Indirect Tax BriefingIndirect Tax Briefing — January 2014 5 In this publication, we bring you a mix of articles reflecting developments in indirect taxes including value-added tax

Indirect Tax BriefingA review of global indirect tax developments and issues

Issue 9 | January 2014

Country updates

“ Recent media reports indicate that the global economy is improving. This development has, however, not halted the reliance by governments around the world on indirect taxes.”

In this issue Philip Robinson Global Director — Indirect Tax

Themes and trends

32 Canada: The “iPod tariff” updateWith the scrapping of the end-use certificate requirement for certain consumer electronics, what are the implications for importers?

34 China: VAT exemption on cross‑border servicesTrial measures for the VAT exemption of cross-border services supplied by businesses in China have been announced. What are the key features of these measures and how will they impact taxpayers?

14 Worldwide cloud computing guide — indirect tax perspectiveCloud computing’s borderless quality and rapid expansion creates complexity for taxing jurisdictions and tax teams. EY has conducted a survey and published a guide covering over 100 countries that gives some insight into the tax treatment of the cloud. This article looks specifically at the indirect tax results of the survey.

20 Global carbon regimes: business and tax considerationsAs concern over emissions intensifies, carbon regimes are becoming more prevalent. Is your organization preparing to operate in a carbon-constrained economy? Are you aware of the tax incentives available to reduce the costs of carbon initiatives?

06 The EU VAT Expert Group — a conversation with three membersAn EY interview exploring the work of the EU VAT Expert Group and about our experience of being involved in this important EU advisory body.

28 Bulgaria: Cash accounting is coming — what is the impact on business?The introduction of cash accounting will impact many businesses. What are the impacts and how do the measures compare with other EU Member States?

Indirect tax changes: Global update

Indirect tax legislation evolves and changes on a regular basis. We outline some of the recent and upcoming changes (agreed and proposed) from around the world.26

Country updates (contd.)

Indirect Tax Briefing is published by EY.Editor Mary O’Hare [email protected] +44 28 9044 5472

Editor Ros Barr [email protected] +44 20 7980 0259

To learn more about EY’s global Indirect Tax network, please go to www.ey.com/indirecttax.

Connect with EY Tax: www.ey.com/tax www.ernstyoung.mobi for mobile devices Follow us on Twitter @EY_Tax for breaking tax news

42 Gulf Cooperation Council and European Union: The reform of the EU’s Generalized Scheme of Preference Changes to the EU’s Generalized Scheme of Preference will affect the GCC oil, gas and petrochemical industries. These sectors will need to assess the impact of these changes on their businesses and develop strategies to mitigate the financial impact.

46 Gulf Cooperation Council and Singapore: Free trade agreement: unlocking the preferential savingsThe recent introduction of a Free Trade Agreement between the GCC and Singapore presents opportunities for businesses to significantly reduce costs in their supply chains. However, the rules are complex and businesses must comply fully with the terms of the agreement.

50 Italy: VAT rate increases to 22%After much debate and an earlier postponement, Italy increased the standard VAT rate from 21% to 22% on 1 October 2013. In this article we discuss the background to this latest VAT rate increase and the VAT compliance implications for both domestic and foreign businesses operating in Italy.

54 Japan: Consumption tax rate increase announcedThe consumption tax rate in Japan will increase to 8% on 1 April 2014. This article outlines the details of the phased increase and some of the transitional provisions for supplies spanning the change in rate.

56 Kenya: Ten economic impacts of changes in the VAT Act 2013In September 2013, Kenya unexpectedly announced far-reaching changes to its VAT Act causing concern and confusion among Kenyan businesses and consumers in a wide variety of sectors. What are the possible impacts of these changes on the Kenyan economy?

60 Malaysia: GST is coming in 2015GST is due to come into operation in Malaysia on 1 April 2015 with a tax rate of 6%. What should businesses do now to get ready?

64 Mexico: Amendments to indirect tax laws impact foreign trade operationsImportant amendments to the Mexican Customs Law, VAT Law and Excise Tax Law come into force from January 2014. In this article we set out the most relevant amendments affecting foreign trade operations.

68 Poland: Impact of VAT law changesSignificant changes to the Polish VAT law come into effect on 1 January 2014. Polish VAT payers, particularly those involved in international trade, will be affected. In this article, we look at some of the new rules relating to the time of supply and invoicing. We also look at how the changes may impact on international supply chains.

72 Russia: VAT and logistic servicesIn this article, the second in a series focusing on Russian VAT issues, we examine the VAT treatment of services related to international trade and logistics, and outline some considerations for foreign companies doing business with Russia.

76 Slovakia: New VAT filing obligationsThe Slovakian tax administration has introduced a new VAT filing obligation which, if approved, will require Slovakian VAT payers to submit detailed VAT ledger reports along with their periodic VAT returns from 1 January 2014. In this article we discuss the details of the new reporting obligation and how it may affect businesses operating in Slovakia.

4 Indirect Tax Briefing — January 2014

Recent media reports indicate that the global economy is improving. This development has not halted, however, the reliance by governments around the world on indirect taxes. Indirect tax changes continue with new VAT/GST systems still being introduced or contemplated in a number of countries, major legislative reforms still being enacted and the trend for increasing rates continuing. These global trends are illustrated by many of the developments highlighted in our snapshot of indirect tax changes around the world.

In our Trends and themes section we explore a range of issues that have an impact on doing business internationally. Our first article explores the work of the European Union’s (EU) VAT Expert Group, an important tax policy advisory group. Three EY participants of the VAT Expert Group outline its purpose, goals and achievements and explain how they

can represent the views and concerns of businesses that trade in and with the EU.

Our next article focuses on the VAT/GST trends identified in our Worldwide cloud computing tax guide.1 This guide features the tax rules for cloud computing in more than 50 countries based on three common operating models. The survey shows that, in most countries, the local tax laws have not yet evolved sufficiently to specifically address the taxation of cloud services, which can lead to uncertainty and risk both for service providers and their customers. To illustrate this point, the article features a number of VAT/GST heat maps that summarize the risk rating for cloud service providers in incurring irrecoverable VAT costs, encountering legislative issues and having to register for VAT as non-residents.

In our final feature in this section, we look at the business and tax considerations for carbon regimes. As these regimes become more prevalent and cover more industries, businesses need to prepare to operate in a low carbon environment and be aware of the tax incentives that are available to help with the cost of carbon initiatives.

In our Country updates section, we feature some of the important indirect tax issues arising in countries and regions around the world. Malaysia is due to introduce a new GST in 2015. We look at some of the main features of the new tax and examine what businesses need to do to be ready for this major change. China continues with its VAT pilots, and it has recently set out the trial measures for the VAT exemption of cross-border services. We outline these measures and examine how they can help taxpayers and tax authorities. We also look at the planned consumption tax increase in Japan.

Welcome

1. www.ey.com/cloudtaxguide.

5Indirect Tax Briefing — January 2014

In this publication, we bring you a mix of articles reflecting developments in indirect taxes including value-added tax (VAT), goods and service tax (GST) global trade matters and other indirect taxes, using information and insights from our global network of Indirect Tax professionals.

Philip Robinson Global Director — Indirect Tax Tel: +41 58 286 3197 Email: [email protected]

Welcome to edition nine of our Indirect Tax Briefing.

Our article on the introduction of cash accounting In Bulgaria sets out details of the expected reform and also features a summary of cash accounting provisions in the rest of the EU.

Indirect tax compliance remains a top priority for businesses, but this is made difficult when changes are announced at very short notice. We feature articles from Kenya where the VAT Act 2013 came into effect on the same day and from Italy where a VAT rate increase, which was expected to be postponed, was confirmed at the last minute.

Articles on Mexico, Poland, Portugal and Slovakia also set out details of VAT/GST reforms and their implications for local and international businesses.

Turning to international trade, we feature articles from Canada (the “iPod tariff”), Russia (VAT and logistic services) and the Gulf Cooperation Council (GCC) countries (on how changes to the EU’s Generalized Scheme of Preference will affect GCC businesses and on the free trade agreement with Singapore).

We hope that you find Indirect Tax Briefing useful and informative. We want this publication to continue to be relevant to you and your business, and we welcome your feedback. Please let me know your thoughts and any suggestions for future topics that you would like us to cover.

You can contact me by email ([email protected]) or by telephone (+41 58 289 3197).

Best regards,

Philip Robinson

Welcome

Themes and trends

The EU VAT Expert Group — a conversation with three members

Ros Barr in EY Global talks to Gijsbert Bulk, Audrey Fearing and Gwenaelle Bernier about the work of the VAT Expert Group and about their experience of being involved in this important EU advisory body.

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Ros Barr Tel: +44 207 980 0259 Email: [email protected]

Gijsbert Bulk Tel: +31 88 40 71175 Email: [email protected]

Audrey Fearing Tel: +44 20 795 16531 Email: [email protected]

Gwenaelle Bernier Tel: +33 25 117 5031 Email: [email protected]



The EU VAT Expert Group

Ros: Gijsbert, Gwenaelle and Audrey, thank you all for joining me today and agreeing to talk about your experience of participating in the VAT Expert Group. Perhaps I could kick off with you, Gijsbert, and ask you for a brief outline of what the VAT Expert Group is and why it was set up.

Gijsbert: Yes, Ros, I’d be happy to do that! The VAT Expert Group was created in 2012 as a direct consequence of an initiative that the EU Commission took in 2010–2011, the so-called Green Paper Initiative. In its Green Paper the Commission made public a large number of ideas and plans and opened them up for consultation. The topics ranged from organizational issues around VAT and the process of levying VAT to more technical concerns and to communication transparency and making sure that the Commission could take all relevant information on board in proposing changes.

One of the key ideas that they announced in the Green Paper was the creation of the VAT Expert Group, a sort of sounding board of 40 VAT “experts” from different European Union countries, half of them to represent organizations, and the other half were asked on a personal basis as academics or as well-known VAT specialists in a certain fields. The idea is to bring this wide group of people together for discussion, for soundings, and for the generation and the creation of ideas. This was put into motion in the course of 2012. The VAT Expert Group now has meetings some four, five, six times per year, and the discussions are very interesting and very open.

Ros: Gwenaelle, I believe that you are in the VAT Expert Group in your own right. Can I ask how you got involved?

Gwenaelle: Well, I had participated in the Commission’s former expert group on invoicing, which was set up in 2008, and I think I’ve been recognized as knowledgeable on VAT and IT subjects and all the work around technology and VAT. My role in the group is really to bring these sorts of specific skills around IT and VAT. I am there as an individual, not representing any organization. So, for me, I take my role as being able to bring all the issues that I hear from my clients, from the enterprises in the European market or international market, and to be able to bring these constraints to the Commission and to be able to make a difference by helping to create a strong legislation that can be harmonized and be clear for the enterprises and that responds to their issues.

Ros: That’s very interesting! Gijsbert, I think that’s slightly different from your and Audrey’s role in the group. Can you elaborate?

Gijsbert: EY was one of the 20 organizations allocated a seat in the VAT Expert Group, and I was involved in that process as the Indirect Tax leader for our EMEIA Area. I do this role together with Audrey, who is an Indirect Tax partner doing a lot of work in the public services and public bodies field in the UK and also in the field of indirect tax policy. Together we follow the developments in the VAT Expert Group, we read the documents, we communicate about it within Indirect Tax in EMEIA and hold soundings with EY colleagues such as Steve Bill and Claudio Fischer, we prepare our viewpoints, our contribution, and we go to the meetings. If I can’t make a meeting, Audrey takes my place. I should also mention that we have discussions as well with Professor Ben Terra, who is a renowned academic and who is there as an individual member of the VAT Expert Group.


So, in a way, we’re there with different hats from Gwenaelle and Ben, which I think underlines the fact that it’s quite a diverse group of people in the VAT Expert Group, although I would say that we all have the same goal, working on creating a more efficient and more streamlined VAT system.

Of course that is a long process, as consultations and reaching unanimity in Brussels always tend to take a long time. But I do know that the Commission Services have found the work of the VAT Expert Group extremely useful, and it helps them in getting a feel for what is happening and where the consensus may be and especially how industry and how businesses look at the various proposals or initiatives that the Commission is working on.

Ros: I know you’re all very busy with your “day jobs” as EY partners and that being involved with something like this does require quite an additional effort. What are you reasons for getting involved?

Gijsbert: Good question! Well, as you know, Ros, EY finds it extremely important to be active in the field of indirect tax policy, including getting involved in consultations and public debate or even in political debate. We have our viewpoints and insights, and we represent our clients’ concerns and experiences. But more than that, we have a strategy to build a better working world. We take that very seriously. And we believe that doing that includes working on improvements and efficiencies in the field of EU VAT, which is a big, big issue for many of our clients.

We take it as an honor doing this work and being active in the field of indirect tax policy and not just in the European Union, but also within the OECD and in many rapid-growth markets where we assist governments and lawmakers with the introduction of VAT GST or sales tax systems. So, for us, this is a very natural place to be, for our clients and for ourselves. And if it means that we must invest in that, we will.

Ros: That’s a great answer! Do you have anything to add, Gwenaelle, from your perspective?

Gwenaelle: I definitely agree with Gijsbert! I also would like to add that I think we have an important role to play vis-à-vis the Member States themselves. Maybe initially some Member States were wondering whether this group would just reflect the opinion of the Commission. Even if we cannot say too much about how we debate in the group, I can really attest that we are free to speak our minds, say to the Commission that we disagree on this and this position. So I think that, thanks to our day jobs, we can really represent business and the economies and be a good go-between and link between the position of the Commission and the position of the Member States and represent business about how VAT is perceived and what the practical difficulties are that enterprises face in applying the rules correctly.

I think it is important to see ourselves as a new body that is able to talk on a neutral basis. We are not politicians. We are not representing our country. But we can bring ideas on what could be improved.

Ros: That leads me on to asking, what topics has the VAT Expert Group been working on?

Gijsbert: Well, the group has been addressing quite a number of topics; one of them, I think the most striking one, is the issue of the business-to-business supplies of goods cross-border between EU countries. I think that’s been on the agenda already three or four times. The Commission is very seriously looking at alternatives for the present system of intra-Community supplies and intra-Community acquisitions, and it is doing a lot of work on studying and assessing the consequences of those alternatives.

Public bodies have also been on the agenda and the question of what to do with the VAT exemptions in the public interest.

We’ve been discussing place of supply of services as well — in particular, the big, big changes coming our way in the field of broadcasting, telecom services and in fact every supply of digital content as of 1 January 2015. That’s more than a year away, but the changes in pricing, in IT systems and in customer relations are already starting to become visible, and businesses must really start preparing for that now!

And then at one of the recent meetings we’ve discussed the standard VAT return,* which is a proposal that was made public a couple of weeks ago.

Ros: Audrey, I think you were at the meeting where the standard VAT return was discussed. Could tell us a little more about that?

Audrey: Yes, I’d be happy to! I was at that meeting and, at the outset, it was clear that there were members of the group that felt that the standard VAT declaration as proposed was not “pure” enough. I use that phrase based on the fact that the proposed return has the five mandatory boxes and then 21 optional boxes that Member States can choose to have or not. I think that quite a few of the members felt that we should go for complete standardization across the board and do it from day one. But there were other members in the group — and I have to say it was primarily members who are working within industries — who said that it’s not the number of boxes that has historically been the issue, it is the fact that the type of information requested by each Member State has varied so greatly that it’s caused systems problems. So Members of the VAT Expert Group working within industries felt that the proposals laid on the table were very helpful because they could set up their systems to produce all of the information that

* Further details on the proposed unified EU VAT return are available on page 12.


would be needed and then they could simply choose to switch on or off which pieces were needed for each Member State. They felt that that was quite a big leap forward and a very positive move for business and that it would actually help to reduce the administrative burden on them.

As the debate moved around the room, it was clear that the group moved toward a consensus. I thought it was good how the different aspects and interests represented by people in the room were given a voice and that that was taken on board as a whole. I think that the information-sharing was really helpful in that process.

Ros: Gijsbert, do you have anything to add?

Gijsbert: Well, I think that Audrey put it right. The debate shows how difficult it is to reach consensus in the European Union, but you can sense that the Commission Services are quite experienced in doing that. One of the ways to do it is in a progressive manner, by at least making a start, making sure that the Member States will start operating within certain boundaries, and that the Member States themselves will start to see the benefits of this standardized process. Some Member States will lead, and then others will follow.

And of course the date of implementation, 1 January 2017; seems like a long time away, but you sometimes feel that the Commission Services are almost thinking in these longer time frames because they know what a great deal will be involved for the tax administrations in doing this. But eventually things will start moving. Business is sometimes a little bit more impatient, and you can really see that you have to reach a balance between the various elements.

Ros: That’s an interesting point! I know that you’re also involved in one of the subcommittees of the VAT Expert Group, Gijsbert. Could you explain what is involved in that?

Gijsbert: Certainly! This work has to do with the alternatives for the business-to-business cross-border supplies of goods. One of the alternatives proposed was to do nothing — that is, to leave the existing transitional system that we already had for 20 years now in place on the basis of “if it ain’t broke, don’t try to fix it!”

But then the representatives in the VAT Expert Group indicated that doing nothing is unacceptable — there are big issues, and we feel that they should be looked at. And so the Commission Services decided to come up with another alternative, which is that we leave the situation as it is, but, within the existing legal framework of the VAT Directive, we start looking at points of improvement.

Three areas of improvement have been mentioned: one is the whole issue of chain transactions and triangular transactions and the simplification measures for that; two is call-off stocks and

consignments stocks and the question of whether or not simplification and harmonization are possible; and three is the evidence required in the field of zero rates, which is more of a topic for the Member States that meet with the Commission in the VAT Forum, which is a different sounding board.

As far as the VAT Expert Group is concerned, two subgroups were formed that are studying the possibility of coming up with simplifications in the field of triangular trade, ABC transactions and consignment stocks. I’m a member of the subgroup that is doing the work on consignment stocks, and we are now preparing for our fourth meeting with that group. There are a couple of representatives of Member States that are also in the subgroup, and representatives of business, industry organizations and consultants, and the Commission Services, are providing some facilitation and support to what we’re doing. I think that altogether there are 12 or so of us in the group. We are working in detail on this issue, and we will then present our findings and proposals to the full VAT Expert Group.

In the subgroup we are really discussing all the alternatives. The fact that there are also some Member States present in that group helps to make sure that what we suggest or what we discuss is also feasible and realistic in the eyes of the tax authorities.

Ros: When do you expect to have some outcome from that work?

Gijsbert: We are finalizing our report before Christmas for it to be discussed in the VAT Expert Group meeting on 7 February 2014.

Ros: So we may expect to hear something around that topic pretty soon?

