The OECD has published its international VAT/GST Guidelines, which are expected to be approved in 2016.
Jurisdictions are encouraged to use existing bilateral, regional or multilateral arrangements on mutual co-operation to practically comply with the Guidelines. The soft-law guidelines provide additional insight into the taxability of intangibles and services.
Links to EY’s Indirect Tax Alert and the OECD Guidelines are provided for reference.
Click to access 2015G_CM5949_Indirect_OECD%20publishes%20consolidated%20International%20VAT%20GST%20Guidelines.pdf
Click to access international-vat-gst-guidelines.pdf
As indirect taxes are becoming more significant and visible, it is apparent that the governance of such taxes should be coordinated with direct taxes in multinational organisations for significant transactions and conformity of principles. This area of tax is also increasingly specialized, with potential risks that should be considered in a global tax risk framework.
EY’s Global Tax Alert highlights the indirect tax consequences resulting from final guidance of the BEPS Action Items:
Click to access 2015G_CM5836_Indirect_OECDs%20recommendations%20on%20BEPS%20project%20has%20wider%20indirect%20tax%20implications.pdf
- 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.
Australia’s Budget reveals its intent on becoming a leader in tax transparency and implementation of tools to address anti-avoidance initiatives. The provisions cite OECD BEPS initiatives, while deciding to act unilaterally on draft guidelines and introducing new transparency standards within its various proposals.
This Budget may set the stage for others to follow similar trends and timelines; accordingly such actions should be monitored in Australia as well as the rest of the world. The Public Tax Transparency Code is another signal that reporting of economic and tax activity will be used as a public measure to assess reasonableness for determining payment of a “fair share of tax.”
MNE’s have now fully realized the impending complexity, documentation demands and transparency standards that it will be judged by. Internal education, communication and alignment are now vital in establishing a MNE’s global tax risk framework.
A link to the Budget actions is provided for reference:
Key Corporate Tax provisions:
- Multinational Anti-Avoidance Law
- Economic Australian activities = Australian taxation income
- Penalties up to 100%, plus interest
- Country-by-Country (CbC) reporting effective as of 1/1/2016, consistent with OECD Guidelines
- OECD recommendations re: treaty abuse / non-taxation to be incorporated into tax treaties
- Draft OECD anti-hybrid rules to be implemented
- Public Tax Transparency Code to supplement CbC reporting
- Serious Financial Crime Taskforce to target serious financial crimes and tax evasion
- Common Reporting Standard to be adopted from 1/1/2017
- GST Compliance programme extended 3 years
TEI submitted comments on the Modified Nexus Approach for IP (BEPS Action 5) and International VAT/GST Guidelines. Links to the submissions are provided for reference:
Click to access TEI%20Comments%20-%20BEPS%20Action%205%20Harmful%20Tax%20Practices%20-%20FINAL%20to%20OECD%2019%20February%202015.pdf
Click to access OECD%20VAT%20Guidelines%20-%20B2C%20Practical%20Application%20-%20TEI%20Comments%20-%20FINAL.pdf
Summary: IP, BEPS Action 5:
- Accelerated comment process will likely lead to suboptimal results.
- The singular entity approach to benefit from the IP regime is problematic from a potential restructuring necessity and poses deviations from the arm’s length principle.
- R&D and patents have been expressly stated as benefitting from the IP regime, whereas other activities are not yet mentioned.
- Limiting the preferential regime to strictly patents, vs. innovative software, etc., represents a myopic approach.
- The 2021 expiration date for existing regimes seems too short-sighted for patents that may last 20 years.
Summary: International VAT/GST Guidelines
- Unilateral implementation of such guidelines erodes the neutrality principle, leading to double taxation or double non-taxation.
- Recommendations should align with the OECD discussions for a reverse charge mechanism in B2B scenarios.
- Supplier based documentation requirements should be practical and simple.
- The statement that a VAT/GST registration does not create PE should be moved from a footnote to the body of the document for clarity.
- The lack of consistency in application of transfer pricing adjustments for VAT/GST will provide increased risk of double taxation.
- Final rules that are clear and uniformly interpreted should be implemented via simple, consistent, flexible and proportional guidelines.
TEI’s comments for these two critical topics convey practical and thoughtful considerations for change prior to final implementation. They should thereby be reviewed to better understand the global context and potential consequences for these actions.
PwC has recently published this report highlighting new challenges and forward looking insights for indirect taxes. Detailed country summaries are presented for Brazil, Canada, China, China, Germany, India, Russia, Singapore, South Africa, United Kingdom, and the United States. The article referenced at the end of the post highlights India’s intentions to introduce a GST.
VAT systems are present in more than 150 countries, with VAT receipts representing approx. 20% of total tax revenue in the OECD countries. As VAT rates are increasing, tax bases are broadening, and EU joint audits with VAT are commencing, indirect taxes are requiring added focus for effective tax risk management.
The OECD’s Global Forum on VAT held its first meeting in November 2012, striving to increase collaboration and establish Best Practices in VAT administration and compliance. The OECD International VAT/GST Guidelines will be finalized by year-end 2013, studying VAT neutrality, the destination principle for supply of services and intangibles, anti-abuse provisions, as well as enhancing mutual cooperation and dispute resolution mechanisms.
The report highlights Best Practice ideas, including the following:
- Identifying responsibility and awareness for indirect taxes, including environmental taxes
- Drafting contracts with provisions for new VAT/GST consequences in different jurisdictions
- Import and export risks and opportunities for logistic planning
- Risk awareness for indirect tax consequences
- Reviewing refund opportunities based on case law precedents
- Developing a methodology for reviewing and testing VAT characterizations and rate changes
- Inclusion of indirect taxes as an integral component of the global tax strategy and Tax Risk Framework