Slide Presentation Title - Institute for Professionals in ... · PDF fileSlide Presentation Title Philip Walton ... •A fixed establishment in a digital context requires a sufficient

Slide Presentation Title

Philip Walton Senior Tax Manager

Deloitte Tax LLP

Chicago, Illinois [email protected]

Lionel Van Rey Exec. Director

Ernst & Young

Chicago, Illinois [email protected]

mailto:[email protected]

2017 IPT’s Value Added Tax Symposium

Advanced VAT Session

2

AGENDA

Global contracts

Fixed establishments

VAT considerations in centralized supply chain

models and the impact of the OECD Base Erosion

and Profit Shifting (BEPS) project

The future of VAT / Global trends


Any Particular Topics To Cover?

3


Global Contracts

10


Typical Global Contract

Contractual arrangements

Physical flows

Legal flows

U.S. Multinational

Customer Parent

Invoice &

payment

Local Customer Subsidiary

U.S. Multinational

Supplier Parent

Global contract

Invoice and payment

Invoice &

payment

Local Supplier Subsidiary

Goods and services


Global Framework - Local

Contracting

U.S. Multinational

Customer Parent

U.S. Multinational

Supplier Parent

L

Party

to

GFA

Local Customer Subsidiary

Global framework agreement

(GFA)

Party

to

GFA


Physical flows

Legal flows

Local Supplier

Subsidiary

Invoice & payment

Goods and services


Local Contracts - Global Collecting

Agent


Physical flows

Legal flows

U.S. Multinational

Customer Parent

U.S. Multinational

Supplier Parent

L

Global framework agreement

(GFA)

Payment Payment

Local Customer Subsidiary (end user)

Global summary request for

payment

Invoice

addressed to

local customer

from local

supplier

Invoice

addressed to

local customer

from local

supplier

Local Supplier

Subsidiary

r

Goods and services


Fixed Establishment

14


• VAT concept of fixed establishment (FE) is different from the permanent establishment concept used for corporate income tax purposes.

• There is no definition of an FE in the EU VAT directive or in local country rules/guidance.

• Key decisions of the Court of Justice of the European Union (CJEU) relating to an FE are:

– Berkholz (Case C – 168/84)

– Faaborg–Gelting Linien A/S (Case C-231/94)

– Skandia (Case C-7/13)

– DFDS A/S (Case C-260/95)

– Welmory (Case C-605/12)

• Broadly, a VAT fixed establishment is created by:

- A sufficient degree of permanence;

- Sufficient human and technical resources so it can (i) receive and use the services supplied to it for its own needs; or (ii) provide the services which it supplies.

Concept of VAT fixed establishment

and key triggers


• To determine the place where the supplier/recipient of a service

belongs, it is necessary to identify the country where this person

has:

– A business establishment; or

– Some other fixed establishment.

• Where the supplier/recipient has establishments in more than one

country, the supplies made from/received at each establishment must be

considered separately.

• For each supply of services, the establishment that is actually

providing or receiving the services normally is the one most directly

connected with the supply, but all facts should be considered to make

this determination.

The importance of

establishment


• The CJEU held in Welmory that a foreign company can be deemed to have a purchase FE in the member state of the supplier by using the supplier’s infrastructure.

• A fixed establishment in a digital context requires a sufficient structure, as regards human and technical resources, such as computer equipment, servers and software.

• Does the CJEU decision expand the scope of the concept of a VAT FE?

• Could the required structure be owned by a third party instead of the business?

• Tax authorities throughout the EU seem to be applying Welmory by either:

• Taking the position that Welmory does not change the status quo regarding determining the existence of FEs going forward; or

• Have not yet published any opinion or guidance on the impact of the case in their jurisdictions.

• However, it is possible that the authorities in Latvia, Lithuania and Poland may rely on Welmory.

Concept of a VAT fixed

establishment and key triggers -

Welmory


Example of different

interpretations of FE in the EU

XYZ GmbH

EU Business

Customers

Invoices

Germany

Spanish

Branch

Lux

Branch

Local

Service

Suppliers

Local

Service

Suppliers

Local

Service

Suppliers

Local

Service

Suppliers


• XYZ GmbH is a German-based company that sells advertising space in magazines.

The magazines are provided for free throughout the EU (metro entrances, shows, etc.)

• XYZ’s headquarters (HQ) is located in Germany, and XYZ is registered for German VAT

purposes.

• XYZ has branches in Luxembourg and Spain.

• Each branch has permanent offices, with more than 20 permanent employees each.

