax policy may be used to handle critical economic situation like depression and inflation. In depression, tax is set to increase the consumption and reduce the savings to increase the aggregate demand and vice versa. Tax policy is also used to protect the local poor industries from the uneven competition.

The indirect taxes have their absolutely special role for the state. They are the biggest source of profits for the state budget because these taxes are present almost in every economic operation.

The subject about indirect taxes is one of the most discussed subjects in present. Some significant changes are taking place in the legislative frameworks that are regulating indirect taxes, the rates are growing constantly. These changes will influence everybody.

In my work I want to develop the theme of indirect taxation. To give a brief characteristic of indirect taxes in some developed countries and the main rates. An analysis of taxes’ trends, revenues from taxes, taxes’ shares in the GDP of the countries will give a better understanding. How the changes will affect people and how the countries are trying to improve their indirect taxation systems? I’ll try to give answers on this questions that are important for understanding of the major role of indirect taxation in the contemporary states.

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1. General principles of taxation

Taxes are the obligatory payments collected by the state on the basis of law from juridical and physical persons -enterprises, organizations, citizens - for satisfaction of social necessities.

The state’s tax adjusting of profits basic task is concentration in the hands of the state and local budgets of monetary resources necessary for the decision of problems of social, economic, scientific and technical development that appear during the life of people, state and industries in a whole.

Public purpose of taxes is showed in their functions. They are two -fiscal and economic.

The fiscal consists of forming of money profits of the state. Money is used for maintenance of state machine, army, development of science and technique, for maintenance of all layers of population, defense of environment. Part of money goes to education, health protection.

The economic function of taxes consists in influence through taxes on all processes in the economy of country, and also socio-economic processes in society. Taxes from this point of view can play an encouraging (grant or tax deductions), restrictive (increase of tax rates) and supervisory role.The functions of taxes are correlated - realization of fiscal function provides material basis for realization of economic role of the state, i.e. to the economic function.

The elements of tax are the determined by legislative acts principles, rules, categories, terms, used for organization of collection of tax. The subject, object, source, unit of levying, tax base, tax period, rate, privileges and tax salary, belong to the major elements of tax. The indicated elements of taxes are the linking beginning of all taxes and collections.Through them, these elements, in laws on taxes all tax procedure is generally set, in particular, order and terms of levying of taxable base and tax sum, rates, terms and other conditions, are determined. It is important to underline that the concept of each element of tax is universal; it is used in tax processes by the all countries of the world. These elements were inherent to the tax from the moment of its origin.

Speaking about the subject of tax, it is important to distinguish this concept from the concept of carrier of tax. Subject of tax, or tax-payer, is a person (legal or physical), on whom, by law, a promise to pay a tax is laid. On occasion a tax can be transferred by the payer of tax on other person, being at the same time carrier of tax. It takes place mainly at the levying with indirect taxes. If a tax is not transferred, then a subject and carrier of tax is the same person.

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An object of taxation is an object liable to the duty: different types of profits (income, value added cost of the realized commodities, works and services), transactions due to sale of commodities, works and services, different forms of accumulated riches or property.

The object of taxation can be also another economic basis, having cost, quantitative or physical descriptions, with the presence of which the tax-payer legislatively has a promise to pay a tax.

Unit of levying is a certain quantitative unit of measurement of the object of levying. That is why it depends on the object of levying and can be in natural or in a money form (cost, area, weight, volume of commodity and so on.).Cost, physical or another description of object of taxation represents by itself a tax base. It is necessary to mention that a tax base is an expressed in taxable units part of object of tax, to which a tax rate is applied by law. For example, the object of levying of income taxes is an income of enterprise, but a tax base will be made by not all balance income, but only by part of it, so called taxable income that can less or more than balance income.

Under a tax period a calendar year or another period of time for some taxes is understood, upon termination of which a tax base is calculated and it is determined the sum that should be paid to the budget.

A tax rate is a size of tax on unit of tax base. Depending on the article (object) of taxation tax rates can be fixed or percentage.

For the better understanding of the essence of tax payments, it is important to define the basic principles of taxation. As a rule, they are the same for taxation systems of any country and consist in the following:

1. Fiscal adequacyThe sources of government revenue should be sufficient to cover government expenditures and other public needs. This is essential for avoiding budgetary deficits and to minimize foreign and local borrowings.

2. The theoretical justice and equalityA good tax system must be formed on the ability of the tax-payer to pay. That means taxation must be progressive. It means that in similar situations taxpayers should pay equal taxes, while those who have more should pay more.

