As the UK prepares for a post Brexit deal with the EU, details are emerging re: the customs rules that are being contemplated. Needless to say, it will not be as simple as the EU framework that accommodates this system currently.
EY’s summary provides details and highlights to think about re: current supply chains and routes to market for goods entering or leaving the EU via the UK.
As the subject of permanent establishment (PE) becomes more controversial amid the ever-changing rules, multinationals (MNEs) should have a proactive partnership relationship with their global mobility service provider, whether in-sourced or outsourced.
Global mobility generally reports through the HR function, thus a silo approach may result without the proactive ability of the tax function to create a cohesive team. The concepts of legal employer, economic employer, intercompany allocations, foreign reporting relationships, contractual arrangements, intercompany agreements, etc. all need to be vetted and challenged for every assignment that may have adverse consequences for the employee and/or the company.
Countries are taking a more aggressive PE approach, thus a standard assignment template and / or agreement may not work in today’s post-BEPS world. India, for example, has very specific rules that dictate a PE without special attention to the control and payment arrangements of the assignment. Assessments may take years to resolve requiring additional cost and time, including the necessity of external advisors.
The organizational structure of significant functions that may cause consequences for a MNE’s tax organization should be reviewed, possibly adding dotted line relationships for global mobility, customs, external communications, etc. At the very least, these related functions should be discussing these potential issues on a regular basis, while forming a mini-university for learning.
As the subject suggests, the organizational structure and reporting relationships should not follow the same-as-last-year approach due to the BEPS evolution around the world.
EY’s Global Tax Alert highlights the indirect tax consequences resulting from final guidance of the BEPS Action Items:
- Interaction of Article 1 (Digital Economy) and Article 7 (PE) may create a wider gap for findings of a indirect tax “fixed establishment” and a direct tax “permanent establishment” (PE), although some countries do not respect such distinction. Thus , business models merit a review for such changes.
- Article 8 (Intangibles) set forth changes in allocation and valuation that may affect customs valuations.
- Actons 8-10 (transfer pricing) may invite additional focus by tax authorities on VAT/GST and customs.
- Action 13 (country-by-country reporting) may invite scrutiny of indirect taxes.
The focus of BEPS has been on direct taxes, while its impact will now be measured for purposes of indirect taxes. Thus, a BEPS review should encompass direct and indirect tax effects, including VAT/GST and customs.
EY’s Global Tax Alert highlights important changes to be introduced by the EU Customs Code.
- First Sale for Export rule abolished, although some planning opportunities exist in the short-term.
- Bonded warehouse transactions are somewhat unclear.
- Royalties, license fees and trademark intangible transactions are undergoing major changes.
As the OECD is preparing to issue final Guidelines for the BEPS Actions tomorrow, it is a critical time to ensure that tax and customs practices for multinationals are integrated in their operations while sharing Best Practices and learning how the international tax world is being transformed.
The EU Customs Code changes merit immediate review for planning opportunities, as well as time to change systems accordingly for the new rules.
As May 2016, the effective date for the EU’s Union Customs Code, approaches several questions remain. One significant question is whether the long-recognized “first sale” rule will be transformed into.. the sale occurring immediately before the goods are brought into the customs territory of the Union.
The links to Deloitte and PwC guidance highlight this change, among others, for which all MNE’s and organisations affected by EU customs duties should closely review and assess current operations to quantify impacts of such changes.
Tax/Customs oversight observations for MNE’s:
- Are these separate functions?
- Is there in-house customs expertise?
- Are transfer pricing and customs integrated re: risks, opportunities and planning?
- What supply chain changes are contemplated, and is customs a major consideration?
- What reporting lines are in place for each function?
- Should tax, treasury and customs be integrated functions for risk oversight and review?
As the OECD BEPS Actions approach conclusion the end of this year, it may be timely to review anticipated transfer pricing changes and upcoming customs considerations for effective long-term planning.
The International Chamber of Commerce (ICC) has released the 2015 update of its policy statement on “Transfer Pricing and Customs Valuation” first issued in 2012 jointly prepared by the ICC Commission on Taxation and the Commission on Customs and Trade Facilitation. The statement supports companies that face the challenge of determining the appropriate related party valuation of goods in the context of disparity between governments’ customs and fiscal policies.
The proposals put forward in the statement are designed to help simplify regulations for companies and administrations and also to clarify rules for both parties so as to reduce the negative financial impact linked to divergent valuation. The compliance costs of companies would be significantly reduced if tax and customs administrations were to accept and implement ICC’s proposals that would contribute to a more coherent approach to cross-border trade. These policies would also minimise the risk of penalties that result from opposing views between customs and tax authorities.
In February 2015 the policy statement has been offered to the Organization for Economic Co-operation and Development (OECD). Within the context of the G20 mandated OECD Base Erosion and Profit Shifting (BEPS) taxation project. The OECD is working on a revision of its transfer pricing guidelines and the ICC Statement will be helpful in this regard.
Furthermore, the policy statement will be included by the World Customs Organization (WCO) in the WCO’s Revenue Package, which provides guidance (tools and guidelines) to customs administrations around the world on their revenue collection. The WCO Revenue Package will be released in spring 2015.
Best Practice observations: Customs is playing a larger role in today’s environment of tax transparency, although there continues to be a disparity between customs adjustments and transfer pricing determination. It is hopeful this welcome update will introduce simplicity and transparency while avoiding the “one-sided” effect of adjusting customs or transfer pricing going forward.
Additionally, timing is also critical to review the MNE functional oversight of customs and transfer pricing, ensuring they operate seamlessly and in tandem as the international tax arena becomes more complex.