synergy global vat/gst update – overview of recent changes & what’s on the horizon

GLOBAL VAT/GST UPDATE

Overview of recent changes and what‟s on the horizon - Grant Thornton UK LLP

YOUR PRESENTERS

Karen Robb Keith MacDonald Alex Baulf

Partner Senior Manager Senior Manager

020 772 82556 011 895 59151 020 772 82863

INTRODUCTION

GLOBAL CHALLENGES….

RATE CHANGES

VAT/GST system in over 150 countries!

NEW REGIMES

RULE CHANGES

Corporate footprint, supply chain and customers across

globe

TAX AUTHORITY

POWERS

AMBIGUITY

Often changes announced without warning or only confirmed late in day

COMPLIANCE REQUIREMENTS

FRANCE: VAT RATE INCREASE

• The Amending Finance Law no. 2012-1510 (article 68) of 29

December 2012 provides for an increase in VAT on

1 January 2014.

• The standard rate will increase from 19.6% to 20% and the

intermediate rate from 7 % to 10%. The reduced rate of 5.5%

was originally scheduled to decrease to 5%. However

announced in Budget 2014 it will remain at the 5.5% rate.

FRANCE: E-BOOKS

• European Commission has referred France to the European

Court of Justice for its use of a reduced VAT rate for e-books.

• The action was launched last week following October's

Council of Ministers meeting EC claims that France has

failed to comply with the EU VAT Directive which requires the

full VAT rate to be charged on digitally distributed books -

compared to the reduced rate allowed for printed books.

• 2015 changes … limited benefit to customers in France?

IRELAND: ANTI-FRAUD MEASURES

• To assist Irish Revenue in combating the shadow economy, legislative changes will be introduced in 3 areas:

• disallowance of input VAT – businesses which have not paid (in full or in part) for supplies within 6 months will be required to repay the VAT claimed on those supplies (a similar provision already applies in the UK)

• quick reaction mechanism – allows Irish Revenue to introduce an emergency and temporary reverse charge mechanism to certain goods and services to deal with sudden large scale VAT fraud.

• record keeping – powers to allow Revenue issue notices to traders to procure specific information where Revenue believe that the specified records might assist in identifying VAT fraud.

EU: PAN-EU VAT RETURN PROPOSAL

• [update from GT meeting with the Treasury]

• standard VAT return proposed replacing national VAT returns

• to ensure that businesses are asked for the same basic information, within the same deadlines, across the EU.

• Algirdas Šemeta, Commissioner for Taxation:

"The standard VAT return presents a win-win situation. Businesses will enjoy simpler procedures, reduced costs and less red tape. Governments will have a new tool to facilitate VAT compliance, which should increase the revenues they collect. Today's proposal therefore supports both our commitment to a business-friendly Single Market and our drive to improve tax compliance in the EU."

EU: PAN-EU VAT RETURN PROPOSAL

• Observations:

• Uniformity or optionality?

• Calendar-monthly VAT returns

• Comitology post-2016

EU: 2015 CHANGES

• The main VAT changes effective 1 January 2015 are in

relation to the:

- place of supply of B2C supplies of telecoms, broadcasting

and electronically supplied services will become where the

customer is established;

- introduction of an optional Mini One Stop Scheme for the

above B2C supplies;

- new VAT voucher rules

EU: 2015 CHANGES

• Currently, the place of supply of the affected services is the country where the supplier is established.

• However, under the new rules, the place of supply will transfer to the customer‟s country.

• For Business to Business transactions, the customer will still be able to account for any tax due through the „reverse charge‟.

• However, where consumers and other non-taxable persons are involved with a supply the reverse charge is not possible. As a result, liability to account for any VAT due in a Member State rests entirely with the supplier. main VAT changes effective 1 January 2015 are in relation to the:

EU: 2015 CHANGES, STORY SO FAR…

• OECD principles on the taxation of e-commerce agreed at a conference in Ottawa in 1998

• established that the rules for consumption taxes (such as VAT) should result in taxation in the jurisdiction where consumption takes place

• plans put to the WTO in 1998 by President Clinton to ensure that trade in digital goods remained tax free

• WTO agreed a one-year moratorium at the time, which was due to be discussed in Seattle trade talks which collapsed

EU: 2015 CHANGES, STORY SO FAR…

• “VAT on E-Commerce Directive” (Council Directive 2002/38/EC) was adopted by the EU in May 2002.