3. Administrative feasibilityTax law should be capable of convenient, just and effective administration or enforcement at a reasonable cost.

4. Economic efficiencyThe system or power of collecting taxes should not exceed the amount of tax collected.

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After the general description of VAT and other indirect taxes I’ll take a group of most developed European countries for showing how these taxes work in a best way. Exactly in Europe VAT plays an essential role among all other taxes. Excises are on the second place after VAT. Talking about the customs regime in Europe – it is really elaborate and helpful for member states. These three are the main indirect taxes that are common for all European countries, so their description has the main place in this work. The tax system in EU countries is efficient and complex and the conclusions for sure will be more representative.

2. The Value-Added Tax

2.1 General notions

The Value- Added Tax, or VAT, is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption.

Value-Added tax is:

1) a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services.

2) a consumption tax because it is borne ultimately by the final consumer. It is not a charge on businesses.

3) charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain.

4) collected fractionally, via a system of partial payments whereby taxable persons (i.e., VAT-registered businesses) deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.

5) paid to the revenue authorities by the seller of the goods, who is the "taxable person", but it is actually paid by the buyer to the seller as part of the price.

For VAT purposes, a taxable person is any individual, partnership, company or whatever which supplies taxable goods and services in the course of business.However, if the annual turnover of this person is less than a certain limit (the threshold), which differs according to the country, the person does not have to charge VAT on their sales.The VAT due on any sale is a percentage of the sale price but from this the taxable person is entitled to deduct all the tax already paid at the preceding stage. Therefore, double taxation is avoided and tax is paid only on the value added at each stage of production and distribution. In this way, as the final price of the product is equal to

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the sum of the values added at each preceding stage, the final VAT paid is made up of the sum of the VAT paid at each stage.Registered VAT traders are given a number and have to show the VAT charged to customers on invoices. In this way, the customer, if he is a registered trader, knows how much he can deduct in turn and the consumer knows how much tax he has paid on the final product. In this way the correct VAT is paid in stages and to a degree the system is self-policing.

For the purpose of exports between most countries, no VAT is charged on the transaction and the VAT already paid on the inputs of the good for export is deducted - this is an exemption with the right to deduct the input VAT, sometimes called 'zero-rating'. There is thus no residual VAT contained in the export price.However, as far as imports are concerned, VAT must be paid at the moment the goods are imported so they are immediately placed on the same footing as equivalent goods produced in the country. Taxable people registered for VAT will be allowed to deduct this VAT in their next VAT return.

2.2 Features of VAT in modern states

FranceThis country deserves special attention – it is a first country that introduced in fiscal practice VAT in its modern understanding. The tax system that is operating today was forming in 1930-1965, when the process of unification and association of many taxes took place.

The Value Added Tax was introducing gradually, starting with year 1954, in some industries, and in 1968 was widely spread on retail sales.

VAT is used for levying of any goods and services made in France, where it is a taxable supply made by taxable person in the course of any activity.

The standard rate of VAT in France is 20 %.A reduced rate of 5.5% is applied for certain goods and services that include:

1) Food products and beverages (except alcohol beverages);2) Water;3) Self-supply of units for elderly, disabled people;4) Subscription feels for delivery of heat energy when this energy is produced

with 50% of sustainable resources;5) Services provided in school canteen;6) Medical equipment for disabled persons;7) Sales and rentals of books, including digital books (from January 1st 2013);8) Theatre (from January 1st 2013);

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A reduced rate of 10% (from 1 January 2014) for certain goods and services is applied to:

1) Some pharmaceutical products;2) Some radio and television broadcasting;3) Cinema, museums and exhibitions;4) Transportation of passengers;5) Works on residential units;6) Hotels accommodation;7) Writers and composers works.

There is also a reduced rate of 2.1% for certain goods and services, including:

Newspapers; Admissions to shows (applicable only for the 140 first performance of the

show); Medicines covered by social security;

It is worth noting that special VAT rates are available in the French overseas departments (Martinique, Guadeloupe, Reunion Island), as well as in Corsica.VAT is temporarily not applicable in French Guyana.The list of exemptions includes:

1) Some medical supplies;2) Postal services;3) Education;4) Charities;5) Some financial transactions;6) Insurance;7) Betting, gaming and lotteries.

In France as payers of VAT should be registered all businesses that make taxable supplies for which it is liable to pay VAT. Entities established in France may be exempted from registration if their supplies were, the previous year, less than (amounts tax excluded) EUR 32,600 for services of EUR 81,500 for goods.

