As UAE’s (and some other GCC States) VAT regime, effective 1/1/2018, becomes closer, it is clear that multinationals (MNEs) need to prepare now re: VAT assessments, information required, system review, etc. to plan effectively for this new indirect tax.
Additionally, India’s new scheme also is in effect starting this year, and a similar exercise should be conducted re: operations conducted in India.
As VAT is an indirect tax, all MNE’s should ensure such local filings are coordinated with regional / global compliance governance controls.
EY’s Global Tax Alert provides additional details re: the GCC’s upcoming rules.
The long -awaited VAT has become a reality in the GCC, effective 1/1/2018.
This provision will require advance (systems) implementation and training, especially for companies in the region not familiar with VAT reporting. Note the UAE and other GCC countries have nil, or minimal rates of corporate tax and this indirect tax will provide a local economic stimulus without creating additional complexities of corporate tax reforms.
This reform is not unexpected, although now the execution phase is very important to provide a seamless transition for reporting and collection.
EY’s Global Tax Alert provides additional details of this development.
As a long-standing advocate of Tax Executive Institute’s (TEI’s) expertise and peer networking for all executive tax members of multinationals, their reappointment as a member of the VAT Expert Group is a sound testament to their advice for the international tax community.
Additionally, TEI’s training programs, and opportunities to be a guest speaker, should be taken advantage of if one has the opportunity.
TEI Appointed as Member to the European Commission’s VAT Expert Group
On September 30, 2016, the European Commission reappointed TEI as a member of the VAT Expert Group for a three-year term. The VAT Expert Group was established in 2012 for the purpose of “advis[ing] the Commission on the preparation of legislative acts and other policy initiatives in the field of VAT” and “provid[ing] insight concerning the practical implementation of legislative acts and other EU policy initiatives in the field of VAT.” The VAT Expert Group’s next meeting will take place on October 17, 2016 in Brussels.
TEI has participated as a member of the VAT Expert Group since its inception. Allard van Nes will continue to continue to serve as TEI’s primary representative and Lorry G. Limbourg will serve as Mr. van Nes’ alternate. TEI wishes to thank Lynne Clare for her work as the alternate representative during TEI’s prior terms.
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.
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:
- 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 Alert provides an update on discussions being held in the UAE.
A corporate tax law has been drafted and a common value added tax (VAT) law framework for Gulf Cooperation Council (GCC) countries has also been drafted. These discussions are now in an advanced stage, although implementation of a tax would take additional time to implement.
In efforts to provide financial sustainability, this initiative should be closely followed to plan for the potential impact in the UAE and the Region.
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:
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.