• rules came into effect from 1 July 2003 for non-EU suppliers

• Luxembourg planning – difference in treatment based on where established: Lux v other EU member state v Non-EU One Stop Shop

• Resistance from Luxembourg to give up advantage gained

• 1 January 2015 – a level playing field

2015: ELECTRONICALLY SUPPLIED

supply of

websites or web-hosting

downloaded software

downloaded images, text or

information

access to databases

downloaded music, films or

games

digitized books and electronic publications

Internet access

broadcasting

2015: ELECTRONICALLY SUPPLIED

virtual goods

digital gifts e.g. Facebook/Little

World gifts

avatars/ digital clothing for

avatars

digital media

downloadable content to

consoles, PCs and TVs

content keys used to unlock content already on a game

disk

virtual currencies or in-game currencies

access to social media sites

2015: KEY ISSUES FOR CONSIDERATION NOW:

Pricing

• As the local VAT rate where the customer is established

(ranging from 15% to 27%) will need to be accounted for on

B2C digital revenues, businesses will need to consider

whether prices should be inclusive or exclusive of VAT,

taking into account natural price points and modeling

exercises on the current geographical location of customers.


Ambiguity over nature of services

• Distinction between "electronically supplied service" and general services may not currently be a genuine concern of business/tax authorities, as for EU suppliers, the place of supply for B2C revenues is generally the same (i.e. charge local VAT where supplier is established). However, with effect 2015, there will be a distinction and difference between the place of supply of electronically supplied services.

• The UK VAT tribunal case of Smart Voucher (2009) suggests that the term electronically supplied service "…is capable of having broad application" and that the key consideration is "…not the description or analysis of the nature of the service, but the manner in which it is supplied " .

• Therefore, certain services provided via the internet/digital networks with limited human intervention could be classified as electronically supplied services and be subject to the future changes.


Customer Location

• need to correctly identify where customer established for VAT purposes.

• Businesses will need to consider how they can verify this location and provide an audit trail for tax authorities.

• May be problems in relation to the information that can be obtained under data protection legislation etc. and that required by tax authorities..

• Customer self-verification? Credit card billing address? Geo-location software? IP-address? SIM card?


Storage and retention of data

• As HMRC and other tax authorities will likely require an audit

trail and evidence on customer location, businesses should

consider whether the data they obtain from customers can be

stored and retained without manipulation or corruption.

• 10 year record retention under MOSS?

• Data privacy issues?

EU: 2015 CHANGES

Front-end system architecture

• Consideration must be given to customer-facing and font-end

system architecture e.g. what information will be requested

and in what format e.g. check-out on website.

IT systems, tax engines and reporting capability

• Businesses should consider the changes that will need to be

made to IT systems, and whether current systems are

capable of handling the requisite VAT reporting and

accounting

EU: 2015 CHANGES

412 days (… and counting)

• Budgeted for IT spend, indirect tax advice in 2014?

• IT projects approved, logged and in queue/scheduled

• Pricing approach agreed?

SOUTH AFRICA: E-SERVICES

• SA Treasury has proposed in its 2013 Budget Review that

foreign businesses supplying e-services (e-books, music and

other digital goods/services) be required to register for VAT

in SA and account for SA VAT.

• Current lack of specific place of supply rules

INDIA: GST

• Indian Prime Minister has virtually ruled out the introduction

of GST in the remainder of the government‟s second term in

office

• citing differences between the centre and states over the levy

billed as a landmark tax reform.

• “India is a federation and there are difficulties to bring

states to agree to surrender tax power, but I am

confident we will overcome the hurdle”

INDIA: GST

• GST aims to remove barriers to movement of goods and

services across states and economically unify the country.

• this year we have seen both the states and the central

government trying to forge a consensus on the final GST

architecture.

• 2014/15? 2016? beyond? Watch this space!

INDIA: GST, STORY SO FAR….

INDIA: GST, CURRENT FRAMEWORK

ASIA-PAC

MALAYSIA: GST INTRODUCTION

• proposed that current sales tax and service tax be abolished and be replaced with GST

• GST bill was tabled for first reading in 2009 but was put on hold because of the country's election.

• Prime Minister Najib Razak unveiled Malaysian Budget for 2014 in October 2013.

