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.
Withholding tax rates are increasing in many developing countries, creating additional timing and/or permanent cash inefficiencies. To the extent withholding tax payments, receipts and documentation are viewed from a Best Practice process perspective, immediate cash savings may be realized. The following points may be considered in this process:
- How are payments attracting withholding taxes identified?
- Identify internal/external responsibility for tracking changes in withholding tax rates and communication to the business payor.
- Are higher payments being made due to contemporaneous documentation (i.e., certificates of residence) not received timely?
- What integration is in place for Tax and/or Treasury to manage the withholding tax process?
- For shared service centers, how are changes in withholding rates communicated for timely implementation?
- Has an internal and/or external review of withholding taxes been performed in the last year?
- How are withholding taxes considered for new intercompany loans?
- Who reviews withholding tax considerations for legal entities in new jurisdictions?
- For taxes that are not ultimately creditable, is there a process to identify and quantify such payments?
- Is there a review process for proper characterization of “withholding” taxes that may or may not be creditable?
- Is there specific responsibility within the business to ensure withholding taxes are properly characterized and paid timely?
- Should a withholding tax flow chart be used for internal governance and global consistency in methodology?
- Is there a governance process for collection of receipts when withholding taxes are paid?
- Identify a process for physical/electronic receipt retention to ensure timely and accurate documentation is maintained for audits.
- Are different payment flows in place for similar services where withholding taxes apply?
- Is there a variance analysis performed on a recurring basis to identify significant changes?
- Are internal governance principles established for withholding taxes?
- Is the business aware of the importance for efficient mechanisms re: withholding taxes?
Withholding, and similar, taxes are being legislated by many countries, especially in developing markets. Accordingly, Best Practice processes should be in place to maximize cash efficiencies.
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