Amid growing calls for UK VAT reform, stakeholders will be seeking inspiration from how similar taxes work in other countries. One expert with particularly relevant insights is Eugen Trombitas, Managing Director at PwC Ireland and Global Indirect Tax Policy Leader for PwC as a whole. With extensive career experience in New Zealand and Australia, Trombitas says that their Goods and Services Tax (GST) systems provide fascinating points of comparison.

However, he cautions: “There’s no secret sauce here. To a large extent, a VAT system’s acceptance and effectiveness hinge on two crucial factors: timing and political courage.”

A prime example of how those factors can collide, he notes, came in the Australian Federal Election year of 1993. During his campaign, John Hewson, then leader of the Liberal Party, was cornered in a famous TV interview when trying to explain his plans for Australian GST. Under shrewd questioning, Hewson unintentionally made the tax sound too complex for the man on the street. The result: Hewson lost an election he had been widely tipped to win. Yet seven years later, with a fresh national perspective, Australian GST finally took off.

As New Zealand’s system marks the greatest contrast to UK VAT, let’s start with that.

New Zealand GST

Introduced 1986

Rate 15%

Trombitas points out that many tax experts and practitioners consistently hail New Zealand GST as a best-in-class exemplar of how a modern VAT system should work.

Its reputation was further enhanced in a recent working paper from the International Monetary Fund, entitled Designing a Progressive VAT. Published in April, the paper makes a number of positive references to New Zealand’s GST and describes its progressive approach as “nearly pure”. So, what are the key features that have attracted such acclaim?

“Apart from financial services and transactions on residential rentals, New Zealand GST taxes everything,” Trombitas explains. “Historically, European VAT systems have been shaped by political compromises, leading to carve-outs for healthcare, education and other services. As those systems only tax certain things, their rates tend to be higher. But when you go broad-based and lower rate, you unlock some crucial advantages.”

At a basic level, he says, the more carve-outs and boundaries a VAT has, the more public debate rages about what’s in or out. But when you have a VAT that is woven far more widely throughout the commercial landscape, it becomes “part of the furniture”, enjoying a higher level of popular and political acceptance.

“There’s no real argument in New Zealand about GST’s scope,” Trombitas says. “Citizens are used to paying it through price, and its ubiquity is good from a business standpoint in terms of compliance. Ultimately, that makes it a very efficient tax to collect. On an annual basis, it consistently contributes about 30% of the total tax take. That proportion continues to grow as the economy consumes more.”

In Trombitas’s assessment, the broad-based nature of New Zealand’s GST makes it agile enough to catch in its net any changes to the international and digital economies. That covers physical goods sold by ecommerce traders, as well as electronically supplied services and innovative products such as cryptocurrencies (unless exempted) and non-fungible tokens. In addition, GST’s broad base provides the government with the flexibility to make progressive policy decisions around environmental transactions – such as carbon credits, which are zero-rated.

“Plus,” he says, “in just about every other country in the world, a bank that’s lending to businesses can’t recover VAT on its costs, but in New Zealand, it can.”

During the pandemic, Trombitas notes, New Zealand GST continued to generate healthy returns despite changes in purchasing habits, because all the goods and services that citizens consumed still fell within its scope. That reliability has also laid a stable foundation for the government to operate a relatively simple system for making social security payments into the bank accounts of low-income individuals.

Australian GST

Introduced 2000

Rate 10%

Not even a quarter of a century old, Australian GST arrived on the scene much later than the VAT systems of most other countries. For Trombitas, that alone hints at compromises made along the way.

“Compared with New Zealand, Australian GST emerged from a more politically charged environment – particularly in terms of federal versus state friction,” he explains. “Australia had tried and failed several times before to bring in a broad-based consumption tax. In the form in which it was finally introduced, GST came with a number of exemptions. As such, its base was narrower than envisaged in those previous attempts – certainly nothing like as inclusive as what we see in New Zealand. Since then, thanks to having all those boundaries to debate, Australian GST has attracted a significant body of case law, creating further carve-outs.”

Trombitas points out that for a tax with a narrower, more proscriptive base, its actual rate is remarkably low. Indeed, the Organisation for Economic Co-operation and Development (OECD) has recently urged the Australian government to shift GST to a higher rate.

On top of that low rate, GST is also blunted by the context of an on-the-whole fragmentary national tax system. “For example, Australia has quite a complex income tax, plus eight different sets of rules for state and territory stamp duty,” says Trombitas. “If you map on to that the also rather fragmented base of Australian GST, it’s easy to see why the tax brings in less money, relatively speaking, than New Zealand’s.”

A key aim for GST was to replace several state taxes – some of which went, and some of which stayed – with proceeds to be distributed to states under a negotiated protocol. As it stands, Trombitas notes, GST accounts for only around 15% of Australia’s total tax take, and provides 20% to 25% of states’ funding. “That’s a decent portion of states’ annual income,” he says, “but from a federal standpoint, GST isn’t Australia’s primary muscle power.”

Summing up how the UK could use the two taxes as reference points, Trombitas says: “Australian GST is perhaps a little closer to the current UK system, although its very low rate suggests an alternative path for policymakers to consider. But overall, New Zealand provides a stronger example of political courage.”