Gijsbert: Absolutely, yes!

Ros: One of the things that I think you mentioned, Audrey, which I thought was really interesting, was the fact that working with the VAT Expert Group has maybe changed some of your perceptions as an advisor. Could you expand on that?

Audrey: I suppose it’s purely from the perspective of what is realistically achievable and in what time frame, because often we see things that are maybe not working so well, and we ask, “Why is it so difficult?” And maybe normally we just look at the issue from our own country’s perspective or indeed from our own client’s perspective. I think what the VEG has done is that it’s made the whole process of policymaking much more transparent, certainly for me, which has given me a greater appreciation of the amount of work that it takes to effect a policy change at the European level.


It’s not just the fact that you have 28 Member States to take into consideration; it’s also the due care and attention that is paid in terms of the process that is followed and the fact that the Commission doesn’t think about these things in isolation. For example, it draws upon input from the likes of the VAT Expert Group; also, it has a working group with the Member States who field their own experts. And it seeks external validation of what it’s thinking about, both through the consultation processes that it undertakes and through studies. One of the things that should also be highlighted is that the proposals that are laid on the table for us to review in the VAT Expert Group often lead to a study being undertaken to validate the idea or identify issues, or we are being presented with the findings of a study that has been carried out already. And the studies are always presented “warts and all,” so that we can debate and discuss them openly and to decide whether the problems or negative aspects are so significant that they mean that the policy change is untenable. I certainly think that that level of transparency has really opened my eyes and given me a greater appreciation of what actually happens from a tax-policy perspective in Brussels.

Ros: Have you had a similar experience, Gwenaelle?

Gwenaelle: Well, I think since it’s the second time for me being involved in this sort of capacity, that is where it’s interesting. The first time I was involved in an expert group with the Commission I was quite frustrated by the fact that it was highly political and the legal aspect. In other words, the fact that we had to draft a new directive that could apply in every Member State while minimizing the risk of not having harmonization — that seemed to be very secondary.

Here in the VAT Expert Group, though, I have the feeling it is the other way around, meaning that I think we can really bring our technical ability in examining the project that has been submitted to us and think as lawyers or VAT professionals, from a legal perspective, about what would be the effect of drafting the VAT Directive in a different manner than it is now.

Aside from the fact that this is very interesting from an intellectual perspective, I think it allows us to bring our real expertise to bear by sharing it with one another and with the Commission and the Member States. That’s where I feel that being involved is a very interesting exercise.

Gijsbert: Yes, and if I may add to that, Ros?

Ros: Please do!

Gijsbert: I fully subscribe to the enthusiasm that Gwenaelle expresses and the admiration that Audrey mentions for the complex policymaking work that the Commission Services and the Commission do and that we now get to witness at close quarters. But there’s one more element that I would like to note that we find very important in the VAT Expert Group, and that is also the position of small and medium-sized enterprises, or SMEs, as they are often called.

There’s sometimes a feeling in the public debate that SMEs are left out or are overlooked in Brussels, but from what we have seen and experienced, it’s far from the case. SMEs have a very active contribution and participation in the VAT Expert Group itself; that’s one thing. And in all the debates and topics that we discuss, there is constant attention and special focus on what certain measures or decisions mean for the VAT position and the position in general of SMEs and whether administrative simplifications will work and will be feasible for them. So the position of SMEs is really part and parcel of what we’re doing there.

Ros: That’s definitely an important point! So now, as we come to end of our time, may I ask you all just one final question? Which is: what do you hope that the VAT Expert Group might be able to achieve?

Audrey: For me, it’s uniformity. I think there is a real drive now and desire within the Commission to get greater uniformity and harmony so that doing business across the EU is simpler and easier for all enterprises, and I think that the steps that the Commission are taking — albeit that some people may feel that they’re quite small steps — will have a significant positive impact on business, and I think that’s to be applauded.


Gwenaelle: Well, my dream would be that we can get to have real debate with the Member States. I mean, there are a lot of things that are not easy to apply and manage in the VAT Directive as it stands. If the Member States could listen to us and to our suggestions — which are not really political positions but are actually technical positions — on certain articles which could be redrafted in another way it could help everyone to reach a certain level of agreement for changing the things that go wrong. That would increase the amount of change or to make it come more quickly than at present, since a rewrite of the Directive takes around 10 years at the moment, given the political issues. That is my dream, at least!

Gijsbert: In the short term, I expect that there will be progress in the field of business-to-business supplies of goods — that is, that as a group we will be able to come with a couple of improvements or suggestions for improvements that will be adopted in the present system.

In the long term, I think we may well be looking at a VAT system that is going to become much more feasible for businesses to work with — more efficient, more robust, less fraud and with lower administrative costs. In fact, a better working world for business!


Web

castOn 23 October 2013, the European Commission

tabled a legislative proposal (COM(2013) 721) for a standard value-added tax (VAT) return. The Commission states that the aim of the standard VAT return is to reduce administrative burdens for business, ease tax compliance and make tax compliance across the European Union (EU) more efficient. The proposal envisages a simplified and uniform set of information that businesses will have to provide to tax authorities when filing their VAT returns, regardless of the Member State of submission. The standard VAT return, which will replace national VAT returns, will ensure that businesses are asked for the same basic information, within the same deadlines, across the EU.

Around 13% of VAT payers in the EU submit VAT returns in more than one Member State. Currently, although the objectives and logic behind a VAT return are the same in all Member States, the content and format of VAT returns vary significantly between them. This is a source of complexity and administrative burdens for businesses. It is estimated that, if adopted, the new return could cut costs for EU businesses by up to €15 billion a year. As such, it reflects the Commission’s stated commitment to smart regulation and reducing administrative burdens for businesses. Another possible benefit of the standard VAT return is that, in simplifying the process for taxpayers, it should also improve tax compliance and increase tax revenue collection.

The proposed standard VAT return will have only five compulsory boxes for businesses to complete — chargeable VAT, deductible VAT, net VAT amount (payable or receivable), total value of input transactions and total value of output transactions. In addition, Member States will be entitled to ask for up to 21 boxes of additional standardized information, covering, for example, the split between tax rates or details of cross-border transactions. The Commission considers that this is a vast improvement on the current situation, whereby some Member States require up to 100 information boxes to be completed.

The standard VAT return will have to be submitted in the language of the Member State of submission.

However, since the content of the information boxes will be the same in all Member States, and the description will be available in all EU languages, the Commission envisages that it will be easy to understand what is expected or to file a return in a foreign language.

Most businesses will file the standard VAT return on a monthly basis, while smaller businesses will only be required to file quarterly. The requirement to submit an additional annual VAT return, which some Member States currently demand, would be abolished.

The proposal also encourages electronic filing, as the standard VAT return will be allowed to be submitted electronically throughout the EU.

The Commission’s proposal will have to be adopted by Member States in the European Council, after consultation with the European Parliament. On this

basis, the Commission envisages that the proposed directive should enter into force on 1 January 2017.

Proposed unified EU VAT return — brings hopes of easier compliance for EU taxpayers

Details of the proposed return

Next steps


Web

cast

Managing indirect tax in rapid growth markets

Are you concerned about managing indirect taxes in rapid growth markets (RGMs)? Do you want to avoid unnecessary costs and risks while maximizing the opportunities available to your organization?

In a series of three webcasts we explored how your organization can manage indirect taxes more effectively for growth.

Session one focused on managing grants and incentives, session two dealt with the VAT and GST landscape and session three looked at customs and international trade issues and opportunities.

You can listen to the individual sessions to focus on the topics that are most relevant to you or you can get the wider picture by listening to the whole webcast series.

Download the report at: www.ey.com/indirecttaxrgm

and the webcast in the on demand section at www.ey.com/webcasts

Themes and trends

Worldwide cloud computing guide — indirect tax perspective

Cloud computing has burst onto the commercial scene, affecting many industries. Generally defined as the hardware and software that supports transactions over a virtual network (i.e., the internet), cloud computing has a borderless quality that creates complexity for taxing jurisdictions and the tax teams that have to proactively manage tax risks for a product that is rapidly expanding on global scale.

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Anne Freden Tel: +1 415 894 8732 Email: [email protected]

Joanna Crookshank Tel: +44 20 7951 1662 Email: [email protected]

Corin Hobbs Tel: +1 408 947 6808 Email: [email protected]

Aileen Bessell Tel: +44 207 9514807 Email: [email protected]



Alongside this, governments are actively investigating and writing tax laws in this area, increasing the risk that taxpayers will be caught unprepared in some countries. In a recent report1 on base erosion and profit shifting (BEPS), the Organisation for Economic Co‑operation and Development (OECD) specifically identified cloud computing transactions as an area in which “international tax standards may not have kept pace with changes in global business practices.” The report further states, “Today it is possible to be heavily involved in the economic life of another country, e.g., by doing business with customers located in that country via the internet, without having a taxable presence there or in another country that levies tax on profits. In an era where non‑resident taxpayers can derive substantial profits from transacting with customers located in another country, questions are being raised on whether the current rules are fit for purpose.”

Tax teams need to have visibility and a good understanding of business operations globally to ensure that they can respond to the introduction of new cloud products in new markets without tax risks, which could impact business margins and commercial reputation. EY has recently published the Worldwide cloud computing tax guide.2 This guide has been published to help support businesses facing this challenge by giving some insight into the tax treatment of the cloud in over 100 countries.

About the guideThe guide was created in response to requests and observations from clients that a comprehensive summary of the tax treatment of cloud services did not exist on a global scale. Businesses that supply or receive cloud services typically grow rapidly and expand globally; many tax authorities have not kept up with advances in the technology sector and as such guidance is often unclear about how to treat cloud services from a tax perspective. To further add to the complexity, new products are coming onto the market within the cloud space that need to be understood and analyzed in order to define them correctly for tax purposes.

Although cloud-related operations are evolving and the tax issues around them are uncertain, the guide aims to show how each of the world’s jurisdictions views certain cloud-based operating models under current law, from a direct and indirect tax perspective. To accomplish this goal, we surveyed more than 140 countries, 50-plus of which are represented in this initial release, to understand the tax considerations under three separate operating models that involve a cloud service provider and a user of cloud services. These three models were selected based on their common use in practice and their simplicity:

• Commissioned agent model: The commissioned agent operating model represents a disclosed agency arrangement in which the commissioned agent local entity provides services to the principal for an arm’s length agency commission and the customer deals directly with the principal. In this model, “commissioned

agent” refers to the entity that works on behalf of a principal to sell cloud-based services to customers in the local market. However, the commissioned agent neither signs contracts with customers nor delivers cloud-based services. “Principal” refers to the lead entity that assumes most if not all the risks associated with providing cloud services to customers.

• Commissionaire model: The commissionaire operating model represents an arrangement in which the commissionaire local entity invoices the customer in its own name on behalf of an undisclosed principal. In this model, “commissionaire” refers to the entity that signs customer contracts on behalf of an undisclosed principal.

• Buy-sell model: The buy-sell operating model represents an arrangement in which the local buy-sell/sales and marketing subsidiary performs in-country sales and marketing activities (i.e., promotional activities likely remunerated on a cost-plus basis) for the principal. This entity may also perform buy-sell activities directly with the customer, own the rights to intellectual property and content and assume the risk of loss with respect to the transactions in buy-sell agreements. In this model, the “buy-sell” entity refers to either a limited risk distributor or a full-fledged distributor. The buy-sell entity may sign customer orders and be contractually responsible, in part or in whole, for the cloud-based services rendered to customers.

Diagrams contained within each chapter contemplate transactions according to the three operating models mentioned above.

1. “Addressing Base Erosion and Profit Shifting,” OECD Publishing, http://dx.doi.org/10.1787/9789264192744-en, 2013. The OECD works with governments to understand what drives economic, social and environmental change. It sets international standards on a wide range of issues, including tax policy.

2. http://www.ey.com/GL/en/Services/Tax/Worldwide-Cloud-Computing-Tax-Guide---Country-list.

The worldwide cloud computing tax guide

Tax teams need to have visibility and a good understanding of business operations globally to ensure

that they can respond to the introduction of new cloud products in new markets.


Within each operating model, this guide provides high-level tax considerations regarding contractual terms that indicate lease/rent/license, sale or service arrangements. The tax matters considered also include how such payments may be treated from the perspective of:

• Income characterization

• Withholding tax

• Permanent establishment (PE)

• Indirect tax

Although not specifically discussed in this guide, other areas of tax that may affect cloud computing services include:

• State and local tax

• Specific local tax incentives

• Transfer pricing

• The availability of a local ruling or advance pricing agreement (APA)

It should also be noted that this guide is generally focused on inbound taxation, not outbound taxation.

General commentary on indirect tax resultsCertain trends emerged from the data upon review. In general, the trend reflects that local tax laws have not evolved sufficiently to specifically address the taxation of cloud computing services, as the laws often predate the technologies entirely. The tax analysis is therefore based on existing laws that seem to have general application to this area and our understanding of and experience with the practice of the countries’ tax authorities.

For each of the three separate operating models selected — commissioned agent model, commissionaire model and buy-sell model — we have analyzed the VAT/GST treatment of transactions involving cloud services and assigned a risk rating for each of the 50-plus countries* in this initial release of the survey. The following maps summarize the risk rating, from a VAT/GST perspective, for the countries represented. The risk ratings are represented via a traffic-light system for each of the countries. Those countries illustrated as yellow or red indicate more potential for VAT/GST risks. More attention needs to be paid to the VAT/GST treatment of cloud services in these countries. The potential risks include VAT/GST costs, legislation issues and the possible requirement to register for VAT/GST.

Those countries illustrated as green, while not risk free, indicate that the particular VAT/GST issues may have clearer rules or definitions.

Figure 1. Cloud computing services under the commissioned agent model

High risk rating for VAT/GST issues on cloud computing services

Lower risk rating for VAT/GST issues on cloud computing services

Medium risk rating for VAT/GST issues on cloud computing services

* Afghanistan, Albania, Aruba, Australia, Austria, Bahrain, Belgium, Brazil, Brunei, Bulgaria, Cambodia, Canada, Cayman Islands, Chile, China, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Greece, Hungary, Iceland, India, Indonesia, Iraq, Ireland, Isle of Man, Israel, Italy, Japan, Jersey, Kuwait, Libya, Luxembourg, Mexico, Mongolia, New Zealand, Netherlands, Nigeria, Peru, Philippines, Romania, Russia, Singapore, South Africa, Sweden, Switzerland, Ukraine, UK, United States, Venezuela


Figure 2. Cloud computing services under the commissionaire model

Figure 3. Cloud computing services under the buy‑sell model








ConclusionsLegislation and tax policy dealing with cross-border services (particularly those that are supplied electronically) are constantly evolving, and there are many open issues, such as whether the tax laws will be expanded specifically to capture fees for the use of servers, whether establishment laws will evolve to consider so-called smart servers and whether there will be new rules around intangible property ownership. New rules on the EU VAT treatment of electronically supplied services supplied by a business to consumers, which are expected to come into force in 2015, will affect many businesses that operate in the sector in Europe.3 At the time of this release in 2013, the OECD and other stakeholders, policy-makers and lawmakers in numerous jurisdictions are debating the appropriate taxation of certain

industries that perform their business across borders. Businesses must keep apprised of the state of affairs for cloud computing in the countries where they conduct business.

Businesses must also assess the impact of tax rules on their specific circumstances to make decisions. The guide provides a high-level overview of how the three operating models are likely to be treated. Certain assumptions and local terms may be used, and the facts and circumstances surrounding a business’s involvement with cloud computing are likely to be more complex than the three operating models that are profiled. Therefore, any businesses operating in the cloud should seek specific guidance to further understand the tax implications with respect to their unique facts and circumstances.

3. See the article in Indirect Tax Briefing Issue 8 (pages 6–10) entitled “EU: 2015 changes — VAT compliance issues for EU suppliers of e-services” at http://www.ey.com/Publication/vwLUAssets/EY_Indirect_Tax_Briefing_eighth_edition/$FILE/EY-ITB-Issue-8.pdf.

From an indirect tax perspective, it is clear that many countries have not defined or have only partially defined the VAT/GST treatment of cloud computing services. In some countries there is a generic definition of services under which cloud computing services would fall, as well as clear and consistent rules in relation to these services. However, certain countries typically have more complex definitions for specific types of services and multiple taxes that apply depending upon the definition. It is therefore important that businesses understand the product being sold, the potential consequences of this definition and the jurisdictions in which they may have VAT/GST reporting obligations. Penalties are often high where errors are made, and the time and cost involved in finalizing tax audits or tax litigation can be significant.

As with any indirect tax analysis, it is important to understand the supply chain and who is obligated to account for local VAT/GST. This is particularly important where the supply chain involves cloud services rather than tangible goods, as the place of taxation can be misinterpreted or misunderstood by suppliers,

customers and tax authorities. Often, local VAT/GST rules are based upon a somewhat subjective test regarding the capacity of the supplier or the customer to make or receive the supply — for example, whether the customer has enough substance (human and technical resources) in the local country to be able to receive the supply. Businesses should consider where local VAT/GST obligations may arise and look to reduce the risk of exposure to VAT/GST requirements that have not been properly understood or agreed to as part of the commercial relationship, or a challenge by tax authorities when the place of taxation can be uncertain. On the other hand, the intangible nature of the product provides some flexibility regarding the supply chain and contractual relationships that businesses may want to consider to ensure that any adverse VAT or GST implications are avoided.

It is clear that many countries have not defined or have only partially

defined the VAT/GST treatment of cloud computing services.

Businesses should consider where local VAT/GST obligations may arise and look to reduce the risk of exposure.

Cloud computing has burst onto the commercial scene, affecting many industries. Generally defined as the hardware and software that supports transactions over a virtual network (i.e., the internet), cloud computing has a borderless quality that creates complexity for taxing jurisdictions.

Despite that complexity, governments are actively investigating and writing tax laws in this area, increasing the risk that taxpayers will be caught unprepared in some countries. In a recent report on base erosion and profit shifting (BEPS), the Organisation for Economic Co-operation and Development (OECD) specifically identified cloud computing transactions as an area in which “international tax standards may not have kept pace with changes in global business practices.”

This new guide from EY summarizes the cloud computing tax regimes in over 50 countries, providing valuable insight into a complex subject that continues to develop at a rapid pace.

