In this episode of VAT Talks we speak with Branislav Kovac. Branislav is a tax partner at VGD Slovakia, a Bratislava based advisory company. In the following Branislav will explain how Slovakia achieved to significantly decrease the VAT gap during the last few years. Nevertheless, he also points out that the VAT gap is still at 20%. Therefore, the Slovak government is planning to implement real-time reporting. Branislav argues that real-time reporting is a valuable tool to further reduce the VAT gap but it should not come with additional burdens for businesses. While addressing the issue of data protection, Branislav states that “disclosing any kind of unit prices or quantities on invoices should be out of discussion”. Lastly, we discuss why people should get more excited about VAT, for which we dig into the importance of a fair VAT system.
Could you tell a bit more about yourself and the current work that you are doing?
“My name is Branislav Kovac and I am a tax partner at VGD Slovakia. VGD Slovakia is one of the major leaders in the advisory business. In fact, we are the fifth largest company in the advisory market in Slovakia with 150 employees. I’m one of the 4 partners there and I’m mainly responsible for taxation. We are doing auditing, business process outsourcing (BPO) services, accounting, payrolls, tax advisory services, merger and acquisition (MNA) services, and transactions. I am also part of the board of the Slovak Chamber of Tax Advisors (SKDP) and Treasurer of the CFE Tax Advisors Europe which is an organisation uniting tax advisors’ chambers and organisations from different European countries representing the interests of tax advisors towards other institutions such as the European Union (EU) and the Organisation of Economic Cooperation and Development (OECD). I am primarily working on advising clients on their tax transactions in the field of international taxation.”
What makes VAT interesting to you?
“The interesting thing is that VAT is getting more complicated by the day. When Slovakia joined the EU we thought that we would have a regulated, harmonized area of taxation because we would have one EU VAT Directive. We thought that all processes would become easy and smooth. However, we see that it’s only becoming more complicated. On the other hand, that is what makes VAT a very interesting area as it is a real challenge for us tax professionals to constantly be informed about new rules and all these interpretations we have in the field of VAT.”
Over the last couple of years Slovakia managed to significantly close the VAT gap (from 29.6% in 2014 towards 20% in 2018). Could you tell a bit more about the Slovakian VAT gap and how the government managed to achieve this decrease?
“There is a very clear explanation for that and it’s the introduction of the so-called control statement. This means that besides the VAT return, all VAT registered businesses in Slovakia have to submit a control statement which is actually a list of all incoming and outgoing invoices, and some of the cash transactions. Because of this control statement, the tax authority now has a very detailed overview of all B2B transactions. However, it’s still a post-audit system as it needs to be filed after the transaction took place. That means that there is quite some time between the moment the transaction happened and the moment the tax authority is informed about this transaction.”
“Another important measure which helped to close the Slovakian VAT gap is eKasa. EKasa is a cash register system that automatically registers receipts with the tax authority in real-time. However, the reason why the Slovak Ministry of Finance now wants to introduce this real-time reporting system, is that since two years we do not see a significant decrease of the VAT gap anymore. Therefore, the government wants to take additional measures, because there is still a big difference between the VAT gap in Slovakia and the average VAT gap within the EU. We are still at 20% in Slovakia, which means that we’re losing between €1 and €2 billion in VAT on an annual basis.”
Is there already a clear plan about the way real-time reporting is going to be implemented?
“There is not a clear plan yet. At the beginning of the year the Ministry of Finance has published a preliminary proposal to start the discussion with businesses and organisations, without sharing any specific details. What is currently known is that there will be a mandatory system to report to the tax authority before the invoice has been issued. This will become a requirement for both the supplier and the buyer. It is a new bureaucratic obligation for businesses. Therefore the minimal requirement, from a business perspective, is that the new system allows for integration with ERP systems and that the tax authority offers a free application for those businesses that cannot afford to have an ERP system.”
“Still, the preliminary proposal raises a lot of questions and turbulence in the Slovak press, because many argue that it is not bearable for business. At the same time, we also see that the general global trend is real-time reporting and I am sure that these systems will come anyhow. Furthermore, my assumption is that there will even be a uniform real-time reporting for the EU at some point. We want to be at the forefront of the implementation of such a system. However, we must bear in mind that if we impose new obligations we should also take away some other obligations. For example the obligation to report the control statement could be abolished. There should be at least some form of quid pro quo.”