Germany

In Germany Value-Added Tax was introduced in 1973 and in present it has the second place by the revenues collected in the budget. Its share in the budget is approximately 28%. The including of VAT in the tax system of Germany had two main goals: increasing of state revenues due to the taxes on consumption and performing of the main mandatory condition for entrance in the European Union.

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The VAT is due to any tax and services made in Germany that are taxable supplies made by taxable persons. Some transactions are not liable to VAT: cash payments, the assumption of a debt as a form of payment, genuine compensation payments.

In present the standard VAT rate is 19%.

There is a reduced rate of 7% for certain goods and services:

1) Food;2) Plants and animals acquisition;3) Books and newspapers;4) Import of works of art and collector’s items;5) Films listed under the Youth Protection Act, or were first shown in public

before 1st Jan. 1970;6) Entrance fees for cultural sites;7) Charity purpose;8) Renting of living and bedroom apartments;9) Passenger transport for journeys less than 50 km;

A special rate of 5.5% is applicable to suppliers of forestry products. A rate of 10.7% is used for levying agricultural goods and services, supplies of sawmills.

Zero rated supplies are:1) exports2) supply, import, repair and maintenance of ships and aircrafts3) the supply and import of gold to central banks4) cross-border passengers transported by air

The next supplies are exempted from VAT:1) postal services2) insurance services3) health and welfare services4) education5) lotteries

All entities that make taxable supplies in Germany must notify the German authorities for registering as a VAT payer. VAT returns should be made if the entity sold products or services in the amount of more than 17500 EUR in the previous year and not more than 50000 EUR in the current year. Some non-taxable legal entities and small entrepreneurs are not required to register.

Great Britain

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As in other European countries in Great Britain any supply of goods and services is supposed to VAT taxation.

The standard rate of VAT is in present 20%. It was increased on 4th January 2011 from 17.5%. The rate was temporarily reduced from 1 December 2008 to 31 December 2009 and constituted 15%.

There is a reduced rate of 5% on following supplies:

1) energy saving materials2) domestic fuel and power3) kid’s car seats4) smoking surcease products5) equipment for moving for elderly people6) contraceptive products7) welfare information8) women’s sanitary products9) gas supplies

Here is a list of zero rate supplies in UK:

1) food products2) water3) books4) transportation services5) medicines products6) gold products7) charity clothing and footwear for children8) international services

The main supplies exempted from VAT are the following:

1) insurance2) education3) health and welfare4) cultural services5) gambling and lotteries 6) postal services7) finance services8) sports and physical education9) works of Art10) charity

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The VAT registration threshold in UK is 77000 GBP from 1st April 2012. So all businesses making taxable supplies in UK in amount more than this sum must register and account for UK VAT.

Sweden

In Sweden the Value-Added tax was introduced on 1st January 1969. Firstly, only some particular groups of goods and services were supposed to VAT levying, but in 1991 the Legislation was changed and all goods and services became subjects of taxation with some exceptions. Essential changes took place on 1st January 1995 when Sweden became a part of European Union.

In comparison with other EU countries in Sweden is the highest VAT rate for goods and products – 25%. This tax is also imposed on drinking water, alcoholic beverages, tobacco.

There is a reduced rate of 12% for food and non-alcoholic drinks, hotel accommodations, restaurant services.

A 6% rate is imposed on following supplies:1) passenger transport2) books and newspapers3) copyrights for some cultural works of Art4) some sports and cultural events

A zero-rate is applied on:1) exports of products2) intra-EU supplies of goods3) certain transport services4) insurance policies for non-residents 5) gold for Swedish National Bank6) air transportation services7) medicines8) monetary units

The main products that are exempted from VAT are:1) health and welfare2) education3) library activities4) human organs, blood and breast milk5) insurance services6) business transfers7) lotteries8) funeral services

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9) periodical editions of non-profit organizations 10)museum activities supported by the state

It is important to mention that in Sweden don’t exist registration thresholds for VAT. All entities which are making taxable supplies in Sweden must obligatory register and account for Swedish VAT.

3. Excise duties

3.1General notions on excise duties

Excise duties are indirect taxes on the consumption or the use of certain products. In contrast to VAT they are mainly specific taxes, i.e. expressed as a monetary amount per quantity of the product.The most commonly applied excise duties are those on

1) alcoholic beverages ( wine, beer, cider and other spirit drinks) 2) manufactured tobacco products 3) energy products (motor fuels and heating fuels, such as petrol and gasoline,

electricity, natural gas, coal and coke).