2013–14 EY cloud computing guide now available

Access the guide at

ey.com/cloudtaxguide


Themes and trends

Global carbon regimes: business and tax considerations

As the expanding global economy continues to be reliant on fossil fuels, concern has intensified over limiting the release of carbon dioxide (CO

2) emissions associated with the combustion of these fuels. While many countries continue to use incentives such as tax credits, grants and loans to influence sustainable behavior, carbon regimes, including carbon taxes and cap-and-trade systems, are becoming more prevalent as a regulatory instrument to reduce greenhouse gas (GHG) emissions. The EU, China, Australia, the state of California, South Korea and numerous other regions have already adopted legislation or created pilot programs addressing GHG emissions. Carbon regimes are not only growing geographically, but as they become more established, their regulations cover more industries.

03

Dominick Brook Tel: +1 614 232 7376 Email: [email protected]

Akshay Honnatti Tel: +1 415 894 4275 Email: [email protected]

Paul Naumoff Tel: +1 614 232 7142 Email: [email protected]



As the need for, and effectiveness of, carbon regimes in reducing GHG emissions are realized, it will become increasingly important for businesses to understand these carbon markets and prepare to operate in a low‑carbon economy.

Structures of carbon regimesIn the absence of global carbon legislation, several regions, countries and subnational jurisdictions have established carbon regimes that can broadly be organized into two main categories:

• Carbon taxes

• Emission trading or cap-and-trade systems

A carbon tax is a form of carbon pricing where a tax is levied on the GHG emissions associated with the combustion of fossil fuels. For businesses, carbon taxes are more predictable than a cap-and-trade system, as the price of GHG emissions is set and is not subject to market volatility. However, carbon taxes might not result in the most efficient mechanism for reducing GHG emissions, and the introduction of a new tax can often face heavy political resistance.

A carbon cap-and-trade system or emission trading scheme (ETS) is a market-based approach whereby a governing body sets a limit or “cap” on the amount of emissions that can be released. Participants may either be issued or must purchase emission allowances, which represent the right to release a certain amount of emissions. These allowances may then be transferred or “traded” in the open market. A cap-and-trade system is often considered to be an efficient way to reduce GHG emissions since it is a market-based mechanism and the participants decide the price of emissions, not the governing authority.

An overview of current carbon regimes

Global carbon regimes

Figure 1. Global carbon tax/carbon trading footprint

Alberta,Canada

California,USA

Mexico

BrazilSouth Africa

Australia

India

Japan

China

South Korea

European Union

New Zealand

Finalized Proposed

As the need for, and effectiveness of, carbon regimes in reducing GHG emissions are realized, it will become increasingly important for businesses to understand these carbon markets and prepare

to operate in a low-carbon economy.


South KoreaThe South Korean National Assembly has approved an ETS that is scheduled to commence in January 2015 and is expected to be the most ambitious emissions reduction program introduced to date, covering 70% of South Korea’s GHG emissions. Penalties for noncompliance are proposed at three times the market price of allowances, up to US$90/tCO2 (ton of CO2).

ChinaChina recently initiated a pilot cap-and-trade scheme in the province of Shenzhen, covering about 635 local industries and accounting for 40% of the city’s CO2 emissions. The Shenzhen exchange is one of seven pilot schemes due to be launched in 2013 to 2014. On the first day of trading in the Shenzhen market, the price for allowances traded in the market ranged from about US$4.60 to US$5.20/tCO2.

European Union The EU ETS was launched in 2005 and is the world’s first international, mandatory, company-level cap-and-trade system of allowances for CO2 and other GHGs. The EU ETS currently includes 30 member countries and covers around 50% of the EU’s CO2 emissions. EU ETS allowances have historically traded in the range of US$21-US$42/tCO2 but are currently trading at US$7/tCO2. The penalty for noncompliance is currently set at approximately US$138/tCO2.

California, United StatesIn 2006, Assembly Bill 32 was signed into law in the state of California, aiming to reduce GHG emissions to 1990 levels by 2020. The cap-and-trade program is a key element in this plan and covers industries responsible for 85% of California’s GHG emissions. The program started on 1 January 2013 and encompasses approximately 350 businesses representing 600 facilities. The auction reserve price for 2013 has been set at US$10.71/tCO2 and is set to rise by over 5% each year thereafter. Entities that do not meet the compliance obligations will be required to provide four allowances for every allowance above the emissions cap.

AustraliaThe Australian Government launched a carbon price regime in July 2012 to reduce carbon pollution to 80% below 2000 levels by 2050. The price per allowance is currently fixed like a carbon tax, and it will increase from approximately US$23/tCO2 in 2012 to US$25/tCO2 in 2015. In July 2015, the carbon price is expected to transition to an ETS, allowing the price per allowance to be set by the market. New legislation has recently been drafted to repeal the carbon tax by July 2014 and/or replace it with an ETS. Although the carbon tax is currently active, it is unclear whether this legislation will continue to be in effect in the near future.

The impact on businessCompanies must be proactive and prepare for a carbon-constrained economy since carbon regulations will have an impact on all businesses. Organizations need to prepare an integrated carbon management strategy to manage the carbon footprint of their operations.

Some suggested approaches toward preparing a robust carbon strategy include:

Reduce energy consumption — energy efficiency projects present an immediate and cost-effective opportunity to reduce the energy usage of a business and provides a direct impact on its associated carbon footprint. Organizations should continuously assess their operations and identify strategies that could significantly reduce energy use.

Switch to renewable energy — increased use of energy from renewable sources could also help to reduce a business’s carbon footprint. Installation of renewable energy systems is an attractive strategy to reduce emissions, control energy costs and provide increased reliability in energy supply while capitalizing on available incentives.

Purchase offsets or allowances — taxpayers can meet their obligations under a carbon tax or cap-and-trade scheme through the use of carbon offsets. Carbon offsets are generated by projects that reduce GHG emissions. The taxpayer can undertake these carbon-offset

Reduce: energy-efficient equipment in manufacturing, installation of energy-efficient lighting and components in buildings, green building certification, recycling and water savings projects, process changes to reduce energy consumption in operations

Switch: transitioning to low-carbon, low-emission energy sources like wind, solar, geothermal, fuel cells, biomass, combined heat and power, microturbines, waste heat recovery, alternative fuel vehicles

Offset: purchasing offsets and allowances, implementing emission reduction projects and renewable energy projects, reducing emissions from deforestation and reforestation projects

Carbon management strategies

Organizations need to prepare an integrated carbon management strategy to manage the carbon footprint of their operations.


Tax implications of carbon regimes

Countries and local jurisdictions are increasingly offering incentives to encourage organizations to invest in projects and technologies that would help reduce the carbon intensity of their operations. Incentives are available to cover a broad range of energy efficiency and renewable measures that encourage activities in the reduce, switch and offset categories. They include:

• Tax credits for investments in, or production from, renewable and alternative energy assets

• Tax deductions in the form of accelerated depreciation for energy-efficient and renewable energy property

• Property tax abatements from subnational jurisdictions for renewable energy property and infrastructure

• Reduced excise taxes on alternative fuels and fueling infrastructure

• Grants and rebates from government entities to encourage sustainability investments

• Renewable energy credits (RECs), purchased by companies and energy providers to comply with government regulations requiring certain levels of renewable energy production

• Utility incentives from energy providers to encourage energy efficiency of their customers as mandated by government regulations

• Feed-in tariffs (FITs), production-based incentives for renewable energy producers

• Low-interest loans from governments, allowing organizations to finance renewable energy and energy efficiency projects

Incentives offered by different authorities can often be “stacked” to reduce the cost of sustainability initiatives and improve the return on investment for a project. Organizations should implement procedures to research and identify all available incentives for a project and factor them into the evaluation of energy efficiency and renewable energy projects.

Figure 2. Tax and business incentives for sustainability initiatives

European UnionGermany: Interest rate reductions and grants for energy efficiency projectsUK: Feed-in tariffs for renewable energy productionFrance: Asset depreciation incentives for equipment used to produce renewable energy

USA California: 30% tax credit for renewable energy investments

South Africa: Tax deductions for manufacturing projects that result in energy savings

Turkey: Feed-in tariffs with additional incentives for facilities using domestically manufactured equipment in renewable energy production

China: Corporate income tax exemptions for up to 6 years for income derived from qualified energy efficiency and renewable energy projects

Russia: Accelerated tax depreciation and deferred tax payments for energy efficient assets

Australia: R&D incentives for renewable energy projects

projects, or offsets can be purchased from other entities that have conducted carbon-offset projects. The offset projects are generally regulated and must occur in specified regions of the world. Businesses can then use offsets toward meeting their compliance obligations under the carbon regime.

In a cap-and-trade system, taxpayers can also trade emission allowances. A certain number of allowances may be distributed free of charge or purchased from the government entity. However, if taxpayers want to emit more than the allowances they obtain from the government, they must purchase additional allowances through a market system or face penalties for noncompliance.


The tax treatment of allowances and offsetsA major concern for any organization subject to a carbon regime is the treatment of offsets and allowances for accounting and tax purposes at the subnational, national or international level. Some of the key considerations for taxpayers include:

• How should allowances or offsets be characterized in terms of tax-basis recovery? Should allowances or offsets be considered to be inventory, supplies, business expenses or intangible property?

• Can a taxpayer “amortize” the tax basis in an allowance over the compliance period if that period is longer than one year? When should the tax basis of an offset or allowance be expensed?

• How will the gain or loss on the sale or exchange of allowances and offsets be treated for tax purposes?

• What are the tax implications of transferring offsets or allowances from one jurisdiction to another?

• Must a taxpayer allocate a portion (or all) of the costs of an offset project to the tax basis in the offset credit?

• Are gains or losses associated with the trading of emission allowances considered to be capital or ordinary income?

• How and when should allocated emission allowances be taxed?

• Is an entity subject to tax on the gains or losses realized from the sale of offset credits generated from projects by an entity in another country?

• What are the indirect tax implications of allowances and offsets? Are the emission allowances subject to property tax? Are the allowances subject to use tax if consumed in the trade or business? Are the allowances subject to sales tax if sold?

Currently the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have not released final standards for the tax treatment of offsets or allowances, and organizations may have an opportunity to create strategies to minimize the impact of carbon legislations.

Tax and regulatory complianceCompanies subject to carbon regimes will need to consider how to develop processes and controls to accurately measure, monitor and report GHG emissions to governing authorities. In addition, companies are increasingly required to report

additional information on their financial returns for accounting and tax purposes. It will be important for businesses to ensure compliance with these reporting requirements to avoid fines and penalties.

Planning to minimize cost of compliance in carbon regimesCompanies may have an opportunity to manage and reduce their cost of compliance through the advance purchase of offsets and allowances for future years at lower costs. Proactive approaches could also include financial modeling to evaluate and prioritize sustainability investments and the timing of purchasing offsets and allowances. Organizations should also consider including the price of CO2 allowances in economic analyses in order to accurately estimate the return on planned capital expenditures for energy efficiency and renewable energy projects.

ConclusionsCarbon regimes are assuming an increasingly important role as economies transition into being more resource efficient and reducing the carbon intensity of companies’ operations. As taxpayers look to sustainability strategies to reduce their carbon emissions, they should be aware of the tax incentives that are available to help reduce the costs of these initiatives and improve the return on investment. Additionally, as taxpayers begin trading in offsets and allowances, they should be aware of the multitude of tax implications. Engaging tax teams in discussions around carbon regimes and sustainability initiatives will ensure that companies have a better understanding of the tax policies in place and will help drive better decision-making.

Companies subject to carbon regimes will need to consider how to develop processes and controls to accurately measure, monitor and report GHG emissions to governing authorities.

Latest views and analysis from EY’s tax professionals

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The latest edition of the quarterly Global Tax Policy and Controversy Briefing provides coverage of the latest meeting between OECD and business on the base erosion and profit shifting (BEPS) action plan, as well as detailed updates from the recent G20 meeting.

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Our Worldwide cloud computing guide summarizes the cloud computing tax regimes in over 50 countries, providing valuable insight into a complex subject that continues to develop at a rapid pace.

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Indirect tax changes Global update

Recent reports suggest that the global economy is slowly recovering. However, the shift toward indirect taxes continues apace with the adoption of VAT/GST systems, increasing VAT/GST rates and a broadening of the tax base.

This graphic displays some of the indirect tax changes (agreed and proposed) that have taken place across the world in late 2013 and those that are due to take place in 2014 and beyond.

These changes supplement those set out in our report, Indirect Taxes in 20131 and in previous editions of Indirect Tax Briefing.2

A more comprehensive analysis of changes due to take place in 2014 and beyond, will be provided in our annual overview, Indirect tax in 2014, due to be published in February 2014.

1. www.ey.com/indirecttax2013.2. www.ey.com/indirecttaxbriefing.

Canada

1 July 2014: Nova Scotia will lower the provincial component of its HST rate to 9% (from 10%), resulting in a combined GST/HST rate of 14%

1 July 2015: Nova Scotia will lower the provincial component of its HST rate to 8% (from 9%), resulting in a combined GST/HST rate of 13%

Cyprus

13 January 2014: standard rate will increase to 19% (from 18%), reduced rate will increase to 9% (from 8%)

Luxembourg

2015: Proposed standard VAT rate increase (new rate not yet announced) from lowest rate in EU (15%)

Suriname

1 January 2014: VAT introduced to replace turnover tax system

Bahamas

1 July 2014: introduction of value-added tax

Portugal

1 October 2013: new VAT cash accounting regime introduced

Ireland

Reduced VAT rate of 9% on tourism related goods and services (due to expire and revert to 13.5% on 31 December 2012) will be retained

Mexico

1 January 2014: VAT rate of 11% applicable in Mexico’s Border Region eliminated resulting in a 16% VAT rate across Mexico

Spain

1 January 2014: Cash accounting regime introduced


China (mainland)

1 August 2013: nationwide expansion of VAT pilot scheme, affecting transportation and certain modern services sectors

Croatia

1 January 2014: reduced rate VAT increase to 13% (from 10%)

Czech Republic

1 January 2016: single uniform VAT rate of 17.5% will apply

France

1 January 2014: France plans to increase its standard rate of VAT to 20% (from 19.6%)

India

Proposed introduction of a new GST to replace most of the state and central indirect taxes currently in force, date of implementation not yet agreed

Italy

1 October 2013: standard VAT rate increased to 22% (from 21%)

Japan

1 April 2014: consumption tax rate will increase to 8% (from 5%)

1 October 2015: consumption tax rate will increase to 10% (from 8%)

South Africa

1 January 2014: proposed introduction of VAT on cross border e-commerce

European Union

1 January 2015: final phase of VAT package to be introduced

The VAT place of supply for B2C supplies of e-services, broadcasting and telecommunications services will be the customer’s country in all cases

Belgium

1 January 2014: services performed by lawyers subject to VAT at the standard rate of 21% (previously exempt)

Malaysia

1 April 2015: GST due to be introduced at the rate of 6%

Montenegro

1 July 2013: standard VAT rate increased to 19% (from 17%)

Serbia

January 2014: reduced VAT rate increased to 10% (from 8%)

Slovak Republic

1 January 2014: new VAT filing obligation (detailed VAT ledger) introduced

Bulgaria

1 January 2014: cash accounting regime introduced


BulgariaFollowing the example of many other EU Member States, the Bulgarian tax authorities plan to introduce cash accounting for VAT. If the draft law amendments are accepted, they will take effect from the beginning of 2014. On the one hand, this new legislation will likely have a positive impact on small and medium-sized enterprises (SMEs); on the other hand, the new regime may require large enterprises to be more disciplined in their accounting, as input tax recovery in some cases will depend on payments made. In this article we look at the proposed Bulgarian rules in more detail and how they compare with similar measures in other EU Member States.

Cash accounting is coming — what is the impact on business?

Iva Dimitrova Tel: +359 2 81 77 100 Email: [email protected]

Milen Raikov Tel: +359 2 81 77 100 Email: [email protected]



Bulg

aria

Milen Raikov Tel: +359 2 81 77 100 Email: [email protected]

Cash accounting — combatting intercompany debtsThe introduction of cash accounting is part of the wider EU measures aimed at combating intercompany indebtedness. VAT-registered suppliers of goods and services often provide credit to the state by paying the VAT due on their supplies before they have received the cash from their customers. In the meantime, their clients benefit from an ‘‘advance’’ deduction of input VAT without effectively paying anything (including tax) to their suppliers. This effect is known as ‘‘pre-financing,’’ and it is considered to be one of the flaws of the current VAT system.

Therefore, with the aim of reducing intercompany indebtedness, the EU has amended its legislation (Directive 2011/7/EU). One measure is to shorten commercial payment terms, and another is to introduce an optional cash accounting scheme for VAT. Member States can opt to implement the VAT cash accounting scheme in their national legislation from 1 January 2013.

Cash accounting across the EUA cash accounting regime is already in force in most EU Member States (see Figure 1). Currently, 20 of the 28 EU Member States have already introduced the VAT cash accounting scheme. For example, the UK and Sweden had introduced the scheme long before legislation was adopted at EU level. Spain and Cyprus do not allow cash accounting currently, but they are both considering legislative proposals for its introduction. The newest EU Member State, Croatia (which joined the EU on 1 July 2013), was already using the regime even before its accession, and it continues to do so.

The Bulgarian version of cash accountingAccording to the proposed amendments to the Bulgarian law, output VAT under the cash accounting regime will be payable by a supplier when it receives payment from its customers. The customer will, in the meantime, be allowed to claim the VAT on the invoice only after it actually pays the supplier for the goods or services bought, including the VAT due.

Turnover thresholdUnder the EU VAT Directive, taxable persons generating annual taxable turnover of up to €500,000 (or the equivalent in the national currency) can apply the scheme. However, EU Member States can increase the threshold up to a maximum of €2 million after consulting with the VAT Committee. The maximum threshold given in the EU legislation for applying VAT cash accounting applies regardless of the size of the national economy (e.g., Austria, Italy, Estonia and Malta all apply the maximum threshold, as per Figure 1). In some countries, the

scheme is applied without a threshold for certain industries (e.g., in Lithuania it applies for certain agricultural products). As the Bulgarian Ministry of Finance has not consulted with the VAT Committee, the threshold will be €500,000 when the scheme is introduced.

Country Is cash accounting available? Threshold (€)

Austria Yes 2 million

Belgium No N/A

Bulgaria No* N/A

Croatia Yes No

Cyprus No N/A

Czech Republic No N/A

Denmark No N/A

Estonia Yes 2 million

Finland Yes No

France Yes No

Germany Yes 500,000

Greece No N/A

Hungary Yes 422,000

Ireland Yes 1.25million

Italy Yes 2 million

Latvia Yes100,000

Lithuania Yes No

Luxembourg Yes 500,000

Malta Yes 2 million

Netherlands Yes No

Poland Yes 1.2 million

Portugal Yes 500,000

Romania Yes 500,000

Slovak Republic No N/A

Slovenia Yes 400,000

Spain No* N/A

Sweden Yes 350,000

UK Yes 1.6 million

Figure 1. VAT cash accounting in EU Member States (at 1 October 2013)

VAT-registered suppliers of goods and services often provide credit to the state by paying the VAT due on their supplies before they have received the cash from their customers.

