16 Dic Introduction to the Nexia Global Indirect Taxes newsletter
Welcome to the latest bumper edition of the Nexia Indirect Taxes newsletter.
This e-edition underlines the truly global nature of indirect taxes with articles from India, Vietnam, Poland, Switzerland, Belgium, Germany, Australia and Canada. It also emphasises the fact that many indirect tax issues experienced by businesses operating in Europe, are really no different from those businesses engaged in cross border activity in all parts of the world, and this is only to be expected since the basic principles of VAT as a turnover tax are really little different from one continent to another.
In recent months the world of direct tax has focused on the BEPS report, but acknowledging that there may be lessons to be learnt from the indirect tax world when it comes to considering how to tax e commerce. To some extent this arises out of concerns regarding the concept of “establishment” for tax purposes. A recent decision by the CJEU in a Polish case [Welmory Sp. Z.o.o. Case C-605/12] underlines this, recognising that the way we do business today is very different from how businesses operated 20, 15 or even 10 years ago. VAT practitioners are used to working with the concepts of a “business establishment”, typically a headquarters location where decisions are made, and a “fixed establishment” which might be where human and technical resources exist in order to operate a business activity ie. a branch. For direct tax purposes the concept of a permanent establishment is defined by a number of rules, and by reference to Double Tax Treaties. However, these long established definitions are becoming increasingly irrelevant for many businesses which operate via “the cloud”, and where a business establishment may now be represented by someone with a rucksack on their back who might be anywhere in the world, and wherever they happen to plug their laptop into the internet. The concept of establishment does however remain important, because it also dictates which jurisdiction will have taxing rights, and, in hard economic times, many countries will want to claim those rights.
The VAT question in the Welmory case was essentially which country had the taxing rights in relation to services provided. The Polish tax authorities, and now the CJEU, have held that where the human and technical resources of a company are put at the disposal of a third party to the extent that the third party may effectively call on those resources as though they were their own, then that third party may be considered to have a fixed establishment in the same country as where those resources exist. It follows that basic B2B rules for services considered to be supplied across borders may be superseded by local taxing rights.
It is possible to see an extension of the Welmory result to the world of direct tax. Is there an argument that the use of a third party’s resources in another country could create a permanent establishment for direct tax purposes? This would result in numerous international tax complexities. While it is likely that the key issues will continue to revolve around where the decision makers reside, and where those that have power to conclude contracts reside, as the worlds of direct and indirect taxes come closer together in their attempt to address some modern day taxation issues around the concept of establishment in a technological internet age, we should not be surprised if we see the world of direct tax start to take a few lessons from the experiences of the indirect tax world.
Happy reading of this edition. If you have any comments to make, or wish to contribute, please contact me.
Contributed by
John Voyez, Smith & Williamson, UK
E john.voyez@smith.williamson.co.uk
AUSTRALIA
Basic property rules
Working out the GST on property transactions can be a daunting task especially as the GST consequences depend on the nature of the property and whether the supply of the property is by way of sale or lease. In brief, the GST consequences attaching to each type of supply of property are set out in the table below:
Taxable supply:
- Sale of new residential premises
- Sale/lease of commercial residential premises eg hotels, hostels etc.
- Sale/lease of commercial premises
“Input taxed supply”
(where VAT on costs cannot be recovered)
- Lease of new residential premises
- Sale / lease of residential premises (not new)
GST-free supply
- Sale of a building as a rental going concern
- Sale of farmland in certain circumstances
Australia
Furthermore, Australian property developers may also use the margin scheme whereby GST is worked out only on the margin rather than the full sale price, when making a taxable supply of property.
There is also currently a case (MBI Properties Pty Ltd v Commissioner of Taxation [2013] FCAFC112) before the High Court dealing with the supply of property as a going concern, and whether adjustments to GST are necessary when the buyer makes “input taxed” supplies post transaction. This case can have far-reaching consequences for developers selling new residential premises or commercial residential premises subject to an existing lease.
Contributed by
Roelof van der Merwe, Nexia Australia
E rvandermerwe@nexiaaustralia.com.au
BELGIUM
New invoicing and tax point rules
We are reminded that from 1 January 2015 new invoice and tax point rules come into play in Belgium.