Almost all countries apply excise duties to these three product categories. The revenue from excise duties accrues entirely to the country.

The excise rates are established in absolute amounts per measurement unit of the good or per some specified quantity of a good supply.

3.2. Features of excise duty in modern states

FranceTypical examples of excise duties in France are gasoline, tobacco and alcohol.

Talking about alcoholic beverages: The standard excise rate on beer is 2.6 EUR per ht/degree of alcohol of finished product. There are also reduced excise rates on small quantity supplied.For wine the rate is 3.4 EUR per a hectoliter of still wine and 8.4 per a ht of sparkling wine.For fermented beverages with not more than 8.5% of alcohol the duty is 3.4 EUR/ht.For pure alcohol the excise is 1450 EUR per hectoliter.

For tobacco production:For cigarettes the excise duty is 15.97 EUR for 1000 pieces, for cigars and cigarillos – 27.57 % of the value of the product.

For gasoline:

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For heating gas oil – 56.60 EUR per 1000 liters; petrol – 606,60 EUR/1000 liters; propellant gas oil – 428.40 EUR/1000 liters exc.

GermanyExcise duties on alcoholic beverages:

The standard excise rate on beer is 0.787 EUR per ht/degree of alcohol of finished product. There are also reduced excise rates on small quantity supplied.For wine the rate is 136 EUR per a hectoliter of still wine and 51 per a ht of sparkling wine.For fermented beverages with not more than 8.5% of alcohol the duty is 51 EUR/ht.For pure alcohol the excise is 1303 EUR per hectoliter, the reduced rate is 730 EUR per hectoliter.

For tobacco production:For cigarettes the excise duty is 82.70 EUR for 1000 pieces, for cigars and cigarillos – 14 EUR per 1000 pieces.

For gasoline:For heating gas oil – 44.99 EUR per 1000 liters; petrol – 669,80 EUR/1000 liters; propellant gas oil – 485.70 EUR/1000 liters exc.

United KingdomAlcohol duty

For beer – 18.74 GBP per ht; cider – 39.66 GBP per 100 liters, wine- in average 100 GBP depending on percentage of alcohol; spirit duty is 28.22 GBP per liter of pure alcohol.

Tobacco dutyFor cigarettes – 16.5% of retail price plus 184.10 GBP per 1000 cigarettes; for cigars – 229.65 GBP per kg

Gasoline duty For unleaded petrol – 722.02 EUR per 1000 liters; heating gas oil – 138.95 GBP per 100 liters, propellant gas oil – 722.02 EUR per 1000 liters.

SwedenAlcohol duty

Beverages are taxed by content of alcohol, more heavily than in most other countries. The tax on vodka (40%) is 200.56 SEK/liter, on Wine (14%) 22.08 SEK/liter and on

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beer (4.5%) 6.615 SEK/litre (2007). Beer with 2.8% alcohol or less is exempt from tax.  

Tobacco dutyFor cigarettes – 163,33 EUR per 100 cigarettes plus 1% prom the total cost; for cigars – 144,79 EUR per 1000 items.

Gasoline duty For petrol- 741,35 EUR per 1000 liters; heating gas oil, kerosene – 452,22 EUR per 1000 liters; heavy fuel oil – 476,03 EUR per 1000 kg.

4. Custom duties

4.1 General notions on custom duties

According to the law on customs tariffs, a customs duty is defined as the mandatory payment subtracted by the customs authorities for the entry of goods on the customs territory of a country or for the removal of goods from its territory. The customs tariff is a catalog, which includes the nomenclature of goods brought to and removed from the customs territory of some specified country, as well as the customs duties’ rates imposed on such goods.

There are the following types of customs duties:

1) Value added duties are calculated in percent from the customs value of the good.

2) Specific duties are calculated per unit in accordance with an established rate.3) Combined duties combine the value added and specific rates.4) Exceptional duties, which are divided into the following:

Special duties, which have the purpose to protect the local production and are imposed at the entry of foreign goods on the customs territory if they are in a quantity and under conditions, which cause or may cause significant material damage to the local producers;

Anti-dumping duties are used if the goods brought into the customs territory are priced at a lower rate than they are on the domestic market of the exporting country (the domestic price is taken at the moment of entry) in case this price can cause harm to the domestic producers;

Compensation duties are used if the production or export of the goods brought into the customs territory relied on direct or indirect subsidies, in case this already has or may have a negative impact on the interest of the local producers.