*Cash accounting will be available in these countries from January 2014.


Eligible businessesAs in most EU countries, cash accounting in Bulgaria will apply to all the economic activities undertaken by suppliers registered in Bulgaria whose taxable turnover is below the threshold. In some countries (such as Austria, Lithuania and Malta), cash accounting applies only to certain types of activities or businesses such as agricultural producers, engineers and freelancers. In Latvia, there is a higher threshold applicable to agricultural producers and animal farmers than the general threshold applicable to all business sectors. Germany uses a combination of thresholds; the scheme applies to all activities if the taxable turnover is below one threshold, while the scheme applies to other activities regardless of turnover.

In Bulgaria, an additional requirement has been suggested for businesses to apply together with cash accounting for VAT, which is the absence of administrative penalties for tax and social security violations for the last calendar year.

Also, other ideas about eligibility can be observed in the practice of some Member States. For example, in the United Kingdom and Estonia certain supplies are omitted from the calculation of the taxable turnover required for VAT cash accounting, such as incidental supplies of capital goods and immovable property and incidental financial services. These measures allow the cash accounting scheme to apply more widely by not excluding otherwise eligible businesses because of one-off or incidental activities that might distort their total turnover.

Voluntary applicationIn most EU Member States, the application of the cash accounting scheme is voluntary, but there are exceptions. Cash accounting will be optional in Bulgaria for all suppliers that meet the requirements. Instead of taking the advantage of deferring the VAT charge, a taxable person may choose to follow the standard procedure (i.e., that VAT is due on the accruals basis), despite being eligible to apply the scheme.

Bad debtsUnder the current proposals in Bulgaria, there will be no deadline after which suppliers must account for VAT even if the customer has not yet paid. This means that, if the supplier never receives payment from the customer, it will never be required to charge the VAT on the invoiced amount. This allows a wide measure of bad debt relief, which is a welcome feature of cash accounting for many SMEs (this applies in some Member States such as Slovenia and the UK).

To protect the state budget, a deadline for the supplier to wait for payment could be introduced, as applies in other Member States. For instance, in Romania, if a payment is 90 days overdue, VAT becomes chargeable regardless of the effective payment date; in Estonia, if no payment is made two months after issuing the invoice, the VAT needs to be accounted for in the following month; in Portugal, this term is three months; and in Latvia, six months. Since this provision is a serious compromise with the purpose of the scheme, it is hoped that any deemed chargeability is postponed for a longer term.

Good for business?SMEs form a considerable part of the EU economy. According to the European Commission, they make up nearly 99% of all economic operators within the EU.1 Therefore, they play a major role in economic development, employment and social integration. At the same time, they are much more vulnerable to the negative effects of intercompany indebtedness. Because of that, cash accounting is well-aimed at SMEs.

In Bulgaria, most local businesses are highly in favor of the idea of VAT cash accounting, and they would prefer an even higher turnover threshold for eligibility. Although the threshold may be increased in future years, this cannot happen without the explicit approval of the European Commission. However, some Bulgarian trade associations have also expressed concerns over possible complications of the scheme for business, such as VAT compliance and the short deadline allowed to adapt ERP systems for its introduction.

1. EU SMEs in 2012: at the crossroads, Annual report on small and medium-sized enterprises in the EU, 2011/12 Ecorys, Rotterdam, September 2012, Client: European Commission (accessed via http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/files/supporting-documents/2012/annual-report_en.pdf, 25 November 2013).

Cash accounting will apply to all the economic activities undertaken by suppliers registered in Bulgaria whose taxable turnover is below the threshold.


The impact on suppliersThe main advantage of using the scheme is the positive impact on the supplier’s cash flow, especially if a customer is a late payer as, under this regime, the supplier should not bear the burden of paying VAT on the supply before receiving the payment from customers.

What does this mean in practice? Let’s consider an example of a supplier who has only one transaction during the reporting month of August 2014:

• If the supplier sells goods for €100 on 20 August 2014 under the regular VAT accounting, it must pay €20 VAT by 14 September 2014, regardless of when the customer makes a payment.

• If, however, the taxable person applies VAT cash accounting and receives payment on 1 October 2014, the €20 VAT should be paid to the state by 14 November 2014 — a full two months later.

• If, on the other hand, the taxable person receives two equal payments of €60 on 25 August 2014 and 1 October 2014, it must remit €10 VAT by 14 September 2014 and €10 VAT by 14 November 2014.

Therefore, the cash accounting regime is favorable for companies that have VAT cash flow issues that do not receive payment on time for their supplies, and this new option could generally improve their liquidity.

However, in the example above, if a deemed VAT payment provision were to be introduced in Bulgaria — for example, at the expiry of six months — the situation would not be as clear cut. In the above example, if a six-month rule were to apply and the customer did not pay by 25 February 2015, the supplier would still have to pay €20 VAT by 14 March 2015. Therefore, in this case, the advantage of the cash accounting regime would only be temporary, and it would not provide bad debt relief.

The impact of delayed input tax recoveryFor purchasers, VAT recovery is delayed until payment for invoices subject to cash accounting. Therefore, the regime will indirectly help to improve the liquidity of the entities that opt to apply cash accounting by eliminating the situations when a customer benefits from input VAT reclaim before paying the supplier. In such cases, the customer would likely prefer to pay all invoices for which the cash accounting scheme is applied instead of keeping the invoices unpaid.

Another positive side effect from the VAT cash accounting scheme is that it provides a means of combating VAT fraud. Most often, VAT is drained through fraudsters reclaiming input VAT on invoices documenting fictitious supplies. The application of the VAT cash accounting scheme should limit the number of such cases.

Currently, some large customers of SMEs have stronger negotiation powers and are dictating certain contractual conditions, such as long payment terms. These companies can currently benefit from VAT reclaim on their purchases before they actually pay the price (including the tax) to their suppliers. However, after VAT cash accounting is introduced, this will no longer be possible. The need to recover input VAT may prove an incentive for larger companies to pay their SME suppliers more quickly.

Nevertheless, applying the cash accounting scheme may not be attractive to an SME compared with the threat of losing a big client who might dislike this inconvenience. It is currently difficult to predict whether this is a legitimate issue. Even if such difficulties exist initially, they could be mitigated over time. To a large extent, the effectiveness and attractiveness of the scheme depends much more on the practical complexity of the registration procedure and the requirements for its application. In our

view, the scheme should not be considered as a reward to the ‘‘diligent’’ taxpayer, and its application should not depend on covering numerous conditions, such as having no outstanding tax liabilities or recent administrative violations (as currently proposed).

Next steps

The Bulgarian Parliament is already reviewing and voting on the proposals for introducing the VAT cash accounting scheme. However, the way in which the scheme is implemented may vary from the proposals. Therefore, the new rules should be promulgated in the State Gazette as soon as possible after they are accepted. Usually the adaptation of new rules takes time for the Bulgarian tax administration. Furthermore, the secondary legislation and probably even some of the VAT standard forms will also have to be adjusted accordingly to suit the needs of the new scheme.

The taxable persons that are eligible to apply the scheme should consider the effectiveness of the new regime in view of their own business (such as the registration requirements, as well as the need for adjustment of their business practices and the impact on cash flow and on customer relationships). The introduction of cash accounting will require new payment algorithms, an adjustment to input VAT reclaim procedures, and probably changes in contracts and in the settings of accounting software, not only for businesses that apply the scheme but also for their customers.

The effectiveness and attractiveness of the scheme

depends on the practical complexity of the registration procedure and

the requirements for its application.

CanadaThe Canada Border Services Agency (CBSA) scraps the end-use certificate requirement for the so-called “iPod tariff,” but there is still no “plug-and-play” solution for importers of consumer electronics.

Rarely does a Canada Border Services Agency (CBSA) Customs Notice (CN) receive as much attention as did CN 13-015, published on 28 June 2013. This CN effectively reversed the CBSA’s position on the end-user certificate requirement, the issue at the center of the iPod tariff controversy. Although the new approach of removing the requirement is welcome, importers are still faced with significant challenges when applying duty-free treatment under Tariff Code 9948 for consumer electronics. In this article, we report on recent developments surrounding this issue.

Dalton Albrecht Tel: +1 416 943 3070 Email: [email protected]

Mike Cristea Tel : +1 514 879 6628 Email [email protected]

The “iPod tariff” update



CBSA Policy MemorandumThe major controversy surrounding the applicability of Tariff Code 99481 to certain consumer electronics stems from the Departmental Policy Memorandum on 9948. In this administrative policy document, the CBSA states that it expects importers to collect and keep records of end-user certificates confirming that consumer electronics imported as 9948 goods are actually being “used in” computers and video game consoles. For consumer electronics that might otherwise qualify for 9948 duty relief, the typical scenario is one where importers and end users do not interact directly but through several intermediaries, including distributors, wholesalers and retailers. Clearly, the administrative burden of having to collect end-user certificates from consumers, especially when the importers are several degrees removed in the supply chain from the end users, would place a serious burden on both importers and intermediaries such as distributors and retailers.

The recent CN abolishes the end-user certificate requirement, effective 28 June 2013, and importers no longer need to worry about communicating with end users and collecting end-user certificates. CN 13-015, Clarification of the Imported Goods Records Regulations, reads as follows:

“ Effective June 28, 2013, for commercial goods imported and released duty free under tariff item 9948.00.00 in the List of Tariff Provisions set out in the schedule to the Customs Tariff, it will be clarified that the CBSA will allow the importer of the goods to attest to the intended use to be made of the goods in an article listed in tariff item 9948.00.00, rather than require a certificate or other such record to be signed by the user of the commercial goods attesting to their actual use.”

It is unclear whether this change resulted from lobbying pressures2 or was simply a consequence of the CBSA reflecting on a widely publicized issue. The remainder of the CN states that this development is merely a “realignment” of CBSA policy under existing Canadian customs law. It is importers who bear the burden of proving that the qualifying consumer electronics do indeed qualify as goods “for use in” computers, video game consoles and other items within the strict meaning of the legal terms in the Schedule to the Customs Tariff.

Importers bear this burden at the time of importation, where the very declaration of a tariff classification number, such as 9948, requires the importer to make a considered statement that the concerned consumer electronics are 9948-eligible. They continue to bear this burden for up to four years after importation, the legislative period in which those importations can become the subject of CBSA audits and administrative reviews (and even longer if the importer has applied for refunds by drawback on previously imported products where 9948 was not used). The requirement for a written attestation from the importer is in line with requirements of this duty-free provision.

Implication of the new policyUnder the new policy, importers remain responsible for diversions of goods from intended use (i.e., if the importer becomes aware that such goods are not being ”used in” computers). The CN clarifies that, if the importer becomes aware of any diversion of 9948 imports, it is the importer who will be held responsible for reporting the diversion and for remitting additional duties and owed taxes. The circumstances under which the CBSA will consider the obligation as being unmet or will pursue enforcement action are

unclear. Echoing prior concerns with the end-use certificates requirements, the CBSA cannot simply assume that consumer electronics importers have visibility on the sale and end use of the goods they import.

Although Canadian importers will now be able to document the end use of articles imported under 9948 by attesting to their intended use, this does not amount to “plug-and- play” duty relief for consumer electronics. How will importers ascertain the intended use? How will they keep records of this use? Additionally, certain imports of consumer electronics simply do not qualify as “for use in” a computer. At first sight, interpretative challenges remain in determining whether they actually do qualify for 9948 relief. In Canada, in addition to familiarity with the General Rules for Interpretation of the Harmonized System, importers need to become comfortable with the jurisprudence on 9948 relief. Furthermore, importers remain responsible for reporting any known diversions from the end use to which they are attesting in writing. Something suggests that this controversy has not been fully resolved.

Cana

da

1. CBSA, D10-14-51 — “Tariff Classification Policy: Tariff Item 9948.00.00” (6 September 2007).2. See, for example, Canada News Wire, “Canadian importers and retailers victims of $16-million tax grab,” 23 May 2013.

Under the new policy, importers remain responsible for diversions of goods from intended use.

China The China State Administration of Taxation (SAT) has released SAT Announcement [2013] No. 52 (Circular 52), which sets out the trial measures for the VAT exemption of cross-border services, effective 1 August 2013. In this article, we set out the key features of Circular 52 as well as our observations on how Circular 52 would impact taxpayers.

Kenneth Leung Tel: +86 10 5815 3808 Email: [email protected]

Robert Smith Tel: +86 21 2228 2328 Email: [email protected]

VAT exemption on cross‑border services



Trial administrative measuresSince the VAT Pilot was implemented in Shanghai on 1 January 2012, the SAT has started to formulate detailed rules covering the administrative measures that govern taxpayers engaging in the provision of cross-border services. As the VAT exemption would significantly impact tax collection, the SAT has performed detailed research and has consulted the Ministry of Finance (MOF) as well as the finance bureaus and tax bureaus of various VAT Pilot locations. After close to 20 months of research and consultation, the SAT announced the trial administrative measures for VAT exemption on cross-border services shortly after the nationwide expansion of the VAT Pilot for transportation and selected modern services.

This announcement about the administrative measures, although they are of “trial” nature, is welcome news for taxpayers. Over the course of the VAT Pilot expansion, we have observed varying local practices adopted by the tax authorities in different VAT Pilot locations in how the VAT exemption provision is applied.*

Key features of Circular 52Circular 52 sets out the scope of cross-border services that are eligible for VAT exemption. In addition, details aiming to clarify or provide further details for “in scope” cross-border services have also been included in the circular. We have summarized the scope and clarifications in Table 1.

Scope of VAT exemption Clarification on cross‑border services

A. Engineering survey services where the engineering and mineral resources are outside China

Circular 52 does not include any further details or clarifications on cross-border transactions with regard to VAT exemption for this item.

B. Conference and exhibition services if the conference or exhibition takes place outside China

This involves the services of organizing and arranging conferences or exhibitions held overseas for customers.

C. Warehousing services with storage locations outside China Circular 52 does not include any further details or clarifications on cross-border transactions with regard to VAT exemption for this item.

D. Tangible personal property leasing services with the property used outside China


E. Distribution and broadcasting services of radio, film and television programs (works) that are provided outside China

• “Distribution services” of radio, film and television broadcast programs (works) refers to the distribution of works and the transfer of reporting or broadcasting rights of sports competitions and other recreational activities to overseas entities or individuals. The works and sports competitions and other recreational activities must be broadcasted and reported outside China.

• “Broadcasting services” of works outside China refers to business activities of screening or broadcasting works in cinemas, theaters, video halls and other places outside China.

• Broadcast services of works supplied overseas through cable or cable-less equipment, such as domestic radio, television, satellite, internet and cable TV, are not considered as distribution and broadcasting services of works that are rendered outside China.

Chin

a

* It is not uncommon for taxpayers providing the same cross-border services to be told to apply different VAT treatments. For instance, a consulting company with branches operating in different locations could have had some of its consulting services provided to its overseas clients treated as exempt from VAT at some of its operating locations and not at others. This is because only some of the tax bureaus in charge of companies were “temporarily” allowing VAT exemption before the trial administrative measures set out in Circular 52 were announced.

The SAT announced the trial administrative measures for VAT exemption on cross-border services shortly after the nationwide expansion of the VAT Pilot for transportation and selected modern services.

Table 1. Scope of VAT exemption for specific cross‑border services



F. International transportation services that are not eligible for VAT zero rating :

• International transportation services undertaken by waterway without obtaining an International Shipping Business license

• International transportation services undertaken on land without obtaining a Road Transportation Business License or an International Motor Transportation Driving License, or the transporter has a Road Transportation Business License but the business scope does not include “international transportation”

• International transportation services undertaken by air without obtaining a Public Air Transportation Enterprise Operating License or the transporter has a license but the business scope does not include “international air passenger, cargo and mail transportation business”


G. Transportation services within, from and to Hong Kong, Macao and Taiwan that are not eligible for VAT zero rating:

• Ground transportation services undertaken to Hong Kong and Macao without obtaining a Road Transportation Business License or using vehicles without a Road Transportation Permit for Hong Kong and Macao

• Transportation services undertaken by sea to Taiwan without obtaining a Waterway Transportation License for the Taiwan Strait and using vessels without an Operating Permit for the Taiwan Strait

• Transportation services undertaken by sea to Hong Kong and Macao and using vessels without a Hong Kong and Macao Line Operating License

• Transportation services undertaken by air without obtaining a Public Air Transportation Enterprise Operating License and the scope of the business operations does not include “international and domestic (including Hong Kong and Macao) air passenger and mail transportation business”


H. Taxable services that are subject to the simplified computation method:

• International transportation services

• Transportation services within, to and from Hong Kong, Macao and Taiwan

• Research and development services and design services provided to overseas entities or units, excluding the design services provided for real estate located in China


Table 1. (continued)



I. Taxable services rendered to overseas entities or units:

•

• Research and technology services, (excluding research and development services and engineering survey services

• Information technology services

• Culture creativity services (excluding design services, advertising services, and conference and exhibition services)

• Logistics auxiliary services (excluding warehousing services)

• Authentication and consulting services

• Production of radio, film and television programs (works)

• Time charter businesses involved in ocean transportation

• Voyage charter businesses involved in ocean transportation

• Wet-lease business in air transportation

• Advertising services if the advertising takes place outside China

• Aviation ground services, port terminal services, freight and passenger station services, salvage services, loading, unloading and carrying services rendered by taxpayers to overseas entities that 1) carry out international transportation services or transportation services from and to Hong Kong, Macao and Taiwan; and 2) provide such services while staying at domestic airports, ports, stations, airspace, inland water or sea, are considered as logistic auxiliary services rendered to overseas entities.

• The following services are not considered as services rendered to overseas entities or units:

• Contractual energy management services where the contracted object is within China

• Authentication and consulting services rendered to immovable properties located within the territory

• Authentication and consulting services rendered with the object authenticated or consulted being in China while carrying out the services

• “Advertising services if the advertising takes place outside China” refers to the advertising services related to advertisements released outside China.

• VATable services rendered to entities or units in special customs supervision areas would not be considered as cross-border transactions and should still be subject to normal VAT Pilot rules.

Table 1. (continued)


Conditions for VAT exemption Taxpayers providing “in scope” services need to meet certain conditions in order for their services to be eligible for VAT exemption. We have set out these conditions in Table 2.

Conditions Details on the conditions

Signed contract • A service contract signed by both the service provider(s) and the service recipient(s) must be in place.

Payment of service fees • The entire service fees that correspond to the supply of services provided to an overseas recipient should be collected from overseas.