Under these new rules, two events result in VAT becoming chargeable, ie the time of supply of goods or services is made, or the time payment is made if prior to the supply of goods or service. As a result, it is not possible for a customer to deduct input VAT at the time an advance invoice is received. VAT is only deductible when the customer has received delivery or has paid the supplier.
It is possible that prepayments can be requested on a document without any reference to VAT. Once payment has been made, or delivery has taken place, a formal invoice for VAT purposes must be issued. This results in two documents. In order to avoid this, the “advance invoice” will qualify as an invoice for VAT accounting purposes subject to certain rules.
The supplier, must account for VAT due in its VAT return in relation to the period in which payment is made or delivery of goods or services is made. If it is more convenient for the supplier, invoices might be reported in the period the (advance) invoice is issued.
For the customer, VAT is in principle only deductible once it becomes due ie after the invoice has been paid or when the supply is made. However the customer may deduct the VAT based on the document received provided that there is a proof that the VAT becomes chargeable in a period of three months after the issue of the advance invoice.
Contributed by
Katrein Huysse, VGD
E katrein.huysse@vgd.eu
CANADA
International drop shipment rules
Canada’s goods and services tax/harmonised sales tax (GST/HST) legislation contains a set of provisions known as the “international drop shipment rules”. These rules serve a twofold purpose: they ensure that potential tax leakage is minimised whenever an unregistered non-resident business is involved in a chain of two or more commercial transactions with Canadian business entities, while facilitating the participation of that unregistered non-resident business in those transactions without imposing an undue tax burden.
Drop shipment default rule
The default drop shipment rule is essentially an anti-avoidance rule. It provides that where a registered business,
Canadaunder an agreement with an unregistered non-resident person (other than a consumer), makes a taxable supply in Canada of tangible property, or a taxable supply in Canada of a service of manufacturing to the non-resident person, or acquires possession of tangible property from an unregistered non-resident person for the purpose of making a taxable supply to the non-resident person, and the physical possession of the property is transferred from a place in Canada, to a third person or to the non-resident person, the following rules apply:
- the registrant is deemed to have made a taxable supply of the property to the non-resident person at fair market value and
- where the registrant made a supply of a service (referred to above), the registrant is deemed not to have made that supply except in the case of a supply relating to storing or shipping the property.
It is the author’s observation that the default drop shipment rule is often ignored, resulting in the registrant incorrectly charging GST/HST on the value of the goods sold or services rendered.
The default rule is designed to ensure that tax applies on the highest value the sale of the goods could yield in the marketplace, notwithstanding the presence of an unregistered person in the distribution chain. However, while fulfilling a need for tax compliance, the result does not fit well with Canadian tax policy of encouraging international commerce. While the prospect of paying non-recoverable VAT could be avoided if the non-resident person registered for GST/HST purposes, forcing a non-resident person to register and to assume all of the Canadian VAT compliance obligations where that person may be engaging in just a single transaction with a Canadian supplier, may cause that non-resident person to take his business elsewhere.
Drop shipment certificates
Fortunately, the above outcome can be avoided through reliance on the use of “drop shipment certificates”. Where the default drop shipment rule would apply, a GST/HST registrant to whom physical possession of the property is transferred in Canada (the “consignee”) may give a certificate to the first registrant who initiated the transfer that acknowledges that the consignee, on taking physical possession of the property of the non-resident person, is assuming liability to pay any tax that is or may become payable by the consignee in respect of the property.
Upon receipt of the certificate, the default drop shipment rule does not apply to the supply made by the first registrant and, except in the case of a supply of a service of shipping the property, the supply made by the registrant is deemed to have been made outside Canada, which means that GST/HST will not apply. Consequently, the non-resident person will not have to pay Canadian tax, nor will he have to register for VAT purposes.
