Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘VAT’

VAT refund: EC steps in

This is a very interesting case and would seem to form precedence for EU Member States and taxpayers in a similar situation, resulting from a request for a preliminary ruling to the EC from the Supreme Administrative Court, Czech Republic and the Kingdom of Spain also submitted written observations.

 Are tax authorities able to defer the refund of the total amount of excess VAT even though only a small part is still the subject of an ongoing tax inspection? The tax authorities and the Commission believe so, arguing that the deduction under Article 179 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’) is to be made only from the total amount.

 This question is particularly sensitive because the part of the claimed deduction still to be investigated might be connected with a third party’s fraudulent transactions, about which the taxable person possibly should have known. According to the Court’s case-law, this would permit (or require) the tax authorities to refuse the deduction in this regard.  But does this also mean that the deduction in respect of other indisputably ‘legitimate’ transactions can be deferred for several years?  Theoretically, the inspection of a single transaction to the value of one euro could therefore defer the tax assessment for all other transactions for several years. 

It can be stated, as an interim conclusion, that Articles 179, 183 and 273 of the VAT Directive do not include a right for the Member States to limit in time the total amount of excess VAT if only part of it is disputed, while the other part is undisputed.

http://curia.europa.eu/juris/document/document.jsf?text=&docid=221824&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=953875

EU Taxe 3 probe: Paradise Lost

The EU Parliament will open an inquiry, Taxe 3, into financial crime, tax evasion and tax avoidance as a follow-up to the unfinished work released from the Paradise Papers.  A special committee of 45 MEPs will spend a year on this project, with a primary focus on VAT fraud via offshore tax havens.

This development continues the trend to identify potential abuses, albeit via legal sovereign laws and/or intentional illegal tax evasion.

Thus, the reputational risk of all multinationals is still at the forefront of today’s news.  This development should be monitored for transparency and spill-over effects.  

https://www.theguardian.com/news/2018/feb/08/paradise-papers-eu-parliament-votes-launch-tax-inquiry

EU: VAT proposals

The European Commission (EC) has proposed a new set of rules that is meant to introduce efficiencies into long-standing current practices.

The new principles include:

  • One Stop Shop
  • Destination principle, with VAT on goods collected by the selling State and transferred to the State of destination
  • Charging VAT on cross-border trade
  • “Certified Taxable Person” certification allowing simpler EU principles to apply
  • Quick fixes, including storing goods in another Member State

The EY Global Tax Alert is included for reference, which thereby includes links to the related proposals.

This proposal is significant for all businesses trading in the EU, and its principles should be reviewed to enable proactive planning.

Click to access 2017G_05695-171Gbl_Indirect_EC%20proposes%20far-reaching%20reform%20of%20EU%20VAT%20system.pdf

VAT: GCC/UAE/India’s new rules

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.

Click to access 2017G_01345-171Gbl_Indirect_UAE%20MoF%20presents%20key%20information%20in%20relation%20to%20proposed%20VAT%20regime.pdf

GCC VAT: A reality

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.

Click to access 2017G_00900-171Gbl_Indirect_Preparation%20for%20GCC%20VAT%20by%201%20Jan%202018%20requires%20immediate%20action.pdf

TEI: European Commission’s VAT Expert Group (re)appointment

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
TEI Staff

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.

OECD VAT/GST Guidelines

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.

BEPS: Indirect tax impact

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

Key observations:

  • 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.  

UAE: Tax system on the horizon?

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.

Click to access 2015G_CM5575_Update%20on%20the%20proposed%20introduction%20of%20corporate%20taxation%20in%20the%20UAE.pdf

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 comments: BEPS IP & VAT Guidelines

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.

 

OECD Tax Inspectors Without Borders (TIWB): Update

The OECD’s TIWB program’s trial phase ended in December, 2014, with a launch scheduled in 2015, subsequent to a review process.  (Refer to the 9 June, 2013 post).