Specific accounting of VAT-exempt revenue and input VAT transferred out

• Taxpayers should separately account for their VAT-exempt service revenue and transfer out the input VAT associated with the supply of VAT-exempt services.

Requirements on issuing invoices • Special VAT invoices must not be issued for VAT-exempt services.

Requirements for VAT exemption registration

• Taxpayers must register their contracts with the tax bureaus that are responsible for their locations. Taxpayers are required to prepare a submission package to support their registration.

• The submission package should contain the following documents:

• A registration form for VAT-exempt cross-border services

• A cross-border services contract (original and photocopy)

• Details of services that are rendered in overseas locations, where applicable

• Evidences to prove/support the actual provision of international transportation services

• For cross-border services provided to overseas entities, evidence to prove/ support that the service recipients are physically located in overseas locations

• Other information required by the tax authorities

Changes/amendments made to service contracts or to the services that have already been registered

• For service contracts that are already registered with the tax bureaus for VAT exemption purposes, any change(s) to the contract or change(s) to the nature or scope of the delivery of services must be re-registered with the tax bureaus.

Requirements on record keeping • The materials submitted for the purposes of the VAT exemption registration must be kept properly and in full.

Table 2. Conditions for VAT exemption


Perform a detailed review of service contract(s)

Review all service contract(s) in accordance with the details set out in Article 2 of Circular 52. The review would include an analysis of the nature of the services provided with reference to the precise scope of VAT-exempt services set out in Circular 52. Other considerations include the location of the service recipients, details of payments and supportive evidence that could be made available to support the VAT exemption registration process.

Assess the status of the VAT exemption “temporarily” allowed by the tax authorities

Taxpayers who have adopted VAT exemption treatments based on the “temporary” VAT exemption allowed by their tax bureaus should assess whether they should be eligible for the VAT exemption based on the Circular 52 rules.

If taxpayers cannot fulfill the Circular 52 requirements, they should consider computing their underpaid VAT. Depending on the outcome of the assessments, taxpayers should decide whether and how they should approach their tax bureaus.

Prepare documents to support the VAT exemption registration

Taxpayers should study the documentation requirements set out in Circular 52 and assess whether they can fulfill the requirements. It is anticipated that taxpayers could face varying practical difficulties. For instance, it could take time for the contract translations to be completed and to be agreed to by the contractual parties. During this process, taxpayers would be required to pay VAT before their services contracts have been registered with their tax bureaus.

Develop plan to follow up closely on the VAT exemption registration process

Because Circular 52 is a newly issued circular, tax officials across China may need time to understand the administrative measures and could develop some local adaptations or interpretation of the Circular 52 rules.

It is anticipated that taxpayers will raise a high volume of VAT exemption registration requests. To ensure their registration requests are handled in a timely fashion, taxpayers should develop a robust plan with clear time lines, roles and responsibilities to follow up with their tax bureaus.

VAT implications for taxpayers who have already adopted VAT exemption based on the temporary decisions made by their tax bureausAs Circular 52 has an effective start date of 1 August 2013, varying VAT treatments could apply to services supplied from different locations, depending on the VAT-exempt position taken or allowed to be taken by each tax bureau.

For taxpayers rendering cross-border services that are qualified for VAT exemption, the following should be observed:

• If the taxpayers have already adopted VAT exemption, the taxpayers should “make up” for the VAT exemption registration procedures now.

• If the taxpayers have not yet adopted VAT exemption, they should start registering for the VAT exemption. If the registration is successful and has been accepted by the tax authorities, the taxpayers should be eligible for refund of any VAT overpaid or be allowed to offset the VAT overpaid against any future VAT payables. As the taxpayers have not yet

adopted VAT exemption and have issued special VAT invoices to their customers, the taxpayers should collect all the stubs or copies of the special VAT invoices from customers. Otherwise, the VAT exemption registration may not be processed.

For taxpayers rendering cross-border services that are not qualified for VAT exemption but the taxpayers have already adopted VAT exemption prior to 1 August 2013, the taxpayers should quantify the VAT underpaid and make arrangements for payment of the VAT to their tax bureaus.

Our observationsThe long-awaited Circular 52 should provide some relief to Chinese taxpayers providing cross-border services. Taxpayers can now start registering their services for VAT exemption purposes. Taxpayers may also consider taking the following actions as part of their planning for the VAT exemption registration:

Varying VAT treatments could apply to services supplied from different locations,

depending on the VAT-exempt position taken or allowed to be taken by each tax bureau.


Outstanding issues raised by Circular 52The publication of Circular 52 is doubtless welcome news for taxpayers as it has answered most of the questions they and the tax authorities have raised. However, the circular has yet to cover the following VAT technical and practical issues:

• We understand some companies, especially corporate group companies, may have entered into group or multiple-party contracts involving multiple service providers and service recipients in a “many to many” relationship. In this regard, discussions would need to be made with the tax authorities to clarify whether the “group” contract could be recognized as valid supporting evidence for VAT exemption purposes. Companies may consider making changes to their contractual arrangements to ensure compliance (e.g., from a “many to many” relationship to multiple “one to one” relationships). Some ”open ended” contracts (e.g., services provided by consultants charged on a time-spent basis) entered into without setting out the level of service fees could also face practical difficulties or challenge by the tax authorities.

• Circular 52 has specified that the entire service fee corresponding to the supply of services provided overseas should be collected from overseas. Although the circular has not indicated whether overseas payments must be received

from overseas service recipients, it would not be uncommon for some tax authorities to anticipate a full match between the provider of services, recipient of services and service fees payments. In this respect, arrangements would need to be made between the contractual parties and their respective banks to meet with the “additional” local requirements set out by the tax authorities, if any.

• The requirement that “services provided to overseas entities do not include authentication and consulting services related to domestic goods” could have left room for the tax officials to apply their own understanding on the definition of “domestic goods.” For instance, if a China-based consultant advises his overseas clients on the Chinese export VAT implications with respect to an export sales of goods, it may not be clear whether his services could be in scope for Circular 52 and hence become eligible for VAT exemption registration.

• Circular 52 has clearly set out the need for taxpayers to provide true copies and photocopies of service contracts. However, in practice, some taxpayers could face significant administrative problems as the service contracts can contain certain confidential information and the taxpayers may not be able to or may not want to make the contracts available to the tax bureaus. In addition, the number of contracts to be taken to the tax bureaus for registration

purposes could be significant if the contracts are small in size but high in volume. The tax officials in charge of VAT exemption registration could take time to go through all the contracts to be provided by the taxpayers, and it is anticipated that the contract review may be completed only at a relatively slow pace.

ConclusionsThe announcement of Circular 52 has long been anticipated, and it should help create a uniform platform for taxpayers and tax authorities to apply the VAT exemptions set out in the early VAT Pilot circulars (i.e., Caishui [2013] No. 37). However, there is still some room for further clarification of the rules, and we believe the Chinese authorities are likely to issue further circulars to provide the clarification needed. Affected businesses should keep abreast of future changes, and we will continue to report on developments in this area.

Circular 52 has answered many of the questions raised by taxpayers and tax authorities but has yet to cover certain VAT technical and practical issues.


Gulf Cooperation Council and European Union

Garrett Grennan Tel: +974 4457 4210 Email: [email protected]

Arjen Odems Tel: +44 20 7951 1446 Email: [email protected]

Philippe Lesage Tel: +32 2 774 92 69 Email: [email protected]

The reform of the EU’s Generalized Scheme of Preference

Effective 1 January 2014, products from the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) will no longer benefit from preferential customs duty rates granted under the European Union’s (EU) Generalized Scheme of Preference (GSP).

The GCC oil, gas and petrochemical industries will be affected by this change and these sectors will need to assess its impact on their businesses and develop strategies to mitigate the financial impact. For example, the GCC’s principal competitors for exporting these products to the EU include Norway and South Korea, both of which have free trade agreements with the EU, which is likely to result in a competitive advantage for these countries over GCC producers in 2014.

Finbarr Sexton Tel: +974 4457 4200 Email: [email protected]



Euro

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Uni

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What is GSP? The EU’s GSP supports developing nations by granting preferential or 0% customs duty rates on exports of products to the EU. The system was revised in 2012 to focus on nations in most need, poor developing and least developed nations. Accordingly, effective 1 January 2014, nations currently benefitting from GSP that have been classified as “high income” or “upper-middle income” countries by the World Bank for three consecutive years will lose the benefits of the GSP. Nations that will no longer benefit from preferential access to the EU markets will include the GCC countries (Kuwait, Saudi Arabia, Bahrain, Qatar, the United Arab Emirates and Oman). This means that from 1 January 2014, standard customs duty rates will apply on products from GCC countries.

The changes in briefWhile the importation of crude oil from the GCC into the EU will continue to be subject to customs duty at 0%, other important GCC products will become subject to higher EU customs duty rates. As a result, the customs duty on certain oil and gas products that the EU imports from GCC countries will increase from 0% to 4.7% and the customs duty rate on certain downstream products, including chemicals, polymers and aluminum will increase to 7.5%.

Products to be affected by new rates include: jet fuel (4.7%), base oils (3.7%), petrochemicals (6.5%), chemical (up to 5.5%) and aluminum (up to 7.5%).

Implications for GCC businessesThe financial impact of the loss of GSP for sales to the EU will be determined in the coming months. With competition from Norway and South Korea, which both have effective free trade agreements with the EU, and with limited opportunities for GCC producers to recover the increased customs duty cost from customers at current market prices, certain GCC products may become uneconomic in EU markets. This point is illustrated further in Table 1 which compares the current customs duty treatment of certain GCC products with the future treatment for these produces from 1 January 2014 and contrasts the treatment of such products under the free trade agreement between South Korea and the EU.

Implications for certain productsLooking at the information in Table 1, we can draw some conclusions about the possible impact of the new rates on certain GCC origin products imported into the EU, including the following:

• Oil and gas — certain oil and gas GCC products may become uneconomic under the new EU trade regulatory environment. At EY, we have explored various customs regimes to prevent customs becoming due. In particular EY has had several conversations with national Customs Authorities and the European Commission to discuss possible solutions on customs duty applicable on the importation of jet fuel

from the GCC. The EU and individual Member States have entered into binding air transport agreements which include provisions exempting jet fuel from duties and taxes, irrespective of origin. The Commission is examining legislation to exempt jet fuel from customs duty after 1 January 2014.

• Chemicals and petrochemicals — similar to oil and gas products, petrochemicals and chemicals of GCC origin may also become uneconomic under the new EU trade regulatory environment. However, the scope of customs regimes available to this type of product to reduce or prevent the imposition of customs duty is greater. GCC producers may wish to consider the application of end-user reliefs (e.g., inward processing relief or bonded warehouses) to reduce or defer the landed cost of products at import. These reliefs are discussed in greater detail below.

From 1 January 2014, standard customs duty rates will apply on products imported into the EU from GCC countries.


• Fertilizers — in general, imports of fertilizers of GCC origin will be unaffected by the new EU trade regulatory environment; however, GCC producers should give due consideration to the commercial advantage of certain competitors from jurisdictions with which the EU has an effective free trade agreement.

• Aluminum — the exportation to the EU of certain aluminum products with GCC origin will be affected by the loss of GSP benefit. Similar to the oil, gas and petrochemical industries, GCC producers of aluminum wish to consider the application of certain customs regimes on exportation to EU markets.

EU customs regimes available to reduce the landed‑cost of GCC productsDepending on a company’s supply chain, customs regimes may help to avoid or reduce customs duties on the import of GCC products into the EU, including the following:

• Inward processing relief — this relief allows product to be imported into the EU without the imposition of customs duty, if the product is processed and subsequently exported outside the EU. Various processing operations (e.g. such as blending within the oil and gas industry) may be considered in this respect.

• Bonded warehouses — a bonded warehouse is a building or other secured area where dutiable products may be stored, manipulated or undergo manufacturing operations without the imposition of customs duty. After manipulation and within the warehouse period, the products may be exported outside the EU without the imposition of customs duty. Alternatively, the products may be withdrawn from the regime for free circulation within the EU upon payment of customs duty at the rate applicable to the products in their manipulated condition at the time of withdrawal.

Product category Sub‑product category

Duty rate under GSP currently applicable to GCC products (with Form A)

MFN duty rate applicable to GCC products from 1 January 2014

Preferential duty rate under the FTA between Korean and the EU (with certificate of origin)

Oil and gas products

Jet fuel 0.00% 4.70% 0.00%

Gas oil (high sulphur) 0.00% 3.50% 0.00%

Base oil 0.00% 3.70% 0.00%

Petrochemicals Low density polyethylene (LDPE)

3.00% 6.50% 0.00%

Linear low density polyethylene (LLDPE)

3.00% 6.50% 0.00%

Chemicals Methanol 2.00% 5.50% 0.00%

Fertilizers Ammonia1 6.50% 6.50% 0.00%

Urea 6.50% 6.50% 0.00%

Aluminum Aluminum bars (not alloyed) 4.00% 7.50% 0.00%

Liquid metal 6.00% 6.00% 0.00%

Table 1. A comparison of the current and future EU customs duty treatment of GCC products and the free trade agreement rates for the same products imported into the EU from South Korea

1. Ammonia is excluded from GSP treatment.


To benefit from these customs regimes, GCC producers will need to manage and understand the supply chain of their products at all stages from manufacturing through to end consumption.

Preparing for the changeGCC companies that operate in the oil, gas and petrochemical industries should prepare now to analyze their current supply-chains and assess the financial impact of the new rules on their operations. Actions to consider include the following:

• Determine whether products are imported into the EU

• Assess the value of products imported into the EU to quantify the potential impact of losing GSP status

• Identify the ultimate countries of destination and/or usage of the affected products

• Investigate current agreements with customers to determine whether the potential increased duty charges may be passed on to them

• Assess the possible use of customs regimes to reduce the commercial impact of the change

GCC companies that operate in the oil, gas and petrochemical industries should prepare now to analyze their current supply-chains and assess the financial impact of the new rules on their operations.

Gulf Cooperation Council and Singapore

Finbarr Sexton Tel: +974 4457 4200 Email: [email protected]

Shubhendu Misra Tel: +65 6309 8676 Email: [email protected]

Juan Fook Tan Tel: +65 6309 8061 Email: [email protected]

Free trade agreement: unlocking the preferential savings

A free trade agreement (referred to here as the GSFTA) entered into force on 1 September 2013 between the Gulf Cooperation Council (GCC) countries (consisting of Bahrain, Kuwait, Oman, Saudi Arabia and the United Arab Emirates) and Singapore. The GSFTA is a comprehensive agreement that covers trade in goods and services, government procurement, and other areas of cooperation. Major industry sectors that are expected to benefit include telecommunications, electrical and electronic equipment, petrochemicals, jewelry, machinery, and iron- and steel-related industries.

Garrett Grennan Tel: +974 4457 4210 Email: [email protected]



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Who may benefit from the GSFTA?Singapore exporters to GCC markets will enjoy preferential tariff treatment compared with other foreign exporters. The GSFTA will offer limited preferential treatment to GCC exporters to Singapore, as the majority of these products presently enjoy zero “most favored nation” (MFN) tariffs. Singapore businesses doing business in the GCC will also benefit as GCC foreign equity limits will be relaxed.

However, the relaxation of the GCC equity requirements may need further legislative changes in the respective GCC states, and therefore these benefits may not be immediately available to Singapore investors. In addition, the procedural requirements for claiming preferential tariff treatment are still not finalized, and Singapore exporters should seek prior advice before seeking to apply preferential tariff treatment under the agreement.

Key features of the GSFTA Trade in goodsThe agreement provides for comprehensive tariff elimination that will make Singapore goods more competitive compared with other foreign imports entering the GCC. Initially GSFTA will exempt about 95% of all GCC tariff lines for Singapore exports. An additional 2.7% of tariff lines will gain exempt status by 2018.Singapore will grant zero-tariff treatment on all GCC imports.

Rules of origin Rules of origin determine the nationality of a product for customs purposes. In the GSFTA, the rules ensure that only products that are sufficiently worked or produced in Singapore or the GCC qualify for the tariff concession. Under the GSFTA, a product can qualify for preferential treatment if at least 35% of the ex-works price (value-added percentage) can be attributed to manufacturing and other operations in the originating country. There are, however, 10 products where the origin criteria are based on a change in tariff classification.

To determine the value-added percentage, the following formula applies:

Ex-works price — NOM x 100% > 35% Ex-works price

The ex-works price is the price paid for the product ex-works to the manufacturer in the GCC or Singapore. Related expenses after the production of the goods, including transportation, insurance and local taxes, are excluded. NOM is the value of materials originating from outside the GCC and Singapore.

Originating materials from the GCC used in the production of a good in Singapore are considered to originate in Singapore and vice versa when determining origin. This accumulation rule should help develop increased trade between the GCC and Singapore.

Important aspects of the GSFTA • Initially, 95% of tariffs for Singapore exports to the GCC are expected to be

eliminated.

• Foreign equity limits for Singapore businesses operating in the GCC have been relaxed, although more legislative changes may be needed.

• Specific reliefs are provided for Singapore financial service institutions operating in Qatar and Bahrain.

• Singapore will grant zero tariff treatment to all imports from the GCC.

• To benefit from preferential tariff treatment under GSFTA, certain conditions must be satisfied, including:

• At least 35% value must be added to the goods by manufacturing and other operations in one of the member countries, based on the ex-works price.

• Specific guidance has been established on what constitutes sufficient operations for purposes of conferring origin.

• Importation to the markets by direct shipment is generally required, although transshipment is allowed, provided certain conditions are met.

• An authorized certificate of origin from the relevant authority is needed (but waived if the consignment value is less than US$1,000).

Singapore exporters to GCC markets will enjoy preferential tariff treatment compared with other foreign exporters.


The GSFTA also sets out seven “insufficient operations” that shall not be considered as sufficient production to confer origin to the product. They include operations to preserve goods, simple operations such as the removal of dust, changes in packing and the breakup and assembly of consignments, placing product in bottles, simple cutting, placing marks or labels on goods or their packaging, the slaughter of animals, and any combination of the above.

In general, to benefit from the preferential tariff treatment under the GSFTA, products must be shipped directly from the GCC to Singapore and vice versa, although transshipment in third countries may be allowed, provided certain conditions are met.

Customs proceduresThe agreement provides for certain customs procedures to aid the free movement of goods between the GCC and Singapore, including:

• Advance rulings on the eligibility of originating goods for preferential treatment and tariff classification

• No certificate of origin needed for low-value originating goods

• Risk management to focus on high-risk goods and to facilitate the clearance of low-risk consignments

Trade in servicesThe GSFTA will provide Singapore service providers with enhanced market opportunities into the GCC. Some GCC countries will relax the foreign equity limits in certain key sectors of interest to Singapore, including construction services, distribution services and hospital services, while other GCC countries will relax the foreign equity limit across the board for all sectors between 70% and 100%.