Unfortunately, while appearing to be a panacea for tripartite transactions involving at least one non-resident business, the drop shipment certificate solution is often unknown to Canadian resident businesses whose cooperation is needed to make this rule work. For example, a registrant who supplies goods or services to the non-resident, and who is asked to forgo collecting tax with respect to a domestic transaction in exchange for the receipt of a certificate, may react with suspicion and may refuse to cooperate. On the other hand, the consignee who is asked to issue a certificate using unfamiliar wording may also react with mistrust at the notion of certifying that he acknowledges responsibility to pay any tax that may become due. In fact, the tax the consignee is agreeing to pay is merely a reference to the liability that would arise if he acquired the property for consumption or use otherwise than exclusively in the course of his commercial activities.
If a drop shipment certificate is not used, it may still be possible for the unregistered non-resident to obtain tax relief. The registrant to whom physical possession of the goods is transferred may claim an input tax credit in respect of the tax charged to the unregistered non-resident upon receipt of proof of payment of the tax by the non-resident, and suitable evidence that the default drop shipment rule applies. The idea behind this relieving provision is that the registrant would reimburse the unregistered non-resident person for the tax he had to pay while obtaining an input tax credit at the same time. However, reliance appears to be placed on this provision very sparingly in practice, other than between related parties, due either to lack of knowledge as to its existence or outright fear that the documentation is unreliable or that the CRA will not accept it.
There are other drop shipment relieving provisions not described in this article covering matters such as exported goods and goods delivered to a storage facility or a freight carrier. In other respects, the drop shipment rules may also work favourably in situations involving more than three parties.
Contributed by
Clifford Benderoff, Nexia Friedman LLP
E benderoff@nexiafriedman.
GERMANY
Combating VAT Fraud
A business will be disqualified from deducting input VAT on purchases of goods and services where there is an indication that the business should have known that the supplier was involved in VAT fraud. According to the German tax authorities, the tax office must be able to demonstrate the existence of factors indicating fraud, and once it has done so, the burden of proof is on the business to prove that no VAT fraud is involved. It is worth noting that, by contrast, the European Court of Justice only precludes the deduction of input tax when the tax office provides specific evidence of the existence of VAT fraud.
In order to simplify demonstrating fraud, the German tax authorities have now issued a memorandum on VAT to selected companies which lists approximately 40 points that could indicate the existence of VAT fraud. These include;
- the supplier is a newly established enterprise.
- the supplier does not have suitable storage space or stores its goods at a freight forwarder
- the supplier does not have a website.
If an enterprise ignores or overlooks these factors this could lead to the following, depending on the facts of the case: - rejection of input tax deduction
- rejection of tax exemption for intra community supplies, or
- liability for culpable failure to correctly account for VAT.
German businesses that receive this memorandum are recommended to carefully check their suppliers and customers to see if any of the listed factors apply and to document this. Many of the factors listed as triggering suspicion of VAT fraud also affect foreign suppliers and customers. It can therefore be expected that German businesses will have to look at their foreign business partners more thoroughly.
Contributed by
Alexander Michelutti, EbnerStolz
E alexander.michelutti@ebnerstolz.de
Maren Kiera-Nöllen, EbnerStolz
E maren.kiera-noellen@ebnerstolz.de
Frank Weidemann, EbnerStolz
E frank.weidemann@ebnerstolz.de
INDIA
Indirect taxes and the information technology industry
In recent years the information technology (IT) and software industry has been an engine room of economic growth in India. Exports dominate the industry and account for nearly 77% of the sector’s total revenue. Indian IT companies are respected and recognised as leading players across the globe. However, of late, they are facing a multitude of issues with an uncertain global outlook, regulatory hurdles to offshoring, and increasing costs for skilled personnel. Also, they are being adversely affected by certain ambiguity in India’s indirect tax laws. In this article, we attempt to capture a few of these issues and the tax implications.
India has a federal as well as state-level indirect tax system with multiple tax levies on the IT industry’s three broad activities of development, licensing and maintenance of software. Broadly, indirect tax levies in India are shown in the following table:
- Customs Duty:
On import of goods into India (Generic rate: 28.85%) - Excise Duty:
On manufacture of goods (Generic rate: 12.36%) - Service Tax
On provision of service (Generic rate: 12.36%) - Central Sales Tax
On inter-state sale of goods (Concessional rate: 2% against C-Forms) - Value Added Tax
On sale of goods within the state (VAT: 0–15%) - Entry Tax and Local Body Tax
On entry of goods in the state or local areas
Should software be regarded as “goods” or “services” for the purposes of indirect taxes?
