This month in indirect tax: GST reform in Malaysia; VAT updates in UK, Italy, Ukraine

The Federation of Malaysian Manufacturers has called on the government to reintroduce the goods and services tax in its 2023 budget.

It proposes implementation in 2024 with a GST rate of 4% and a registration threshold of RM500,000 ($117,000).

In a statement, the federation said reviving GST “is a timely lifeline for the country’s debt dilemma as well as to shore up adequate fiscal buffers in order to weather the next economic downturn”. It added that increasing indirect taxes would give the government flexibility to reduce direct taxes, making Malaysia a more attractive business destination.

About three-quarters of respondents strongly supported reintroducing GST to replace the sales and service tax in a recent survey, according to the federation.

More UK businesses are keeping their annual revenues below the VAT threshold of £85,000 ($105,000), probably to avoid becoming liable for VAT, according to analysis by the Financial Times based on data obtained from HM Revenue & Customs.

The analysis suggested that up to 26,000 sole traders, companies and partnerships deliberately held back growth in the tax year 2018-19. The number of companies with revenue just below the limit was about 8,500 compared to 3,000 that were just above it.

The UK has a higher VAT threshold than any country in the EU, where the average is about £30,000. The current UK threshold is planned to be maintained until at least March 31 2026.

The Italian government has further extended the 5% rate for VAT on domestic and industrial gas until March 31 2023.

The cut to 5% was introduced in October 2021 for a period of three months. It has now been extended five times.

Many European countries have cut VAT on fuel in the face of high rates of energy inflation caused by the war in Ukraine and other factors. In April 2022, EU finance ministers approved Council Directive (EU) 2022/542 amending the VAT directive to give member states more freedom to reduce VAT rates, but energy rates must be at least 5%.

Foreign businesses that are VAT registered in Portugal must now comply with three requirements: invoices must be produced by certified invoicing software using a unique eight-digit code; paper or PDF invoices must include a QR code; and invoices can be reported monthly using standard audit file for tax billing.

These requirements took effect on January 1 2023 and are the same as those that apply to resident businesses.

Ukraine’s Economic Affairs Department is considering how to comply with the 15% minimum standard VAT rate required in the EU.

The country was granted EU candidate status in June 2022 and will have to comply with EU standards as it prepares to join the bloc.

Ukraine’s VAT rate is 20%, although it is planning a cut to 10% to boost the economy. The government is reportedly considering either ending the proposed 10% rate after the transition period or extending the 7% rate that applies to essential supplies to comply with accession requirements.

On January 18, the UK Treasury published an exploratory memorandum on the impact of the EU VAT in the Digital Age proposals on Northern Ireland.

The VITDA initiative was launched in December 2022 and is being discussed by EU member states.

Under the Northern Ireland Protocol agreed as part of the Brexit negotiations, Northern Ireland remains aligned with EU VAT rules concerning goods. The exploratory memorandum, authored by Treasury Minister Victoria Atkins, noted that, if implemented, some of the VITDA proposals are likely to require action in Northern Ireland.

“This includes the proposed amendments to online marketplace liability and efforts for the EU to progress towards single EU VAT registration for intra-EU trade, including proposals for [one-stop-shop] expansion and mandatory acceptance of a reverse charge,” it added.

The UK government said it is committed to resolving any issues with the EU so that any changes “do not impact Northern Ireland’s position within the UK internal market”.

On January 9, Representative Earl L ‘Buddy’ Carter introduced the Fair Tax Act of 2023 (HR25), which would impose a national sales tax to replace current income taxes, payroll taxes and estate and gift taxes throughout the US.

The rate of the new sales tax would be 23% in 2025. The bill was referred to the House Committee on Ways and Means.

According to a summary published by the Congressional Research Service, this proposal would mean a fundamental change in how taxes are collected in the US. It said transitioning to a consumption tax may increase individual saving, boosting economic output, but pure consumption taxes place a greater tax burden on lower-income individuals, as well as younger and older ones.