The following GCC countries are committed to relaxing the foreign equity limits in certain key sectors:

• The United Arab Emirates (UAE) will relax foreign equity limits in construction services, distribution services, hospital services and legal advisory services.

• Qatar will relax foreign equity rules. The foreign equity limit is set at 49% under the foreign capital investment law, but the Ministry of Economy and Commerce will permit up to 100% if the Singapore services supplier can demonstrate it has sufficient experience.

• Oman will allow 100% foreign equity for construction services.

• Kuwait will commit to setting the foreign equity limit for the following seven sectors at 100%: construction; banking; insurance; information technology and software development; hospital and other health services; tourism and hotels; and culture, information and marketing.

• Bahrain will bind its foreign equity limit for companies at 100%, while Oman will bind its foreign equity limit for companies at 70% across all sectors.

The above benefits will extend to citizens, permanent residents, local companies and multinational companies (MNCs) based in Singapore or the GCC.

Government procurement The GCC and Singapore have committed to maintaining an open and transparent system of procurement to give competitive opportunities to the suppliers of both sides to penetrate each other’s markets.

Singapore suppliers are also given the same price preference of 10% that is given to a GCC domestic supplier for the use of any goods or services that are produced in a GCC state for the procurement of goods and services.

Procedural requirementsAlthough the GSFTA came into force on 1 September 2013, the procedural requirements for claiming preferential tariff treatment are still not finalized in the GCC countries. Singapore businesses wishing to use the provisions under the agreement should seek advice prior to executing transactions.

ConclusionsWith increased trade between Singapore and the GCC, the GSFTA presents opportunities for businesses to significantly reduce costs in their supply chains. However, the term “free trade” should more accurately be termed “conditional trade,” because in order to obtain the preferential treatment, businesses must comply with the specific rules of origin to determine whether a product actually qualifies. The GSFTA rules are complex, and terms must be fully complied with to obtain the benefits under the agreement and to avoid the risk of incorrectly claiming benefits.

The GCC and Singapore have committed to maintaining an open and transparent

system of procurement to give competitive opportunities to the suppliers of both sides

to penetrate each other’s markets.

Italy

Emanuele Muolo Tel: +39 02 851 4458 Email: [email protected]

Sara Regales Alvarez Tel: +39 05 127 8421 Email: [email protected]

In recent years, we have reported on the global rise in VAT rates, particularly in the European Union (EU), where many countries have come to rely more and more on indirect taxes to finance their budgets. This trend has continued, and as a result of the latest economic challenges and after much debate, Italy has increased the standard VAT rate from 21% to 22% effective 1 October 2013, although the 4% and 10% reduced VAT rates have remained unchanged.

In this article, we discuss the background to this latest VAT rate increase and what it implies for VAT compliance for both Italian and foreign businesses operating in Italy.

VAT rate increases to 22%



Italy

Legislative progressWhen another planned standard VAT rate increase was announced in December 2012, it created broad debate not only within the Italian Government but also in the country in general. The controversy was intensified by the fact that the last VAT rate increase, from 20% to 21%, took effect in September 2011. The Italian legislation proposing the increase1 was supposed to enter into force on 1 July 2013. However, on 28 June 2013, the Italian Parliament approved a postponement of the increase2 until 1 October 2013 in order to stimulate consumer spending.

Contrary to expectations, the Italian Government did not further postpone the VAT rate increase from 1 October 2013 to 1 January 2014. As a consequence, the new 22% standard VAT rate applies to all supplies of goods and services if the tax point is triggered on or after 1 October 2013.

Implications for businessIssues to consider are applying the correct VAT rate, especially for activities that span the change in rate, and adapting VAT reporting processes to take account of the new rate.

The VAT rate increase may also have a negative impact on costs and cash flow. For most Italian businesses, VAT charged on purchases is recoverable in full as input tax against. Therefore, the main concern of the rate increase is to avoid penalties for undercharging VAT to customers or for incorrect accounting. However, businesses in VAT-exempt sectors (such as banking and insurance) suffer VAT charged on purchases and overheads as a cost, so the rate increase will add to their effective costs. Also, an increase in the VAT rate raises the negative cash flow impact of delayed VAT refunds for businesses that are in a VAT repayment position (such as frequent exporters).

Deciding which VAT rate appliesArticle 6 of the Italian VAT Code3 provides the general criteria to determine when a supply is deemed to take place for VAT purposes (known as the “tax point”). If the tax point occurs before 1 October 2013, the VAT rate is 21%, but if the tax point falls on or after 1 October 2013, the VAT rate is 22%.

In theory, this seems pretty straightforward. But determining the tax point for certain transactions is not always easy, as different rules may apply for particular supplies of goods and services as well as for certain classes of taxpayers.

Domestic supplies of goodsFor supplies of movable property, the tax point generally occurs on the date of delivery or dispatch of the goods (unless title to the goods passes to the customer after delivery or dispatch, in which case the tax point is triggered when title is transferred). As a consequence, for goods delivered before 1 October 2013, the standard rate of 21% applies irrespective of the date of payment.

For supplies of immovable property, the tax point generally occurs when the parties sign the agreement transferring ownership in the property.

These basic rules have exceptions. If an invoice is issued before these events or if an advance payment is received for all or part of the consideration, the tax point is brought forward to the date of invoice or receipt of payment. For example, if payment was received in full prior to 1 October 2013, the 21% rate applies even if the goods are delivered after the change. In some cases, both rates may apply to the same transaction. For example, if an advance payment is received before 1 October 2013, the corresponding invoice must be issued with the 21% VAT rate, while the invoice for the balance of the value issued after 1 October 2013 will be subject to the new 22% rate.

1. Article 1, paragraph 480, of Law 24 December 2012, number 228 (the so-called “Stability Law”).2. Article 11, paragraph 1, of Law 28 June 2012, number 76.3. Article 6 of Presidential Decree 26 October 1972, number 633 (the “Italian VAT Code”).

The new VAT rate at 22% implies a number of important changes for Italian businesses and multinational companies operating in Italy.


Intra‑Community acquisitions and importation of goodsSpecial tax point rules govern cross-border trade between EU Member States and imports from outside the EU.

Following the implementation of EU Council Directive 2010/45/EU, the tax point for Intra-Community acquisitions is deemed to be when the transport or dispatch of the goods from the Member State of origin begins. Advance payments do not trigger a tax point in these circumstances. This means that in the case of an intra-EU acquisition of goods shipped to Italy from another Member State prior to 30 September 2013, the buyer must account for Italian VAT through the reverse-charge mechanism by applying the 21% VAT rate.

The time of supply for imported goods is the date of importation (i.e., when the customs bill is accepted by the customs authorities). Consequently, if the customs declaration is accepted on or after 1 October 2013, the goods are subject to VAT at 22% at importation.

Supplies of servicesThe tax point for domestic supplies of services is deemed to be when the consideration is paid or, if earlier, when an invoice is issued. As a consequence, services rendered after 1 October 2013 but invoiced or paid before that date are subject to the 21% VAT rate; conversely, services rendered before 1 October 2013 but invoiced or paid for on or after that date are subject to VAT at the 22% rate.

Many cross-border services supplied by taxable persons established outside Italy are subject to VAT in Italy through the reverse-charge mechanism. The tax point for these services occurs when the service is completed. Therefore, the relevant date for determining the VAT rate depends on the whether the service was completed before or after 1 October 2013.

Adjustments In accordance with Article 26 of Italian VAT Code, and based on general criteria for determining the tax point, adjustment notes (i.e., credit or debit notes) related to invoices that have already been issued must be issued showing the same tax rate that was applied to the original supply. Thus, for example, irrespective of when the adjustment note is issued, the 21% rate is applied if the transaction being adjusted was originally subject to the 21% rate.

Transactions with public bodies and under the cash accounting schemeTransactions with the Italian state, regional or local authorities, and institutions specifically listed in the Italian VAT Code4 are deemed to occur when the invoice is issued, even if the tax becomes due at the time of payment by the public body (under the so-called “deferred VAT payment” scheme).

Deferred VAT payments also apply to transactions carried out by taxpayers who opt for the cash accounting scheme (IVA per cassa). The cash accounting scheme can be applied by taxpayers whose annual

turnover is not higher than €2 million and other small businesses. For businesses using cash accounting, the VAT rate increase does not apply to transactions with invoices dated before 1 October 2013, even though the relevant payment is received afterward.

Penalty “holiday” for the first three months of implementationFor businesses, a VAT rate change means an increase of the VAT compliance, especially for multinational companies that often carry out large numbers of often-complex transactions every day. As a consequence, taxpayers need to efficiently adapt their ERP systems and software in an accurate and timely manner so that all changes are properly dealt with in their accounting and reporting systems.

When fundamental changes apply to VAT accounting, errors and mistakes occur frequently, arising from incorrect tax codings or confusion about the correct VAT rate to apply, for example. The Italian tax authorities seem to be aware of this, and in a press release dated 30 September 2013 the Italian tax authorities have clarified that for the first three months that the new standard VAT rate applies, no penalties will be applied to taxpayers who did not manage to issue invoices correctly due to difficulties in updating their invoicing or accounting systems.

4. Article 6, paragraph 5, of the Italian VAT Code.

All businesses making supplies of goods and services in Italy need to ascertain the correct VAT rate applicable to their supplies.


ConclusionsThe new Italian standard VAT rate of 22% became effective on 1 October 2013.

Taxpayers must ascertain the correct standard VAT rate applicable to each transaction by reference to the tax point rules, which differ between domestic supplies and intra-EU transactions.

An effective analysis of the main business VAT implications, including a review of contracts, financial/physical flows and ERP systems, is highly advisable to minimize possible administrative burdens and prevent negative consequences.

Specifically, no penalties will apply provided that the incorrect invoices are properly amended through the issuance of debit notes (in accordance with Article 26 of the Italian VAT Code) and that the correct VAT amount (i.e., 22%) plus any interest due is paid to the Italian Treasury within specified deadlines (see table at right).

VAT calculation period Invoicing period Payment deadline

Monthly October and November 27 December 2013

Monthly December 16 March 2014

Quarterly Fourth quarter 16 March 2014

The Italian tax authorities have clarified that for the first three months that the new standard VAT rate applies, no penalties will be applied to taxpayers who did not manage to issue invoices correctly due to difficulties in updating their invoicing or accounting systems.

Japan

Kevin Atkins Tel:+81 3 3506 3893 Email: [email protected]

Consumption tax rate increase announced

On 1 October 2013, Prime Minister Shinzo Abe of Japan announced that, effective 1 April 2014, the consumption tax rate will increase to 8% from the current rate of 5%, in accordance with previously enacted legislation. We outline the details of the phased increase and outline some transitional provisions for supplies spanning the rate change.

Toshifumi Endo Tel: +81 3 3506 2460 E-mail: [email protected]



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Phased‑in increases to consumption tax rateThe consumption tax rate will increase to 8% (including local consumption tax of 1.7%) effective 1 April 2014. A further increase to 10% (including local consumption tax of 2.2%) effective 1 October 2015 has also been enacted.

The revised Consumption Tax Law (enacted on 22 August 2012) included a general provision for this first rate increase phase, as well as an “economic resiliency” clause that serves as a mechanism whereby the increase can be canceled if it is deemed necessary based on prevailing economic conditions. In making this determination, the overall economic situation is to be considered, with reference to key indicators such as nominal GDP, real GDP and price trends. However, Mr. Abe’s announcement has confirmed that this economic resiliency clause will not be invoked to cancel the first rate increase phase.

Similarly, the second phase of consumption tax rate increase (to 10%, effective 1 October 2015) also has this economic resiliency clause. Another determination of the overall economic situation will be made prior to its implementation.

Transitional measures regarding the rate increase to 8%A number of transitional measures provide for continued application of the current 5% rate following the effective date of the general rate increase, in certain situations. The main transactions that are affected by the transitional measures are outlined below. Please note that transitional measures may apply to other situations, so businesses should seek specific guidance before determining the correct tax point for particular transactions.

The 5% rate applies under transitional rules to the following transactions with a key date of 1 October 2013:

• Construction contracts — taxable sales made on or after 1 April 2014 pursuant to a construction contract concluded prior to 1 October 2013

• Property leases — lease payments made on or after 1 April 2014 pursuant to a lease agreement concluded prior to 1 October 2013, the term of which begins prior to and extends beyond 1 April 2014

• Books, magazine and journals, etc., supplied on subscription — the sale of these items on or after 1 April 2014 pursuant to a subscription agreement concluded prior to 1 October 2013 for provision thereof at a fixed frequency to members of the general public and for which payment was made before 1 April 2014

• Mail order and online sales — the sale of products on or after 1 April 2014 via mail order or online platforms, for which the vendor had advertised (or completed preparations to advertise) sales terms including the price prior to 1 October 2013, the order was received prior to 1 April 2014 and the sale is made in accordance with those advertised terms

The 5% rate applies under transitional rules to the following transactions with a key date of 1 April 2014:

• Travel fares and admission fees — the transport of passengers or admission of customers to movies, theaters, horse races, bicycle races, art galleries, amusement parks or similar entertainment venues, on or after 1 April 2014, for which fees were paid prior to 1 April 2014

• Utility charges — charges relating to the continuous provision of electricity, gas, water or telecommunications pursuant to an agreement with a term beginning prior to and extending beyond 1 April 2014, for which the right to receive payment is established between 1 April and 30 April 2014

• Newspapers and magazine sales — the sale of certain newspapers or magazines on or after 1 April 2014, for which the specific release dates were prior to 1 April 2014, and for which delivery to the general public occurs at a fixed frequency such as weekly or monthly

• Long-term installment sales — installment payments with a due date on or after 1 April 2014 pursuant to sales that occurred prior to 1 April 2014

ConclusionsBusinesses operating in Japan must make detailed preparations for the consumption tax increases, including assessing their impact on existing contracts, prices, and IT and invoicing systems, particularly if they provide any goods or services that are subject to the transitional provisions.

The consumption tax rate will increase to 8% effective 1 April 2014. A further increase to 10% effective 1 October 2015 has also been enacted.

KenyaTen economic impacts of changes in the VAT Act 2013

Kenya announced far-reaching changes to its VAT Act on 2 September 2013 with no advance warning. Not surprisingly, the new rules have caused concern and confusion among Kenyan businesses and consumers in a wide variety of sectors. In this article, Hadijah Nannyomo, based in Nairobi, reflects on the changes and their possible impact on the Kenyan economy.

Hadijah Nannyomo Tel: +254 20 271 5300 Email: [email protected]



VAT Act 2013On Monday, 2 September 2013, all of us in Kenya woke to the news that the VAT Act 2013 had come into force — that same day! Since then, our newspapers and other the media have been full of comments, especially complaints about an expected general rise in prices of goods and services. Getting this sudden news on a Monday morning had me thinking about the following questions:

• Many of us were busy shopping after midnight on 1 September 2013. Did the popular 24-hour supermarkets adjust their prices to reflect the changes?

• Did the newspaper publishers/vendors apply VAT on the sales of Monday newspapers made on Sunday night?

• Did those fish farmers or milk suppliers from the countryside who deliver their supplies in the wee hours of the morning adjust their prices for VAT? Have they even registered for VAT yet?

• This is one tax law that affects everyone in the country — but what percentage of the population can read and interpret the VAT law?

These and other questions about the new act continue to bother me and other parties affected by the changes, especially how any omissions and errors under the new rules will be dealt with. The new rules have affected manufacturing, oil and gas, media and publications, the health sector, tourism and many other sectors in one way or another.

The 10 economic impacts of the changesGenerally, the new VAT Act substantially reduces the number of zero-rated goods and exempt goods from over 300 items to about 100 items; in addition, some major incentives to investors have been scrapped, and the 12% VAT rate has been abolished.

So what are the mid- to long-term impacts of the provisions in VAT Act 2013 likely to be on the Kenyan economy?

1. Expected higher Government revenues

The biggest motivation behind most of the changes in the VAT Act 2013 is to raise Government revenue by an estimated KES10 billion to finance part of the KES1,600 billion budget for 2013–14. This is a positive move, especially if the revenues are eventually put to good use.

A critical look at the provisions in the VAT Act 2013 makes me optimistically believe that the expected KES10 billion yield is an underestimation. For exemption, as a result of the exemption of VAT on supplies made to oil and gas and geothermal companies, more VAT will be collected by the Government from oil and gas suppliers. Charging VAT on major necessities and foods consumed by consumers and businesses that are not VAT-registered also implies that the corresponding VAT now goes to Government.

2. Repeal of the VAT remission incentive for new capital investments

VAT remission on capital investments has always been a big incentive for investors in Kenya. It has also offered cash flow advantages to many companies to get their projects off the ground. The repeal of the VAT remission incentive may discourage investors from setting up in Kenya. For example, the removal of the incentive would mean incurring an extra KES3.2 million on a KES20 million project. On a good note, however, remissions granted under the repealed act will remain in force for five years.

3. Simpler tax administration due to fewer refunds – leading to greater focus on other areas

The new act does not provide for as many zero-rated goods and services as previously. As such, fewer claims for tax refunds are expected (as fewer businesses will have an excess of input VAT on purchases). This may benefit the economy not only by raising VAT on new areas that were previously not taxed, but also by allowing for the more effective use of tax officials and an increased revenue enforcement. The change implies that fewer officials will be needed to process and audit refunds, so they will be able to concentrate on more critical areas of revenue collection.

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“ On Monday, 2 September 2013, we woke to the news that the VAT Act 2013 had come into force — that same day!”


4. Repeal of zero‑rating status for official aid funded projects

Official aid-funded projects have enjoyed zero-rated status on all their supplies and inputs. This has made these projects, which are much-needed for Kenya’s economic development, less expensive and has also encouraged donors to give more aid to Kenya. The repeal of the zero-rating status for these projects will mean that Government departments benefiting from the projects will have to incur the VAT cost since donors normally do not agree to have the funds used for tax payments. If the Government incurs the VAT cost, this hits deeper into the current budget. With extra spending, the economy is negatively affected, as some sectors’ allocations are reduced.

5. Taxation of some items in the supply chain while others are exempt

In the new VAT Act, animal feeds are taxable, whereas unprocessed milk is exempt from VAT. This implies that people who deal in the supply of unprocessed milk will incur VAT on the animal feeds used for their cattle, but they will not be able to reclaim the VAT as their milk sales are exempt from VAT. On the other hand, a buyer of the unprocessed milk who processes it to make ultra-high-temperature (UHT) milk and yogurt will need to be VAT-registered and to charge VAT to the next person in the supply chain.