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The customs value of the goods, which enter the customs territory, can be determined in accordance with:

1) The price of the deal, the object of which is the particular merchandise;2) The price of a deal, the object of which is an identical merchandise;3) The price of a deal, the object of which is a homogenous merchandise;4) The unit price of the goods;5) The estimated value of the merchandise;6) The reserve method.

Usually, the determination of the customs value of the goods is done in accordance with the price of the deal, the object of which is the particular merchandise. If this method cannot be used, other methods apply. In this case, each consecutive method is used if the previous method could not be applied.

4.2 Determination of custom duty for a product

For the determination of a custom duty for some particular item it is necessary to access the tariff quota consultation site (TARIC) and to introduce there a country of origin of a product, order number, the type of product, validity period of the product. For the EU zone the tariffs are the same.

1. Analysis of indirect taxes in dynamics in the contemporary states

1.1 The share of indirect taxes in total taxes14

Figure 2.1.1: The share of indirect taxes in total taxes in years 2008 - 2012 (%).

From Figure 2.1.1 we can notice that the share of indirect taxes is relatively high in total taxes. It is due to the fact that indirect taxes are much easier to collect than direct taxes and they are the main source of revenue for the state. For example the total revenue from indirect taxes in year 2012 was (in mln. EUR): France – 318 940, UK – 263 556, Sweden – 76 351, Germany – 305 660.

1.2 Comparison of VAT rates in the contemporary states and their dynamics

The rates of indirect taxes differ a lot from country to country depending on its policy and goals. The country may change its rates but also has to follow main rules adopted by the legal framework of EU Union.( minimum rates of indirect taxes that could be applied).

Since 2009, VAT standard rates have been on a rising trend in most Member States and had achieved the pre-crisis level and in some cases even exceed it. Over this period, twenty member states registered a standard rate rise. In 2014, the VAT standard rate has increased in France, Italy and Cyprus. The highest VAT standard rate is found in Hungary (27%), followed by Croatia, Denmark and Sweden (all 25%). The lowest rates are in Luxemburg (15%) and Malta (18%).

Let’s look on the trends in examined countries for the last years:

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Figure 2.1.2: VAT rates in dynamics for the last six years in examined countries (%)

Analyzing the table above the increasing trend it is evident. Rates in Sweden are almost the highest in Europe and they are stable during these years. In other countries rates tend to threshold of 20%.

Figure 2.1.3: VAT and CT in dynamics for the last six years as average of EU, Asia and North

America counties (%)

For better understanding of how huge is the difference between indirect taxes rates in EU and other countries I have drown up Figure 2.1.3. The consumption tax

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in North America countries is stable; there are some insignificant changes in VAT rates in Asia countries. But VAT rates in EU are almost twice higher than in Asia.

The financial and economic crisis that started in 2008 has resulted in significant deterioration of public finances across most EU states. Consequently, fiscal policies have typically been driven by the need to bring public finances back on a sustainable path and to redistribute revenues among all layers of the society. To correct the excessive deficits, according to the Stability and Convergence Programmes, most Member States are making a positive and significant contribution to fiscal consolidation and are cutting public spending. This is the main cause of tax rising.

1.3 Comparison of excise rates in EU countries

Figure 2.1.4: Excise duties on beer in dynamics (Euro per hl of alcohol) . More than 2,8 % vol.

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Figure 2.1.5: Excise duties on still wine in dynamics ( Euro per hl of alcohol). More than 8,5 % vol.

Figure 2.1.6: Excise duties on ethyl alcohol in dynamics.( Euro per hectoliter)

Note: There are also some special national excise duties in Germany and France on blended drinks made

from mix of alcoholic and non-alcoholic beverages.

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Figure 2.1.7: Overall minimum excise duty on cigarettes in % from weighted average price (specific tax +

ad valorem tax) .

Note: As for cigarettes there are two excise duties: a specific tax in Euro for 1000 pieces and ad valorem tax

as a % of a cost of supply, for comparison, I made a graph that is showing the overall minimum excise duty.

So it is a percentage of both taxes that is levied on a product if we’ll take an average price of the cigarettes

on the market.

As we see from the tables above there is a huge disparity among the excise rates in studied countries. Attempts to harmonize rates have been made from 1970s, but it is difficult to do because of considerations other than fiscal. For example high levels of duty have been imposed in some Member States as part of general policies to discourage drinking and smoking. On the other hand, wine and tobacco are important agricultural products in some countries. In the last years this problem is still not solved and for better understanding of how huge are the differences on excise duties in Annex 1 are showed the excise rates in all European countries for 2014.