Typically, there are two broad categories of software – “packaged software” and “customised software”. Packaged software is a mass-market product, usually available in shrink-wrapped, packaged form, off the shelf in retail outlets. Customised software is tailored to the specific requirements of the customers for whom it is created.
Before 2008 tax provisions relating to software were clear-cut. Supply of pre-packaged software as well as the license to use such software was taxable as a “sale of goods”. However, in the Union Budget 2008-09 the Indian government brought software under the ambit of service tax. While many companies continued to treat software as “goods”, the Service Tax Authorities sought to demand service tax on the transfer of software, leading to uncertainty as to which tax was applicable, service tax, VAT or both.
However, the landmark judgment of Tata Consultancy Services vs State of Andhra Pradesh, 137 STC 620 (SC), held that pre-packaged, or shrink-wrapped software put on a medium is considered to be ‘goods’. Accordingly, in the case of packaged software, VAT should be applicable. A majority of Indian states levy 5% VAT on the sale of such pre-packaged software.
In the same judgment, it was also held that the mode of transfer of software is the determining factor for ascertaining the appropriate tax, ie where the software is transferred on a medium (eg. a disc) then the software should be regarded as “goods” liable to VAT. If the software is transferred through electronic means, then it may be regarded as “service” and be liable to service tax. However, even in the case of electronic transfers, issues with regard to the levy of VAT persist.
Further, under the Customs Tariff, software on a medium, whether customised or packaged, is classified as “goods”, and the import of such software on a medium is liable to customs duty, although at present customised software is exempt from duty.
What are the implications on the development of software?
Many companies in India are engaged in developing software based on their customers’ requirements. The issue is to determine which taxes would be applicable on such activity.
Development of software is exempt under excise law, and accordingly excise duty would not be applicable. Under the provisions of service tax, there is reference to the following activities – “development, design, programming, customisation, adaptation, upgrading, enhancement, implementation of information technology software”. As development is included here, service tax would be applicable. However, in a few states in India, even the development of software falls under the ambit of VAT laws (eg in Karnataka), leading to dual taxation and, in turn, higher costs.
What are the implications on licensing of software or grant of rights to use software?
The most complex issue faced by IT companies is with respect to the licensing of software. Typically IT companies develop software either on their own account or according to customer specifications. In either case the companies may hold the intellectual property to the software developed by them. In most scenarios they provide the customers the right to use the software for a consideration. The legislation provides that “a transfer of the right to use any goods for any purpose for cash, deferred payment or any other valuable consideration” is deemed to be a sale. Further, the Apex Court laid down tests to ascertain what constitutes the “transfer of right to use” in the case of Bharat Sanchar Nigam Limited vs Union of India, (2006) 3 SCC 1;
- there must be goods available for delivery
- there must be a consensus as to the identity of the goods
- the transferee should have the legal right to use the goods – consequently all legal consequences of such use including any permissions or licenses required should be available to the transferee
- for the period during which the transferee has such legal right, it has to be to the exclusion of the transferor
- having transferred the right, the owner cannot transfer the same right to others.
In case all the tests are not cumulatively satisfied, then such “transfer of right to use” would be regarded as a service.
A particular difficulty faced by the IT industry in licensing software is that there is a very thin line between the applicability of VAT and service tax on the “transfer of right to use”. The industry has reached a practical solution by charging both, VAT at the rates prescribed under the state VAT laws, and service tax at 12.36% on “transferring the right to use software”. However, this leads to double taxation resulting in increasing the cost of the end product. Trade associations and forums have made several representations asking for clarity on these issues.
Conclusion
In this article, we have discussed only a few critical issues. Several other issues exist such as the dual levy of taxes, and uncertainty with regard to software maintenance contracts, on-site development of software, etc. As there are multiple levies on the same transaction at present, a uniform Goods and Services Tax (GST) is essential to prevent double taxation on transactions, and also to further simplify the existing indirect tax regime. This would enable the Indian IT industry to be globally competitive in today’s economic environment.