The TIWB’s objective is to enable sharing of tax audit knowledge and skills with tax administrators in developing countries through a targeted, real-time “learning by doing” approach.  The program encompasses transfer pricing, thin capitalization, APA’s, anti-avoidance rules, pre-audit risk / case selection, and VAT, although customs is excluded. Links to the program summary and the Toolkit (published in Nov. 2014) are included for reference:

http://www.oecd.org/tax/taxinspectors.htm

Click to access tax-inspectors-without-borders-toolkit.pdf

The Toolkit details the role of a TIWB Secretariat as a Facilitator, and roles and responsibilities of the parties to this shared arrangement.  Eligible individuals must meet a 5-year minimum audit experience requirement, and they can be currently working or recently retired.  Most importantly, the Toolkit addresses legal liability considerations and confidentiality restrictions during, and after, their assistance. T

his initiative should be monitored closely, as there do not seem to be prescribed transparency rules for the company under audit.  Therefore, a question for the opening audit could be an inquiry as to the tax administration’s expectations for outside expert assistance from TIWB.  Additionally, an expert with limited experience, coupled with the lack of familiarity with subjective jurisdictional rules for GAAR assessments, for example, may place additional burdens on an expert and the host country in assessing inherently complex rules.

This initiative has a strong likelihood for implementation that further reinforces the OECD’s intent to provide additional guidance for developing countries as complex BEPS Actions are implemented on a domestic level.  Accordingly, it is imperative to review the Toolkit for current familiarity with this program and follow its developments in the near future.

VAT: European Commission update

Tax Fraud: Commission looks at how VAT collection and administrative cooperation can be improved

Today (12 Feb.) the Commission adopted two reports which shed more light on problems linked to fighting Value Added Tax (VAT) fraud within the EU, and which identify possible remedies. The first report looks at VAT collection and control procedures across the Member States, within the context of EU own resources. It concludes that Member States need to modernise their VAT administrations in order to reduce the VAT Gap, which was around €193 billion in 2011. (see IP/13/844) Recommendations are addressed to individual Member States on where they could make improvements in their procedures.

The second report looks at how effectively administrative cooperation and other available tools are being used in order to combat VAT Fraud in the EU. It finds that more effort is needed to enhance cross border cooperation, and recommends solutions such as joint audits, administrative cooperation with third countries, more resources for enquiries and controls and automatic exchange of information amongst all Member States on VAT. Both reports are part of the broad Commission Action Plan to fight against tax fraud and evasion (see IP/12/1325), and can be found online on the European Commission’s Taxation and Customs Union website .

Click to access com(2014)71_en.pdf

Click to access com(2014)69_en.pdf

It is interesting to compare developments on topics such as joint audits, automatic exchange of information, and tax controls with that of the OECD and UN for corporate income tax.  The reports provide a valuable reference in regards to VAT developments in the EU, which are observed by non-EU countries for Best Practices.

Global Perspective & Challenges: VAT / GST/ Indirect taxes

http://www.pwc.com/gx/en/tax/indirect-taxes/shifting-balance.jhtml

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

EU VAT forum / VAT Rulings test case

http://ec.europa.eu/taxation_customs/taxation/vat/key_documents/eu_vat_forum/index_en.htm

Click to access vat-forum-note-information_en.pdf

The EU VAT forum is a collaboration between tax authorities and business representatives to work on common interests.  The first link provides additional information, including a list of the member organizations that were appointed for a three year mandate starting on 1 October 2012.

Thirteen EU Member States have also agreed to participate in a test case for cross-border VAT rulings.  This program commenced on 1 June 2013 and is scheduled to last until 31 December 2013.  The link provides procedural rules for submission of a private ruling request.  The following Member States participate in this project:

  • Belgium
  • Estonia
  • Spain
  • France
  • Cyprus
  • Lithuania
  • Latvia
  • Hungary
  • Malta
  • Netherlands
  • Portugal
  • Slovenia
  • United Kingdom

It would be beneficial to follow developments of the EU VAT forum, including the test case for cross-border rulings, to build upon Best Practices developed globally and integrated into the tax risk framework.  Additionally, it would be an ideal time to form peer relationships, if not already developed, with business members of the EU VAT forum.

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