1.4 The share of indirect taxes in Gross Domestic Product

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Figure 2.1.8: The share of all indirect taxes in GDP (%)

As we see indirect taxes play a major role in countries economy and the share of indirect taxes in GDP is in direct proportion with the rates.

Figure 2.1.9: The share of VAT in GDP (%)

As the VAT is the main indirect tax its share in the GDP of the countries is the biggest. As the production and the consumption by the population are increasing, the share of VAT is slightly increasing too, because the VAT is subtracted on every level of production and consumption of a product. Revenues from GDP in 2012 were (mln. EUR): France – 142499; Germany – 194040; UK – 140457; Sweden – 37861.

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Figure 2.1.10: The share of excises in GDP (%)

Excises don’t have such a big influence on GDP. As European Union is trying to create an unit trade market on all its territory, the role of excises is diminishing. The revenues brought by excises in the budget in 2012 were (mln. EUR): France – 45167; Germany – 65830; UK – 67159; Sweden – 10587.

The rates of indirect taxes and the revenues from these taxes in Europe are much higher than in any other countries.The main cause of this difference is that European countries are more socially-oriented. The rate is in direct proportion with the number of benefits provided by the state: free health insurance, free education, different types of social guarantees, grants. From this point of view Sweden model is considered the best one.

2. The increasing role of indirect taxation around the world

The economic crisis has caused many governments to find sustainable ways to rebalance their budgets and stimulate growth. This would imply governments to continue the shift from direct to indirect taxes, which are less harmful for growth, look to improve the efficiency of indirect taxes and take action to combat tax fraud and avoidance. The importance of indirect taxes will continue to grow. There are some key trends in indirect taxation that will be significant for the states, businesses and consumers.

Increasing VAT rates

Limited to less than 10 countries in the late 1960s, value-added tax (VAT) - is today an essential source of revenue in more than 150. The spreading of these taxes has also

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driven constantly rising rates in many countries. In the European Union (EU), between 2008 and 2012, the average standard VAT rate increased from around 19.5 percent to more than 21 percent. The upward rate trend in Europe continues as Cyprus, the Czech Republic, France, Finland, Italy, Poland and Slovenia have already increased rates recently. We also have seen this trend on our example.

In Asia Pacific, the upward VAT rate trend is less explicit, but still noticeable. Japan, for example, which is struggling with massive budget deficits, decided in August 2012 to increase the current VAT rate from 5 percent to 8 percent on April 1, 2014 and to 10 percent effective October 1, 2015. Thailand was also considering the possibility of raising its VAT rate from the current temporary 7 percent to the normal 10 percent rate but it is still not known if this will happen.

By contrast, VAT and GST rates in the Americas remain relatively stable. In South America, where VAT systems are widespread and have been in use for some time, rates have not changed much in recent years. One exception is in the Dominican Republic, where the rate is set to increase from 16 percent to 18 percent this year and next year.

The impact on business

The significance of this trend for final consumers is clear: retail prices rise. But its impact on businesses is equally important: higher VAT rates increase compliance risks and may result in a higher tax burden where cascading VAT may not be fully recoverable. Companies must ensure that all the increases are properly dealt with in their accounting and reporting systems, which often results in a range of IT and administrative costs. Errors frequently arise when rates change, resulting, for example, from incorrect product or tax coding or confusion about the correct rate for supplies that span the change. More generally, rate increases mean the amount of VAT “under management” also increases, as do penalties for errors that are based on the amount of tax payable.

Rising excise taxes

Europe also seems to be the leading region for increasing excise taxes as the three important groups of “classic” excise taxes (alcohol, tobacco and mineral oils) have seen significant increases. This year, excise taxes on tobacco and alcohol have increased, or will soon increase, in most EU countries, including Guernsey, Moldova, Norway and Switzerland. But the trend can also be seen in other parts of the world; in Africa, higher excise taxes are being imposed on these items, e.g. in Benin, Gambia

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and Zimbabwe. In the Americas, Aruba, Canada, Costa Rica and Mexico have also raised taxes on alcohol or tobacco, as have Fiji, New Zealand and the Philippines in Asia Pacific.