Contributed by
Pratik Shah, SKP, India
E pratik.shah@skpgroup.com
Jigar Doshi, SKP, India
E jigar.doshi@skpgroup.com
POLAND
VAT on employee incentive programmes
Companies use employee incentive plans for a variety of reasons; to meet or increase sales goals or production goals, to raise employees’ morale or to achieve extraordinary employee performance. Incentive plans are usually designed and executed by specialised agencies, but it is not clear under the Polish VAT regulations how incentive programs shall be dealt with for tax purposes; in particular whether benefits provided to employees constitute part of a “marketing service” or whether the delivery of particular goods within the incentive program is to be viewed as a separate supply.
Employee incentive programs – the settlement process
In most cases, an agency concludes an agreement with a client (employer) under which an incentive program is created. The cost of implementing the program is paid for by the client, usually in the form of a fee for a “marketing service”, whereas employees of the client receive directly benefits in the form of specific goods, services, vouchers or prepaid cards.
Complex performance vs. multiply supplies
Until a few years ago, the Polish tax authorities treated
Polandincentive programs as “complex performance”, in which delivery of the benefits constituted an integral part of a marketing service, and not a separate supply. The price of the service comprised the value of all the services provided by the agency and the value of the goods supplied by the agency. The client received an invoice with VAT calculated on the value of the supply, which gave the client the right to deduct input VAT.
Today, the Polish tax authorities tend to question the above approach. They state that the transfer of goods for the benefit of employees is separate from the services provided by the agency, and is to be treated as a separate supply of goods. Unfortunately the above change in approach means for Polish taxpayers complications with respect of input VAT. The employer does not have any goods at his disposal as owner, but acts only as a third party making payment for the supply of goods in favour of its employees. As a result, the right to deduct input VAT on the value relating to the delivered goods is likely to be refused by the Polish tax authorities.
Benefit in the form of voucher
However, in the case where employees’ benefits are in the form of vouchers, the Polish tax authorities generally accept the supply of vouchers is not subject to VAT as there is no consumption of goods or services at the time of delivery of the voucher, only an “alternative means of payment”.
Recently some agencies treating the provision of incentive programs for clients as a “complex supply”, have not differentiated between delivery of vouchers and other goods, and have charged VAT on the entire supply, whereas the correct treatment would be for VAT to be due with regard to this part of the service relating to vouchers at the time the vouchers are used by the employees in exchange for particular goods or services. Therefore, the value of vouchers should not be included in the tax base of the service provided by agency. If they are, the Polish tax authorities may refuse the right to deduct input VAT in full.
Contributed by
Katarzyna Klimkiewicz-Deplano, Advicero Tax Sp. z o.o.
E kklimkiewicz@advicero.eu
Aleksandra Kozłowska, Advicero Tax Sp. z o.o.
E akozlowska@advicero.eu
SWITZERLAND
The Federal Council amendments to the Value Added Tax Ordinance (VATO) from 1 January 2015
New VAT liability for foreign companies
The Federal Council has made changes to the VAT liability rules for foreign companies carrying out construction work in Switzerland. The aim of the new rule is to reduce the competitive disadvantages suffered by domestic companies relative to foreign ones which are not obliged to register for VAT purposes.
As from 1 January 2015 all companies (foreign as well as Swiss) will be liable to tax on a supply of goods in Switzerland (including construction work) where their turnover subject to purchase tax amounts to at least 100,000 Swiss francs. However, foreign companies will remain exempt from tax if they only provide services that are subject to purchase tax, even if they their annual turnover is more than 100,000 Swiss francs in Switzerland.
The rules should apply until the revision of the Value Added Tax Act (VATA) comes into force, when it is planned that domestic and foreign companies will be subject to tax on all turnover generated in Switzerland if their worldwide turnover amounts to more than 100,000 Swiss francs.