What is the status of SMEs regarding digitalisation in Slovakia? Will they have to face extra costs?
“Probably for small businesses and self-employed the implementation of real-time reporting will come with relatively high costs as compared with medium and larger companies. Some of these small businesses are still used to write down invoices without any digital system. Therefore, digitalisation would be a huge change. There is a really big group of self-employed people in Slovakia that do not even have any kind of accounting, because they actually don’t have to. They only have to report so-called retainer expenditures, where they state that for example 60% of their income is expenditures. It is not necessary to book every expenditure in your accounting. It is not yet clear if self-employed people will have to adhere to the future real-time reporting requirements. According to the preliminary statement of the Ministry, every invoice has to be reported, also from non VAT registered businesses. So this is quite strange, but also very interesting because it means that it’s not only a tool to fight VAT fraud, but it’s also used to close the CIT gap. Only eKassa transactions seem to be excluded.”
There is now a public consultation with several organisations, what does it look like?
“Indeed. So after the government released the preliminary proposal they published a public consultation. There were several organisations that gave their opinion to the government, among them was also the Slovak Chamber of Tax Advisors. Now, there are consultations going on between the Ministry and several organisations where the discussions are more detailed. The first draft of the actual legislation is planned for the end of March, which is very soon. After that document is published the second process will start which is a consultation on the draft.”
Do you think that the Slovak Financial Administration is thinking about building the IT system itself?
“It is not clear yet. There have been some relevant scandals concerning the Slovak tax administration in the field of IT. However, it is still too early to understand if Slovakia will hire an external company or build its own IT company which could develop the system. The latter could be a serious option as recently a state IT company has been established in the east of Slovakia (in Košice), so it could be that this company will be involved in the implementation of such a system. Then again, it’s too early to tell.”
What is the role of data protection in the discussion about implementing real-time reporting?
“Data protection is a very important matter for businesses. It concerns not only privacy, but also confidentiality. So think about business secrets that could be exposed. For example, disclosing any kind of unit prices or quantities on invoices should be out of discussion. Indeed many organisations addressed this issue during the public consultation. I think that the government should develop very clear requirements about the data that should be provided on the invoice, but not things like unit prices and quantities.”
What do you think about the development concerning the implementation of real-time reporting for intra-community transactions, that are currently being discussed within the European Commission (EC)?
“I think it makes sense. However, we should make sure that the new system will not increase the administrative burden on small and medium sized companies. In my opinion, a deep risk analysis concerning where frauds arise should be the priority. This would help governments to assess whether the system should be made mandatory for all businesses or only for bigger companies. In fact, VAT frauds don’t often arise within multinational companies. If we would have even a better understanding of where the fraudsters are, then we can optimise the conditions to keep the bureaucratic burden as low as possible while still closing the VAT gap. This is an important issue because the EU should remain a place where businesses can do their work. Otherwise the USA, Japan and China will become known for having a more appealing business climate than the EU.”
If you could give one piece of advice to the EC regarding the fight against VAT fraud, what would that be?
“In my opinion, the EC should aim at specifying what exactly should be reported. Additionally, there should not be too many exemptions, because if there are too many exemptions the probability of fraud is likely to increase. For example, after the introduction of the reverse charge mechanism for mobile phones or the construction sector, fraudsters rapidly adapted and shifted to other commodities to which the reverse charge mechanism did not apply. Therefore, fewer exemptions will increase the efficiency of the system.”
What would you say to the readers to make them more enthusiastic about VAT?
“Readers should always bear in mind that VAT should be as fair as possible. This means that some businesses have to pay and others can deduct VAT. We have to fight for the businesses which make everything in line with the law. They should never be scared that at one point they will not be able to deduct their VAT costs, because by accident they ended up in a VAT fraud scheme. In fact, there should always be a means to deduct your VAT. The last instance should be the European Court of Justice (ECJ). However, we know it takes a lot of time and it is very costly to go this route. Still, we should encourage businesses and entrepreneurs to fight for their rights, also in the field of VAT.”
We would like to thank Branislav again for his time and for giving his perspective on VAT. The opinions expressed in this article are personal. If you have any questions, suggestions or if you want to be our next interviewee, do not hesitate to contact us via firstname.lastname@example.org