Therefore, the VAT charged on the feed will be trapped in the supply chain. The costs for farmers who produce unprocessed milk and incur

VAT on animal feeds will go up, and they may be forced to sell their product at a higher price to the milk processor, who will again push the extra cost to the final consumer. This will increase general price levels and inflation, which distorts the economy as a whole.

6. Exemption of VAT for geothermal, oil or mining industries will increase costs

The new VAT exemption for taxable supplies imported or purchased for use in geothermal, oil or mining prospecting or exploration implies that a large part of the input tax incurred on services or goods provided to these companies will not be claimable. Most of the suppliers in this sector are foreign investors who may be discouraged from investing in Kenya by the reduction in their profits, which will also reduce overall Government receipts from other taxes, such as income taxes.

7. Appointment of tax representatives

The majority of the services that local businesses source from nonresidents are not readily available in Kenya. The new requirement for nonresident service providers who do not have a fixed place of business in Kenya to appoint a local tax representative implies that nonresidents will face more obligations in Kenya. This may discourage some nonresidents from doing business in Kenya if they can opt to take their businesses to other countries in the region, making Kenya a less-attractive investment destination.

8. Introduction of penalties or imprisonment for members and staff of KRA

The Government has been losing a lot of revenue in the hands of irresponsible, careless or even corrupt members and staff of the Kenya revenue authority (KRA). The introduction of penalties and imprisonment for KRA members and staff will increase Government collections, which will go toward the provision of basic services.

9. Adjustment of VAT rate for electricity, furnace and heavy diesel oil from 12% to 16%

This change in VAT rate for fuel will increase the cost of doing business and eventually increase the inflation rate in the long run since all major sectors of the economy rely heavily on either electricity or heavy diesel oil.

10. VAT refunds One of the biggest challenges KRA is

currently facing is the lack of sufficient funds to refund taxpayers’ input VAT paid in excess of output tax, and some taxpayers have sought the intervention of the courts to have their refunds paid. The new act has not given an undertaking on fast tracking of VAT refunds. This does not solve the current challenges and will continue to result in negative cash flows for businesses that will have a negative impact on profits for businesses.

The new rules have affected manufacturing, oil and gas, media and publications, the health sector, tourism, and many other sectors in one way or another.


ConclusionsThe new VAT Act has both positive and negative effects for the Kenyan economy. For the Government, a lot more work is required to ensure that all stakeholders fully understand how to implement the VAT Act 2013 and how it will affect their businesses. For instance, more information is required regarding who can be a tax representative and what their responsibilities will be, as well as that of the principal they are representing. Will the tax representatives be appointed on application, or can anyone act in this capacity? Furthermore, the Government is expected to proactively issue public rulings to correct some obvious errors or ambiguities that exist in the VAT law, especially in the listings of the exempt and zero-rated supplies.

For businesses, it is to be hoped that they “do not let the tax tail wag the commercial dog,” as the saying goes. In other words, businesses should not be discouraged from doing business in Kenya or from investing here to avoid paying any extra tax that comes with the VAT Act 2013. However, businesses also need to be aware of how the changes affect their activities and pay extra attention to their compliance and accounting for goods and services supplied in and to Kenya. Businesses need to be transparent, keep good records and make investment plans using available incentives.

And for me, as an East African citizen? My personal hope is that the measures raise the expected KES10 billion revenue (and more) and that the money will be put to good use!

MalaysiaIn a budget announcement on 25 October 2013, Malaysia’s Minister of Finance announced the implementation of the long-awaited goods and services tax (GST). GST is set to begin on 1 April 2015 with a tax rate of 6%. The proposed GST is similar in conception to many other value-added tax (VAT) systems around the world. This change represents a total reform of the country’s single-stage consumption tax system, which will have far-reaching effects for individuals and businesses alike. In this article we set out some of the main features of the new tax and some actions that you may want to take now if you do business in Malaysia.

Bernard Yap Tel: +603 7495 8291 Email: [email protected]

Aaron Bromley Tel: +603 7495 8314 Email: [email protected]

Yeoh Cheng Guan Tel: +603 7495 8408 Email: [email protected]

GST is coming in 2015



What is GST?GST is a broad-based consumption tax applied at each stage of the supply chain. A GST-registered business can mostly offset the GST incurred in making its supplies against GST charged on the supplies it makes. This credit mechanism means that GST is levied on the value added at each stage of production, and it can be cost-neutral to a business, with the full burden of the tax falling on the final consumer who cannot recover the GST paid.

GST is to be accounted for on an accruals basis. This means that GST will become due when a sale is made and not necessarily when payment is received. This aspect of the tax can create negative cash flow for businesses if their customers pay late or do not pay (as the supplier must account for the VAT charged in a period even if no payment has been received).

What does GST apply to?GST is charged on any taxable supply of goods and services made in the furtherance of any business by a GST-registered person in Malaysia. It is also charged on the importation of goods and services into Malaysia. As a broad-based tax, GST will be applied at the standard rate by default unless a provision states that a supply can be treated differently. This approach means there is no list of what is treated as standard-rated (unlike in the current system). Instead, the GST allows for some limited reliefs and exemptions for certain specific goods and services to be zero-rated, exempt or out-of-scope of GST as follows:

Zero-rated supplies — a zero-rated supply is a taxable supply, but the tax rate is 0%. This means that GST incurred on the supply can be recovered, although the onward supply GST is charged with no GST. If you make wholly zero-rated supplies, you can register as a GST taxpayer. You will likely be in a GST refund position because your input GST on purchases is likely to exceed your output GST on sales. Examples of zero-rated supplies include certain agricultural products, foodstuffs, water supplied to domestic consumers, electricity supply (with limits) for domestic users, exports of goods and international services.

Exempt supplies — an exempt supply is not a taxable supply, GST does not apply to the sale, but the supplier has no right to offset GST input tax. If you make wholly exempt supplies, you will not be able to register for GST, and GST will become a cost to your business. If you supply goods and services that are both subject to GST and exempt from GST, you may need to register for GST, and you may recover GST on purchases related to your supplies that are liable to GST but not on purchases related to GST-exempt activities. Special rules will likely apply in these circumstances to allocate GST incurred on overhead costs. Examples of exempt supplies include residential property, private health care and private education, and certain financial services.

Out-of-scope activities — an out-of-scope activity is outside the GST system altogether. As such, GST is not charged, and the supplier is not obliged to register for GST as a result of performing that activity (although the supplier may be GST-registered for other reasons). Examples of out-of-scope activities are limited but include a transfer of a business as a going concern and supplies made by the Government, such as the issuance of passports and licenses, except some supplies of services prescribed by the Minister of Finance.

Who will be affected by the introduction of GST?Everyone in Malaysia will be affected by the implementation of GST. In particular, businesses that are registered for GST will need to regularly account for GST on their business activities and pay the GST due to the Customs Department. Given the radical nature of the changes, complying with these obligations will require most businesses to start planning and acting now to be fully prepared in 2015.

Not all businesses will be required to charge GST, as some small businesses will be excluded from the obligation to register. The turnover threshold for GST registration is MYR500,000 (roughly US$158,000) in the past year, based on a rolling 12-month period. A business will also be obliged to register at any time if this registration threshold is expected to be breached. Therefore, for large companies, GST registration will likely be required from the start of operations.

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Given the radical nature of the changes, complying with these obligations will require most businesses to start planning and acting now to be fully prepared in 2015.


What is the impact on other taxes?The Malaysian Government is abolishing the current single-stage consumption taxes (sales tax levied at 5% and 10% and service tax levied at 6%) when GST starts, but they will apply until the end of March 2014. Businesses will need to take particular care over transactions that span the change from sales or service tax to GST.

Government assistance to ease the impact of GSTThe Government has announced the following measures to help individuals and businesses to adapt to the change. These measures will be effective from 2015:

Assistance for individuals• There will be one-off cash assistance of

MYR300 (roughly US$95) to households that receive the Bantuan Rakyat 1 Malaysia (BR1M) cash aid, paid to lower-income households.

• Individual income tax rates are to be reduced by 1% to 3%.

• The income tax structure for individuals is to be reviewed to ensure a more progressive tax structure, including increasing the chargeable income subject to the maximum rate from income in excess of MYR100,000 (roughly US$31,700) to income in in excess of MYR400,000 (roughly US$127,000).

Assistance for businesses• Corporate income tax will be reduced

from 25% to 24%. At the same time, the income tax rate for small and medium enterprises (SMEs) will be reduced from 20% to 19%. Both reductions will take effect in the year of assessment 2016.

• The cooperative income tax rate will be reduced by 1% to 2% from the year of assessment 2015.

• Secretarial and tax filing fees (subject to limits) will be allowed as tax-deductible expenditures from the year of assessment 2015.

• Accelerated capital allowances on the cost of information and communications technology (ICT) equipment and software are extended to the year of assessment 2016.

• Expenses incurred for training in accounting and ICT relating to GST are to be given a further tax deduction for the years of assessment 2014 and 2015.

• Grants will be provided for GST training of employees in 2013 and 2014, and financial assistance will be provided to SMEs for the purchase of accounting software in 2014 and 2015.

What should businesses do now to get ready?The new GST represents a major change from Malaysia’s current consumption tax system. Therefore, implementation of the new tax will mean significant changes for all businesses operating in Malaysia. Some practical issues still need to be worked out fully, and we will continue to report on developments as more detailed guidance becomes available. However, if you do business in Malaysia there are already some things that you can — and should — do now to get ready for 2015.

Businesses will need to take particular care over transactions that span the change from sales or service tax to GST.


Here are 10 key actions to consider now to prepare your business, accounting and reporting systems, staff, suppliers and customers for the new regime:

• Make a project plan and budget for the cost of implementing GST (e.g. consultant fees, configuration of accounting systems, training expenses, hiring of additional finance support)

• Consider the cash flow impact, as GST is paid on accruals basis

• Analyze the capabilities of existing accounting systems to deal with the new tax

• Review accounts payable processes to ensure tracking and posting of expenses are done in a timely manner

• Review employees’ benefits and the process of approving expense claims

• Determine the changes required for existing documentation to comply with the new tax

• Analyze and understand transitional issues for supplies of goods and services that span the GST implementation period (e.g., a bill for services supplied both in March 2015 and April 2015)

• Evaluate the impact on pricing for any supplies that span the GST implementation period

• Train employees to appreciate the impact of GST on accounting and reporting processes

• Identify the legal implications of existing long-term contracts spanning the GST implementation period (e.g., contracts for services to be supplied throughout 2015)

10 key actions

MexicoThe Mexican Congress approved important amendments to the Mexican Customs law, VAT law and Excise Tax law on 31 October 2013. These amendments significantly affect foreign trade operations in Mexico. While most of these changes will come into force on 1 January 2014, some will be deferred for a limited period. In this article, we set out the most relevant amendments affecting foreign trade operations.

Armando F. Beteta Tel: +1 214 969 8596 Email: [email protected]

Sergio Moreno Tel: +1 214 969 9718 Email: [email protected]

Amendments to indirect tax laws impact foreign trade operations

Yamel Cado Tel: +52 55 1101 6412 Email: [email protected]

Rocio Mejia Tel: +52 55 5283 8672 Email: [email protected]



Use of customs brokers is no longer mandatoryImporters and exporters are no longer required to engage the services of a customs broker in order to file import or export entries and customs declarations (pedimento).

While importers/exporters may opt to continue using a customs broker to perform their customs clearance procedures, they also may choose to perform such procedures on their own behalf by designating a legal representative or “customs representative” who will be responsible for preparing and filing import/export documentation.

It is important to note that the “customs representative” will be jointly liable with the importer/exporter for the payment of duties and other taxes due upon the import/export of goods.

No later than one year after this amendment is published, the Mexican tax authorities will establish the mechanisms to be used by importers/exporters performing customs clearance procedures on their own behalf.

Strategic bonded warehouses Amendments to the Mexican Customs law allow for the establishment of a strategic bonded warehouse (Recinto Fiscalizado Estratégico, or RFE) anywhere in the country. While these amendments will allow more flexibility in the conditions for establishing a strategic bonded warehouse, goods that are imported in-bond under the RFE regime will be subject to VAT payment. Therefore, the benefit of using this customs regime will be significantly reduced.

Expedited customs clearance processSince 1 June 2012, the use of an electronic foreign trade platform, commonly referred to as the “Ventanilla Unica” (single window) became mandatory in order to perform the customs clearance of products in Mexico.

The recent amendments to the Mexican Customs law merge the former Ventanilla Unica platforms into a new Electronic Customs System. Under this new system, all filings required for the customs clearance process will be performed electronically and through digital documents, including the import/export declaration and supporting documentation (commercial invoice, bill of lading, certificates of origin, etc.).

As part of the new Electronic Customs System, importers will have to transmit an electronic declaration with information on the value of imported goods. The amendments to the Customs law establish a new fine of US$1,500 to US$2,500 that may be imposed on importers if they declare inexact or false data in their electronic value declarations.

Also, in order to expedite the customs clearance process, the secondary review of goods during the import customs clearance process is eliminated.

Post‑entry amendmentsMexico’s Customs law currently limits the importer’s ability to make post-entry amendments to customs declarations. For example, when adjusting the value, an importer is generally limited to correcting the information on declarations up to two times for downward price adjustments; additionally, some fields in the

declaration, such as the country of origin or the description of the goods, cannot be amended.

The amendments to the Customs law allow for changes to be made regarding the information contained in the customs declaration at any time and as many times as required, with some exceptions for which the Mexican tax authorities will need to issue prior authorization.

Mexican tax authorities have not yet determined the scenarios for which prior authorization will be required through General Foreign Trade Rules.

Regularization of expired temporary importsThe amendments to the Mexican Customs law approved by Congress specifically acknowledge the possibility for importers to apply the “regularization” procedure on expired temporary imports, limiting the importer’s exposure to the payment of omitted duties, if any, and VAT.

Change of regime of temporary imported goods is extended The Mexican Customs law previously allowed a change of regime from temporary to permanent importation only for goods that were temporarily imported for manufacturing, transformation or repair purposes (for example, goods imported under an IMMEX program). The amendments to the Mexican Customs law now make it possible to change the customs regime for other goods (e.g., that are not in an IMMEX program) that may be temporarily imported, such as samples and goods imported by foreign residents.

Mex

ico

Importers and exporters are no longer required to engage the services of a customs broker to file import or export entries and customs declarations.


VAT to be paid on temporary importations and other customs regimesThe VAT is currently waived when goods are temporarily imported into Mexico under an IMMEX program or entered into other customs regimes (i.e., bonded warehouse for the auto industry, bonded warehouse for transformation and strategic bonded warehouse). In accordance with the amendments to the VAT Law, import VAT at the rate of 16% will have to be paid on imports under these customs regimes when the import declaration is filed. While the VAT paid upon importation may be recovered through a credit or refund, the recovery process may take significant time and effort. Companies must carefully evaluate the cash flow implications arising from this new obligation.

To avoid negative cash flow effects, companies may obtain a certification from the Tax Administration Service if they can demonstrate compliance with requirements related to adequate controls of their temporary or in-bond imports. While these requirements have not yet been clarified, we understand that this certification should allow companies to apply a tax credit against the VAT that has to be paid for the temporary importation of goods. The certification will be valid for one year and must be renewed 30 days prior to its expiration date.

Alternatively, companies that choose not to obtain the certification will be able to avoid the payment of VAT on their temporary or in-bond imports as long as they guarantee the VAT payments through a bond issued by an authorized institution.

The obligation to pay the VAT upon the temporary or in-bond importation of goods will become effective one year after the Tax Administration Service publishes the rules regulating the certification process and the mechanism through which the tax credit will be applied.

VAT to be paid on sales of imported goods under IMMEX and other customs regimesThe VAT exemption on sales of imported goods under IMMEX (and other customs regimes) between non-Mexican residents and

Mexican residents is eliminated, and these sales will be subject to VAT at the 16% rate. However, the VAT charged should be withheld and paid to the authorities by the Mexican resident (i.e., buyer of the goods). This VAT should be recoverable by the Mexican resident.

VAT in Mexico’s Border Region to be increasedThe VAT rate of 11% that currently applies in Mexico’s Border Region is eliminated. Effective 1 January 2014, a 16% VAT rate will be in force across the country.

Excise tax to be paid on temporary importations and other customs regimes

The excise tax, which applies to the importation of beverages with alcohol content, beer, cigarettes, gasoline and diesel, was usually waived when such goods were temporarily imported into Mexico under IMMEX or entered into other customs regimes (i.e., bonded warehouse for the auto industry, bonded warehouse for transformation and strategic bonded warehouse). In accordance with the recently approved amendment, the excise tax will now have to be paid on imports of excisable products under these customs regimes when the import declaration is filed.

Similar to VAT, to minimize the excise tax paid upon importation, companies may obtain a certification from the Tax Administration Service in order to apply a tax credit against the excise tax that has to be paid for the temporary or in-bond importation of goods or guarantee the excise tax payments through a bond issued by an authorized institution.

The obligation to pay the excise tax upon the temporary or in-bond importation of goods will become effective one year after the Tax Administration Service publishes the rules regulating the certification process and the mechanism through which the tax credit will be applied.

The VAT rate of 11% that currently applies in Mexico’s Border Region is eliminated. Effective 1 January 2014, a 16% VAT rate will be in force across the country.


ConclusionsThe recent changes in Mexico’s Customs, VAT and Excise laws will have far-reaching consequences for foreign trade companies. Although the addition of VAT and excise taxes to temporary and in-bond imports may create cash

flow issues for some importers, the changes to the Customs law will mostly be welcomed, especially the ability for importers to change their customs declarations.

PolandSignificant changes to the Polish VAT law come into effect on 1 January 2014. These changes affect fundamental aspects of the Polish VAT system, including the rules relating to the time of supply, the time when input VAT can be claimed, the invoicing process and the taxable amount.

All Polish VAT payers will be affected to some extent by these far-reaching changes. But, along with the changes already in force since April 2013, they will be particularly significant for businesses involved in international trade. In this article, we set out some of the new rules relating to the time of supply and invoicing, and we look at how Polish VAT changes may have a major impact on international supply chains.

Dorota Pokrop Tel: +48 22 557 7339 Email: [email protected]

Joanna Perzanowska‑Kuśnierek Tel: +48 22 557 7562 Email: joanna.perzanowska-

[email protected]

Impact of VAT law changes



Tax point rulesOne of the main VAT changes coming in 2014 relates to the general time of supply (or tax point). The tax point determines when a taxable supply of goods or services takes place. It decides which tax period a supply falls into (and therefore when the tax charged must be paid to the tax authorities).