Group taxation for occupational benefits schemes
Further, the Federal Council has decided to amend the VATO which excluded from group taxation occupational benefit schemes. The Federal Supreme Court ruled that the exclusion was unlawful, and consideration is being given to amending the VATA in relation to a limitation of liability for occupational benefits schemes to improve legal certainty.
Contributed by
Anita Eggerschwiler, ABT Treuhandgesellschaft AG
E anita.eggerschwiler@abt.ch
VIETNAM
VAT and business start up
In recent years, there have been significant changes in the VAT legislation in Vietnam, especially the conditions to determine the filing of VAT returns which have a burden for small and medium enterprises (SMEs) and new businesses.
Current VAT practice in Vietnam
Unlike VAT in many countries where a revenue threshold is set to determine which enterprises are subject to VAT filing and payment, most businesses are subject to VAT declaration under a two-tier system maintained in Vietnam since VAT was first introduced in 1999. There is a credit method and direct method. While the credit method is similar to other VAT systems, the direct method does not reflect the true nature of VAT, and places businesses at a disadvantage with an additional cost where input VAT is not credited.
With the credit method, output VAT collected from the customers or end-users is off-set against input VAT incurred from purchases. However, in Vietnam there are a number of enterprises that evade VAT by “buying” invoices from others to increase their costs and input VAT recovery, and thus reduce the VAT payable, leading to serious tax fraud and evasion.
The direct method not only distorts the system of VAT, but also puts SMEs at a financing and competitive disadvantage, since the tax payable is only calculated on the turnover without considering input VAT. Input VAT not credited under the direct-method is recorded as a cost. Also it creates unfair competition with businesses on a credit method. Nevertheless although the direct method is not preferred by both businesses and their customers, it is undeniable that in comparison to the credit method tax fraud is lower when this method is applied. Thus it is favourable to the Vietnamese tax authorities.
Calls from the investors
Given that there is increasing number of enterprises selling illegal VAT invoices detected by the Vietnamese tax authorities in recent years, a transparent business environment is necessary in order to safeguard the tax inflow of the State Budget, and protect the rights of businesses complying with laws and regulations. As a result, an amendment was made in late 2013 with significant changes and strict conditions to allow the credit method for new enterprises established from 1 January 2014. Accordingly, only those enterprises which invest in the purchase of fixed assets, machinery and equipment, and tools with the total value exceeding an amount equivalent to VND 1 billion (approx. USD47,000), before being licensed, are entitled to apply the credit method. This rule causes issues for newly established SME’s which raise concerns that it is not common for newly established enterprises to invest in the purchase of fixed assets prior to the date it is licensed, or tax codes are granted. As a consequence many businesses are not qualified to register for VAT by the credit method and, with the disadvantages of the direct method, a large number of SMEs’ investors decide not to invest in Vietnam.
Responses from the tax authorities
Recognising the new VAT rule unintentionally prevents investment by new enterprises, which in turn leads to a loss to the State Budget, and a market which is less competitive than it should be, the Vietnamese tax authorities have now finally decided to abolish this rule from September 2014. However, the Vietnamese tax authorities have not yet provided any clear guidance to enterprises already established between January 2014 to August 2014 which are forced to apply VAT by the direct method.
Contributed by
Le Viet Tho, Nexia STT
E tho.le@nexia.vn
Contact us
For further information on any of the matters discussed in this Newsletter, please contact:
Mike Adams
E mike.adams@nexia.com
T +44 (0)20 7436 1114
Nexia International is a leading worldwide network of independent accounting and consulting firms, providing a comprehensive portfolio
of audit, accountancy, tax and advisory services.
Nexia International does not deliver services in its own name or otherwise. Nexia International and its member firms are not part
of a worldwide partnership. Nexia International does not accept any responsibility for the commission of any act, or omission to
act by, or the liabilities of, any of its members. Each member firm within Nexia International is a separate legal entity.
Nexia International does not accept liability for any loss arising from any action taken, or omission, on the basis of the content in this
publication. Professional advice should be obtained before acting or refraining from acting on the contents of this publication.
Any and all intellectual property rights subsisting in this document are, and shall continue to be, owned by (or licensed to) Nexia International Limited.
References to Nexia or Nexia International are to Nexia International Limited.