• GST confirmed with effect 1 April 2015

• GST standard rate - 6%

MALAYSIA: GST INTRODUCTION

• registration threshold under GST is RM500,000 per annum (approx. GBP 100,000)

• replacing existing consumption taxes - sales tax and service tax.

• Sales tax is imposed on certain locally manufactured goods & imported goods. Local sales tax is imposed when annual turnover (threshold) exceeds RM100,000. Sales tax rates are 5%, 10% and at a specific rate.

• Service tax is imposed on selected services. The rate is 6% while specific rate is charged on credit cards. Most services are not subject to a threshold except for a few types of services where the thresholds are set at RM150,000, RM300,000 and RM3 million a year.

CHINA: VAT PILOT EXPANSION

• 29 October - The Shanghai Municipal Office of the State

Administration of Taxation released the

“Announcement on Issues Concerning the Filing of

Value-added Tax Exemptions for Cross-border Taxable

Services under the Business Tax (BT) to Value-Added Tax

(VAT) Pilot Conversion and Tax Settlement during the

Initial Pilot Period (Announcement [2013] No.3)

• provides clarification on rules

CHINA VAT, STORY SO FAR….

• Jan 2012 - VAT reform pilot started in Shanghai

• later rolled out to 8 cities/provinces in 2012

• rollout nationwide was anticipated due to distortion in competition between areas within/outside program

• April 2013 – decided that expansion throughout China and new service industries to be included with effect 1 August 2013

USA: SALES TAX

• 50 States

• state and local indirect taxes (e.g. county, municipal)

• no uniform code/system

• Streamlined Sales Tax Program ("SSTP")

• nexus

nexus = level of connection between state taxing jurisdiction

and an entity

USA: SALES TAX

• This no uniform code/system for US state and local taxes, with the exemption of the Streamlined Sales Tax Program ("SSTP") which some states have signed up to.

• Requirement to register and collect sales tax in a state - a company generally needs to have "nexus".

• Nexus is level of connection between state taxing jurisdiction and an entity. Until this connection is established, state taxing jurisdiction cannot require an entity to collect/remit sales tax

• The U.S. Constitution & Supreme Court decisions stipulate that substantial physical presence is required to establish sales tax nexus Quill Corp. v. North Dakota

USA: MARKETPLACE FAIRNESS ACT

• However please note that last month the U.S. Senate passed the Marketplace Fairness Act of 2013 (S. 743), which would allow states to require remote (out-of-state) sellers to collect and remit sales and use tax on sales to in-state residents even if the retailer has no physical presence in the state.

• This still needs to pass Congress but is targeting e-tail businesses.

• There is no shared definition of what constitutes physical presence in a state but certain activities clearly create sales tax nexus but state interpretations are often vague & ever-changing. Once sales tax nexus is established, a company must register immediately with the taxing jurisdiction


• A state that is a member of the Streamlined Sales Use Tax Agreement ("SSUTA") would be allowed to impose a collection and remittance requirement upon remote sellers 180 days after it first publishes notice of its intent to exercise its authority under the MFA.

• A non-member state could begin exercising its authority no earlier than the first day of the calendar quarter that is at least six months after the date of its enactment of legislation adopting the simplification requirements.

• last month the U.S. Senate passed the


• The MFA would exempt remote sellers with $1 million or less in annual sales (“gross annual receipts in total remote sales in the United States")

• would require that an adopting state provide free software to remote sellers to calculate and file sales and use tax returns

• The MFA has long been championed by large brick-and-mortar retailers, who argue that Internet retailers have an unfair advantage because they are not required to collect sales tax on purchases in states in which they have no physical presence.

• Opponents of the MFA argue that it will hamper one of the fastest growing segments of the economy, burden small online retailers and unfairly allow states to target businesses outside their borders.

… watch this space

USA: SALES TAX

• Streamlined Sales Tax Project ("SSTP")

• As of August 1, 2013 there were 2,002 companies registered

on the central registration system.

• As of June 30, 2012 those companies had collected

approximately $1.08 billion in sales tax for the Streamline

states.

USA: SALES TAX

VAT CLUB

regular UK and Global VAT

alerts and updates

articles and factsheets posted

materials/presentations from

London VAT Club

video content and industry sub-

groups

synergy global vat/gst update – overview of recent changes & what’s on the horizon

Economy & Finance

eu vat directive

far vat

vat compliance

national vat

reduced vat rate

main vat changes effective

calendarmonthly vat

treasury standard vat