Until now, the basic tax point has been recognized by reference to the invoice date. Effective 1 January 2014, the tax point will be recognized by reference to the date of delivery of goods or the provision of services. This means that in many cases the tax point will be recognized earlier than under the invoicing rule, and consequently VAT might be payable to the tax office earlier than before.

Currently, the Polish VAT law also contains a wide range of specific tax point rules, covering situations where the basic tax point rule is not considered appropriate (e.g., for telecommunications, energy, transport, construction, rental and many others sectors). In some cases, these special rules will be removed and the basic tax point rule will apply instead (e.g., in transport services), while in other cases the specific tax point rules will be modified and the tax point will be triggered by different events.

Implications for business: Polish taxpayers should identify and track the necessary tax point events for their activities to recognize the new tax point rules (for example, when goods are delivered to customers). Doing this is likely to require some adjustments to companies’ ERP systems and in the procedures governing the flow of information and documents to ensure the tax is captured at the right time, which is

not in relation to any invoice issued by the system. In addition, commercial contracts concluded in the past may not to accommodate the new rules properly and should be reviewed to avoid any adverse effects once the law is changed.

Input VAT deductionBusinesses that are registered for VAT are entitled to offset VAT paid by them on purchases (input tax) against VAT charged on sales (output tax). The new rules have an impact on input tax deduction in a number of ways.

Time of deduction: According to the new provisions, the taxpayer’s right to deduct input VAT will depend on two dates:

1) The date when the tax point arose for the supplier

2) The date when the invoice documenting the supply was received

Until now, the invoice receipt date has been the crucial date for deduction in most cases. Therefore, the deduction could happen if an invoice has been issued before the service is completed or the transfer of the right to the goods has been allowed (assuming that it took place before filing the VAT return in which the claim was made, with certain exceptions). Also, in general, the recipient has not been obliged to track when the supplier should recognize the tax point.

Under the new rules, combined with new rules that provide greater flexibility to issue invoices before and after the supply, it could be more difficult for purchasers to correctly determine when to deduct input VAT. In particular, implementing the changes will require good communication between different departments within the company and awareness of what information is needed.

Goods and services supplied to Poland: A further complication related to input tax deduction concerns international transactions, specifically intra-Community acquisitions of goods (i.e., goods acquired from other EU Member States) and the acquisition of cross-border services that are taxed using the reverse-charge mechanism. For these transactions, the Polish buyer of the goods or services must account for the output tax and recovers input tax. Under rules already in force since 1 April 2013, the Polish VAT law allows the taxpayer to deduct input tax only if the output tax was reported in the correct VAT return.

Further restrictions have been also introduced with respect to the intra-Community acquisition of goods. Effective January 2014, a Polish taxpayer will have the right to deduct the input VAT on an intra-Community acquisition only if it collects commercial invoices issued by his supplier (there are specific rules that allow a three-month waiting period). Thus, the timely collection and processing of foreign commercial invoices will be required in order to fully benefit from the right to deduct the input VAT on these transactions.

Pola

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Fundamental aspects of the Polish VAT system are being changed, affecting all Polish VAT payers to some extent.

70 Indirect Tax Briefing — December 2013

Invoicing processThe rules related to issuing and filing VAT invoices will also change on 1 January 2014. In particular, it will be possible to issue a VAT invoice 30 days before the actual delivery date of goods. It will also be possible to issue an invoice much later than is currently allowed. The general invoicing deadline will be extended from seven days after the supply to the 15th day of the month following the month of the supply (which could extend the issue date by more than a month in some cases). Special invoicing deadlines will be set for specific types of supplies.

Consequently, these changes will give taxpayers much more flexibility in choosing when to issue an invoice. Suppliers may welcome this flexibility as it may allow them to align their invoicing practices more closely to other commercial processes. And this trend toward flexibility may be seen in a relaxation in the Polish rules related to VAT invoicing in general (e.g., allowing invoices to be issued on behalf of another taxpayer or granting permission to file and archive tax documents electronically under certain conditions). However, as we mentioned earlier, this flexibility, combined with changes in the input VAT deduction rules, will not only affect invoice issuers, it will also have a major impact on invoice recipients.

Implications for international supply chainsPolish VAT changes are likely to significantly impact international supply chains in the following areas:

Reverse charge: The Polish rules governing the reverse-charge mechanism have been changed frequently over the years. Since 1 April 2013, the reverse-charge mechanism is not applicable if a foreign supplier is registered for VAT purposes in Poland. Therefore, changes in the reverse-charge conditions might have an impact on international supply chains that involve sales made by a nonresident principal. Changes may apply to the compliance requirements of the foreign principal and to those imposed on any entity registered for VAT purposes in Poland.

Chain transactions: The rules concerning the allocation of transport in chain transactions where three or more parties are involved have been recently modified (e.g., ABCDE transactions). As a result, if an intermediary (e.g., party B in the example) is responsible for the transport, the “default” transaction that is treated as an intra-Community supply is no longer clearly indicated. Therefore, chain transactions involving multiple parties should be looked at carefully to ensure their correct VAT classification as local or intra-Community supplies.

Restrictions on input tax for intra-Community acquisitions of goods: The introduction of conditions for deducting input tax on intra-Community acquisitions could have a significant impact. VAT recovery will be lost if businesses do not introduce effective controls and procedures to recognize the correct tax point and the receipt of the supplier’s invoice documenting. Furthermore, input tax deduction is blocked if a Polish VAT number is given to the supplier but the goods are delivered to another EU country. Therefore, taxpayers need to review their processes to ensure the correct VAT identification number is supplied in all chain transactions involving Polish entities.


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RussiaIn the modern world, international trading plays an important role in most types of business, and every day millions of cross-border trade transactions take place totaling billions of US dollars in value. Transportation and logistics are often important cost factors in these transactions. In Russia, international logistics plays a particularly important role as the country is still very dependent on imported goods.

In this article, the second in a series focusing on Russian VAT issues, we look at the VAT treatment of services related to international trade and logistics, and we outline some considerations for foreign companies doing business with Russia.

Vitaly Yanovskiy Tel: +7 495 664 7860 Email: [email protected]

Olga Odintsova Tel: +7 495 664 7859 Email: [email protected]

VAT and logistic services

Toon Beljaars Tel: +7 495 664 7866 Email: [email protected]


73Indirect Tax Briefing — December 2013

The VAT treatment of transportation servicesIn most countries around the world, international transport and international logistics services are zero-rated for VAT purposes. This is also the case in Russia; however, in Russia, there is a catch. According to the Russian VAT place-of-supply rules, transportation services or transportation-related services are subject to VAT in Russia if they are supplied by a Russian company and the departure point and/or the destination point of the transportation is located in Russia. For these purposes, the term “international transportation” should be defined as transportation where the departure point or the destination point is outside the Russian territory.

As we have said, international transportation and certain related logistics services are subject to 0% VAT in Russia. The advantages of applying the zero VAT rate are clear:

• The supplier does not charge VAT with respect to the services, but it can still enjoy input VAT recovery.

• The buyer does not need to finance VAT and wait for a refund of input VAT.

• A non-Russian buyer does not incur non-recoverable Russian VAT.

The VAT treatment of logistic servicesIn Russia, the VAT treatment of the cross-border transport of goods generally hasn’t been discussed (but is generally accepted to be zero-rated). The complication lies in the treatment of

logistics services connected to the cross-border transport. The Russian Tax Code provides a list of certain logistic services that are eligible for the zero rate if they are provided in the context of arranging international carriage and if they are provided under a “freight-forwarding agreement.”

A freight-forwarding agreement is a specific type of agreement established by the Russian civil legislation. In particular, under a freight-forwarding agreement a forwarding agent agrees to perform or arrange for the performance of certain services connected with the transportation of the goods for a fee. In Russia, federal law regulates freight-forwarding services. There are, however, no specific requirements established in the law with respect to logistic services (such as licensing, a special registration or the necessity to own transportation means). As a result, any company can provide freight-forwarding services.

In practice, therefore, there may be uncertainty as to whether the 0% rate or the 18% VAT rate should be applied to certain types of logistic services. For example, doubts may arise for logistic services that are not provided under a freight-forwarding agreement or for services where a forwarding agent does not organize the cross-border transportation itself. In these cases, service providers often prefer to apply the 18% VAT rate instead of the 0% VAT rate. As a result, VAT risks are transferred to the buyer of the services, as the tax authorities could argue that such services should be zero-rated and could challenge the recovery of such VAT by the buyer.

Trends in the how the court treats services related to international transportationRecent court practice with respect to the VAT treatment of logistic services related to international transportation shows the following trends:

• The court applies a “substance over form” approach to freight-forwarding services. This means that the court supports the application of the 0% VAT rate even if the agreement under which the services are provided is not formally called a freight-forwarding agreement. The requirement is that the agreement in substance should match the key features of a freight-forwarding agreement. As a result, application of the 18% VAT to the service is rejected.

• The court supports the position that a freight forwarder should apply the 0% VAT rate even if the freight forwarder neither transported the goods itself nor arranged such transportation. In particular, this approach could be applied to loading, unloading, warehousing, the execution of documents, customs clearance and many more services. This conclusion is based on the fact that the services rendered by the freight forwarder are performed for the purposes of transporting the goods from Russia, and they should therefore be subject to the 0% VAT rate.

Russ

ia

Transportation and related services are subject to VAT if they are supplied by a Russian company and the departure point and/or the destination point is located in Russia.

There may be uncertainty as to whether the 0% rate or the 18% VAT rate should be

applied to certain types of logistic services.

74

These court decisions are very important because they raise the following issues:

• A broader range of services rendered during international transportation are subject to the 0% VAT rate. Various types of logistics support services supplied during the export or import of goods should therefore be zero-rated.

• This zero-rating allows non-Russian buyers to reduce the VAT costs related to the transportation of goods. Russian buyers may also benefit in terms of improved cash flow, as they do not need to finance 18% VAT on these supplies.

• There is increased risk that the tax authorities may successfully challenge the deduction of input VAT charged on international logistics support services, making it more likely that clients will refuse to pay VAT charged by logistics service providers.

ConclusionsIn view of the above it is important to carefully review any Russian VAT being charged by logistics service providers in relation to cross-border logistics support. We believe there is no black-or-white solution to dealing with some of these issues, so a balanced approach should be taken. That includes requesting the application of the VAT zero rate for international logistic services where possible and including protective clauses in the agreement in case the tax authorities challenge the related input VAT deduction.

Indirect Tax Briefing — December 2013


SlovakiaIn an attempt to fight VAT fraud, the tax administration in Slovakia has introduced a new VAT filing obligation (which was recently approved by the Parliament). Subject to approval of the President, all Slovakian VAT payers must submit detailed VAT ledger reports along with their periodic VAT returns, effective 1 January 2014.

In this article, we set out details of the new reporting obligation and how it may affect businesses operating in Slovakia.

Marian Biz Tel: +421 2 333 39130 Email: [email protected]

New VAT filing obligations

Juraj Ontko Tel: +421 2 333 39110 Email: [email protected]



VAT ledger reportThe VAT ledger report will provide the Slovakian tax administration with detailed information on virtually every business transaction performed by Slovakian VAT payers. As a result, the volume of audits and challenges seem likely to significantly increase after the introduction of the new filing obligation, and VAT payers must be ready to meet this increased level of scrutiny.

What information must be declared?The VAT ledger report will require VAT payers to submit detailed information about the transactions they undertake each month. Reports will include the information for every invoice received or issued by the VAT payer, including adjustment invoices, down-payment invoices and cash register receipts. However, invoices for zero-rated and exempt supplies are excluded. The transaction values declared in the VAT ledger report should generally match the data declared in the VAT return for the specific tax period (but there will be exceptions for certain transaction types).

Items to be declared for each invoice include the VAT identification number, the document number (and a reference to the original invoice number in the case of an adjustment invoice), tax point dates and transaction values, and the amount of deducted VAT. For supplies of certain goods subject to the domestic reverse charge, additional information will be required, including their type, volume and a reference to the Customs Harmonized System Tariff Code. Simplified invoices issued (e.g., cash register receipts) are to be reported in aggregate for the tax period net of tax declared separately for each VAT rate applied.

A supplementary VAT ledger report should be submitted to declare any changes or additions to the transactions reported.

When will the obligation to submit the VAT ledger arise?VAT payers will be obliged to submit VAT ledger reports together with each VAT return. This obligation will arise for each VAT period (except when zero returns are filed or if re-exports of imported goods are carried out). The proposals have no de minimis threshold below which a ledger is not required.

In accordance with the approved legislative bill setting out the change, the first report will apply to the VAT return for January 2014.

How will the information be submitted?The VAT payer must compile all the required VAT ledger information electronically, in the XML format, and file it using an electronic filing portal provided by the Slovak Financial Directorate. The Slovak Ministry of Finance has issued the template for the VAT ledger form, which has recently been passed to the Government legislative council. Guidelines providing more detailed information on the VAT ledger form are also expected shortly.

What are the submission deadlines? The VAT ledger must be filed electronically within 25 days after the end of the VAT period, but not later than the date when the VAT return is filed.

Any supplementary reports must be filed by the end of the month following the tax period when the omission was identified.

What are the penalties for noncompliance?Penalties will apply for noncompliance, such as failing to submit the VAT ledger report, submitting the VAT ledger report late, or declaring incomplete or incorrect information. The penalty may go up to €10,000 for a first omission. In the case of repeated omissions, the penalty range extends up to €100,000.

The current wording of the legislation suggests that penalties will also apply to any adjustments reported, regardless of the character of the change.

Possible issues for VAT payersA draft ledger report has been published for comment by VAT payers and stakeholders. In the absence of clear guidelines for completion of the VAT ledger template, we believe that some of the requirements set out in the proposals could create difficulties for taxpayers. Possible concerns include:

• The obligation to mention customs tariff numbers according to the Common Custom Tariff, as well as the type and amount of certain types of goods subject to the domestic reverse charge, has stayed in the bill, but this requirement will apply only to suppliers. However, a new requirement for suppliers requires them to report data that may need to be collected externally or be extracted from their IT systems.

Slov

akia

The VAT ledger report will require VAT payers to submit detailed information about the transactions they undertake each month.

Penalties will apply for noncompliance, such as

failing to submit the VAT ledger report, submitting the

VAT ledger report late or declaring incomplete or

incorrect information.


• The obligation to report data for each individual invoice has remained in the bill, but simplified invoices have been excluded from this requirement, which is a relief for larger businesses. However, the obligation remains to keep a record of all adjustment transactions for each original document that is adjusted by a credit note or a debit note. This may be a major administrative obstacle for businesses that adjust several original invoices by issuing one adjustment invoice (e.g., in the automotive or utilities sectors).

• Transactions that did not lead to an obligation to issue an invoice must be recorded. Examples of these transactions include those made with employees or deliveries that are taxable prior to the invoice being issued. These items may be difficult for many VAT payers to capture and extract for reporting purposes.

• It is sometimes not clear which transaction properties or which types of transactions should be reported in which columns and rows of the VAT ledger form, as currently proposed. There are certain overlaps and ambiguities in the form. Some

transactions may thus be easily misreported. This may cause queries to arise when tax inspectors cross-check data for review purposes and result in harsh penalties being levied on VAT payers, even when there is no effective tax loss.

• The final version of the amendment to the VAT Act has only recently been approved in the Parliament. Since the ledger report is planned to be implemented in January 2014.

What should VAT taxpayers do to prepare for the first report?Through information declared in the VAT ledger report, the Slovakian tax administration will obtain detailed information on virtually every business transaction performed by a VAT payer. This will likely serve as a basis for the selection of VAT payers for VAT inspections and cross audits. As a result, the number of assessments and VAT audits may significantly increase after the new filing obligation is introduced.

VAT payers in Slovakia should be prepared in advance to ensure seamless reporting and compliance with this new statutory

VAT payers have minimal time to incorporate the new reporting requirements into their internal processes and to make the necessary adjustments to their IT systems.


obligation from its date of introduction. Questions that will need to be addressed include:

• Do all invoices, credit/debit notes and cash register receipts received from our suppliers and issued to our customers contain all information required to be declared in the VAT ledger? If yes, is this information stored in the ERP system? If not, can this be easily extracted from the documents and imported to ERP?

• Are all situations captured properly by the ERP system where VAT is to be declared based on documents other than invoices?

• Are manual adjustments being made sufficient to cover situations where VAT is to be declared based on documents other than invoices (e.g., down payments, goods acquired prior to the invoice being received, services supplied cross-border for which no VAT invoice is available, free-of-charge supplies, adjustments made without credit notes and debit notes formally issued)? Can the information for such transactions be extracted easily from contracts, purchase orders, warehouse receipts or delivery notes so that it can be itemized and reported in VAT ledger for each transaction separately?

• Could there be cases when certain transactions reported correctly in our VAT return might be declared incorrectly in the VAT return by our supplier or customers (e.g., different tax period reporting, different values and different VAT treatments)?

• How likely it is that there will be differences (material ones) between VAT ledger reports itemized according to transaction and the cumulative figures reported in the VAT return? Are penalties likely to apply?

The following actions may also help to prepare for the new requirements and to avoid increased penalty risks from differences arising between transactions reported in VAT returns and VAT ledger reports:

• Review the VAT data currently available to you and analyze whether it is sufficient to complete the VAT ledger

• Understand the requirements and set-up processes to compile the required information

• Identify the required data and extract the data needed to prepare the VAT ledger

• Update all IT systems to ensure they can gather and report the required information in the required format and on time

• Convert available data into the VAT ledger template (once the electronic form is published), e.g., by mapping the VAT codes of transactions in the ERP system to the appropriate sections of the VAT ledger form

• Carry out a simulated in-house tax audit with a focus on the correct implementation of VAT ledger processes to identify gaps and weaknesses

VAT payers in Slovakia should be prepared in advance to ensure seamless reporting and compliance with this new statutory obligation from its date of introduction.


Contacts

Americas

Jeffrey N. SavianoNew York: +1 212 773 0780Boston: +1 617 375 [email protected]

Jean‑Hugues Chabot+1 514 874 [email protected]

Asia‑Pacific

Robert Smith+8621 2228 [email protected]

Philip Robinson+41 58 286 [email protected]

Global Director — Indirect Tax

Gijsbert Bulk+31 88 40 [email protected]

Europe, Middle East, India and Africa (EMEIA)

William M. Methenitis+1 214 969 [email protected]

Neil Byrne+353 1 221 [email protected]

Global Trade



Notes


Notes

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Indirect Tax BriefingIndirect Tax Briefing — January 2014 5 In this publication, we bring you a mix of articles reflecting developments in indirect taxes including value-added tax

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