Influencing consumers

While the main purpose for excise tax rate increases is to raise revenue, these taxes are also increasingly being used to discourage consumption of certain products considered to be harmful, thus influencing consumer behavior in a number of areas. A relatively new trend is the introduction of excise taxes on health-related products (other than alcoholic beverages and tobacco products), such as snack taxes on “unhealthy” food. For example, Benin, Costa Rica, Norway and the Philippines have all increased excise duties on soft drinks, Finland has introduced an excise tax on sweets and ice cream, and in France a specific contribution has been introduced on suppliers of beverages (sodas) with added sugar or sweeteners.

Over the last decade, environmental issues have also played an increasing role in determining the nature and application of taxes, e.g. on road fuel, motor vehicles and CO2 emissions. This type of measure includes tackling issues such as waste disposal, water pollution and air emissions. With support from the Organization for Economic Co-operation and Development (OECD), whose analysis seems to confirm the advantages of environmental taxes, many countries are introducing or increasing such taxes. Current examples are Germany, Ireland and South Africa.

Taxing financial transactions

Finally, there is a noticeable trend toward increasing the tax burden on financial transactions. Although there seems to be a common and widespread belief among countries that the financial sector should contribute its fair share in remedying the damage arising from the financial crisis, there is no common approach as to how this should be achieved. Some countries have increased supervision of the industry and tightened regulations. However in Europe, in particular, the preferred approach has been to levy taxes on financial transactions. France introduced a financial transactions tax in August 2012, and on January 1, 2013, Hungary introduced a tax of 0.1 percent on the amount involved in any payment service. Italy followed in March 2013, with a tax on the transfer of shares and derivatives and high-frequency trading. In addition, 11 EU Member States have agreed to introduce a common transaction tax on the exchange of shares and bonds and on derivative contracts this year.

Free trade increases, but is meeting protectionist challenges

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Customs duties were once a primary source of revenue for most countries. Global, multilateral and bilateral efforts to globalize trade, through organizations such as the World Trade Organization (WTO) and others, have led to decreasing duty rates and a downward trend in customs duties around the world.

The WTO currently has 158 members (the most recent, Laos, joined at the start of February 2013) and it reports 546 active and pending reciprocal regional trade agreements among its members. A number of new free trade agreements (FTAs) have entered into force in 2013, thus further reducing the amount of customs duties imposed on global trade. Examples include the agreement involving the EU and Peru and Colombia, Montenegro and the European Free Trade Association, Hong Kong and the European Free Trade Association, and Indonesia and Pakistan. Nearing completion are, among others, the trade agreements between Costa Rica and Peru and between Canada and India, and negotiations are in various stages of completion for a range of others.

However, the situation is not always that simple. Although customs duty rates are generally reducing for international trade, these taxes still play a very significant role in meeting countries' budgetary needs. In many cases, duty rates on many goods and materials remain high. Additionally, the compliance obligation to access the lower customs duty rates, such as meeting strict country of origin requirements, means companies must maintain controls to enjoy the preferential rates or risk large assessments for violations.

Unlike VAT and GST, duties charged at one stage in the supply chain are not offset against taxes due at later stages, so duties form part of the cost base of affected goods. In addition, customs clearance procedures can add to the time and related costs of moving goods cross-border. And even where FTAs exist, many businesses are not actually obtaining the potential benefits offered because they cannot, or do not, meet the qualifying conditions.

Protectionism

More generally, global trade may be hampered by the current economic climate, which is encouraging protectionist tendencies. Non-tariff barriers have grown substantially in recent years, many in the form of health, safety or environmental requirements. The WTO reported 184 new trade-restrictive measures enacted between October 2010 and April 2011 and 182 between October 2011 and May 2012.

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In addition, where countries are not bound by FTAs, import duties are still a common and often-used means to steer trade and production. For example, to boost the development of sugar cane production toward meeting the raw sugar needs of domestic sugar refining companies, effective January 1, 2013, Nigeria now applies a 0 percent import duty on machinery for local sugar manufacturing industries, but it has increased the total tariff on imported refined sugar to 80 percent from 35 percent, and raw sugar tariffs increased from 5 percent to 60 percent.

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Conclusions

Indirect taxes are essential for well-being of the state and its citizens. They are the main sources of revenues. The collected revenues are redistributed for social needs and for economic development of the country.

All countries are trying to change, improve its tax systems using the methods and schemes that ‘fit’ better and give better results and higher revenues.

Many countries are currently in the process of refining their indirect tax systems. In developed markets, long-standing VAT systems need to adapt to the demands of 21st century digital economy. In emerging markets, which are experiencing economic developments at a fast pace, indirect tax systems need to adapt to keep pace. In India, for example, a new nationwide GST is ready to be implemented and only awaits agreement between the central and state governments. Similarly, China is in the process of combining its current business tax (BT) on services with a broader-based VAT through a series of VAT pilots. In the end, the VAT pilots and reforms are intended to join China's BT and VAT into a single GST, with the authorities targeting an aggressive timeline of 2015.

In the EU, the European Commission has launched a comprehensive reform of the existing VAT system. The Commission has identified no fewer than 26 priority areas for further action. Significant changes can be expected in the near future, such as the adoption of a one-stop-shop registration for all taxpayers' duties or a standardized EU VAT return.

The US is still far from implementing a federal VAT. But, even in the US, a trend can be seen toward states extending the scope of their current sales taxes. . While sales taxes, by definition, only apply to purchases of physical goods, it is the market in electronically supplied services (such as digital music distribution, internet downloads or telecom services), which is growing fastest. An increasing number of states are, therefore, trying to expand their current sales tax to cover electronic goods and services or are trying to create a “nexus” for out-of-state vendors to constrain sellers to collect sales taxes on remote sales.

Finally, governments have discovered that, on the administrative side, the efficiency of indirect tax systems can be drastically improved -- which increases tax revenues. There are many approaches taken by governments, but an important one is to create common interfaces and reduce gaps in the system. This is one reason why many governments are enforcing the use of electronic data transmission and filing. The

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reason for this trend is clear: e-filing considerably eases processing the information for tax administrations and makes administration faster and more efficient. In addition, having electronic data enables tax administrations to use IT-based audit tools more easily, which can help to combat fraud and evasion.

Most taxpayers can also benefit from increased efficiencies arising from e-filing, but dealing with multiple tax administrations' different requirements and tax administrations' increased audit capacities means that greater focus must be given to the accuracy and efficiency of indirect tax compliance processes to avoid an increased risk of incurring penalties.

The growing importance of indirect taxes to governments places more pressure on tax administrations to enforce compliance. This focus is leading to greater scrutiny of taxpayers' affairs through more frequent and more effective tax audits and greater consequences for errors.

The level of exchange of information between countries varies widely. It is widespread in Europe, where the common EU VAT system requires an extensive information exchange. On a global scale, the multilateral Convention on Mutual Administrative Assistance in Tax Matters, which is open to all interested countries, facilitates exchange of information on all compulsory payments to the general government except for customs duties. In the last two years, more than 50 countries have either become signatories to the convention or have stated their intention to do so. But, even if countries do not yet share information, they increasingly exchange information internally, between different authorities and departments (e.g. with customs or social security authorities).

The trends identified here are not entirely new but they have become more pronounced in recent times. And it is precisely their continuing existence that indicates that they are important and long-term developments. All of these trends have a direct impact on businesses and common people.

With tax administrations assessing taxes more thoroughly and using powerful and efficient tools, the chance that mistakes will be found has risen considerably and will remain high.

I think, more than ever, it pays to manage indirect taxes proactively. Establishing a clear indirect tax strategy aligned to the overall business strategy will help in staying up to date with the rapidly changing tax environment and avoid the additional costs and risks of poor compliance or missed opportunities.

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Annex 1

Country abbreviations

Be Belgium Lu Luxembourg

BG Bulgaria HU Hungary

DK Denmark MT Malta

DE Germany NL Netherlands

EE Estonia AT Austria

IE Ireland PL Poland

EL Greece PT Portugal

ES Spain RO Romania

FR France SI Slovenia

HR Croatia SK Slovakia

IT Italy FI Finland

Cy Cyprus SE Sweden

LV Latvia UK Unidet Kingdom

LT Lithuania

Excise duty rates in European countries for still wine for year 2014 (EUR)

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Excise duty rates in European countries for ethyl alcohol in year 2014 (EUR)

Overall min. excise duty in EU for cigarettes (%)

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Bibliography

1. Carey, D., and J. Rabesona- Average effective tax rates on capital, labour and consumption, 2002

2. OECD, Consumption Tax Trends VAT/GST and Excise Rates, Trends and Administration Issues, 2010

3. Mendoza, E. G., Razin, A., and L. L. Tesar, ‘Effective tax rates in macroeconomics. Cross-country estimates of tax rates on factor incomes and consumption’, Journal of Monetary Economics, 1994

4. OECD, Organisation for Economic Co-operation and Development, Revenue Statistics, 2011

5. European Commission, Taxation trends in the European Union, 2014

6. German Fiscal Code (Abgabenordnung)

7. French General Tax Code

8. ec.europa.eu Taxation in the European Union

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