• Both branches only provide marketing services to the German HQ. No services are

provided to customers (e.g. the branches do not issue invoices) and, thus, they are not

VAT-registered in Luxembourg or Spain.

Example


• The branches submitted cross-border VAT refund claims (ex -“8th VAT

Directive” refund claims) to recover local VAT incurred (mainly) on services in

both countries.

• Spain accepted the claim.

• Luxembourg rejected the claim on the grounds that (based on articles 44

and 196 of the EU VAT directive) suppliers’ invoices should have been

sent, without any Luxembourg VAT, to the German HQ.

Example (cont’d)


VAT considerations in centralized

supply chain models and the impact

of the OECD BEPS project

14



Physical flows

Legal title

Toll Manufacturer

(local)

Third-Party Customers

Flash-Title LRD

(local)

Parent Company

Principal Operating Company

Toll manufacturing

agreement

Raw Material Suppliers

LRD agreement

Commissionaire (local)

MfgCo operated warehouse

Finished goods

Commissionaire agreement

Country X

Country Y Country Z

IP Holding Company License

agreement

POC Website

Orders

Typical centralized supply chain

model


Key indirect tax considerations for

centralized supply chains

• The three “C’s” of indirect tax when considering centralized supply chains:

• Compliance: VAT registration, identification of end-to-end VAT compliance requirements, customs duty classification of goods, indirect tax implications of transfer pricing and intercompany agreements, correct set up of ERP systems / tax engines, ensuring compliance.

• Costs: Incurring local VAT that is irrecoverable, absolute VAT costs (e.g. due to poor management or non-recovery of foreign VAT, double taxation arising from mismatched systems).

• Cash flow: Incurring local VAT that cannot be recovered for a long time, transferring stock from LOCs to a principal prior to “go live,” VAT accounted for on sales but not yet paid by purchasers, VAT paid on imports and purchases that has not been reimbursed or offset.


Consequences of failing to take proper

account of indirect tax considerations

• Model is unlikely to deliver the full operational and financial benefits.

• Inability to move goods across borders quickly and efficiently.

• Elevated risk of VAT audits and assessment.

• High risk of indirect tax costs and cash flow impact.

• Likely increased level of management time to make needed adjustments.


BEPS actions relevant to centralized

business models

Action point Areas of impact

1. Digital economy • Allocation of taxable income • VAT/GST • PEs

5. Preferential tax regime (harmful tax practice)

• Potentially increased requirements for people activities in country (substance) • Groups benefitting from tax rulings may find benefits lost

7. Preventing avoidance of PE status

• Extend scope of article 5(1) to include local entities not in business on their own account (“own name and own account”)

• Restrict scope of article 5(4) to exclude activities not “auxiliary or preparatory” (e.g. holding of stocks) • Extend scope of article 5(5) to include situations where the economic effect of local activity is to commit the principal

(e.g. commissionaires) • Restrict scope of article 5(6) to exclude related party entities • Add together activities that take place in the same country, even if at different physical locations

8. TP – Intangibles 9. TP – Risk and capital 10. TP – High risk transactions

• Ensure that TP outcomes are in line with value creation (more use of profit split in global value chains/IP?) • Management- fee type payments less accepted • Increased need for substance • Risk of recharacterization

13. TP documentation/ CbC reporting


• Anti-fragmentation rule – The rule essentially require the determination of whether activities in a jurisdiction are preparatory or auxiliary to be made on a group-wide basis.

• Tighter agency PE rule – A dependent agent who works on behalf of an enterprise and who “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise” may give rise to a PE

• This language may result in commissionaire arrangements creating a PE, and commissionaires may need to be replaced with an alternative (e.g. a limited risk distributor)

1

2

3

Article 5: Permanent establishment (PE) – Under most bilateral income tax treaties, an entity that conducts its commercial activities through a fixed place of business within a jurisdiction or conducts its activities through a dependent agent that has the authority to conclude contracts will give rise to a PE. If a PE is created, the profits attributable can be taxed, and the existence of a PE also may bring additional tax and financial reporting requirements. Article 5(4) typically provides a list of activities excepted from the PE definition.

All article 5(4) exceptions to the definition of PE now must be of a preparatory or auxiliary nature

Taxable presence


Post-BEPS model


Physical flows

Legal title

Contract Manufacturer

(local)


Master Distributor

Contract manufacturing agreement


Stockholding LRD

(local)

MfgCo operated

warehouse

Finished goods

LRD agreement

Country X

Country Y Country Z

Principal Operating Company

Raw materials

SalesCo operated

warehouse

Business and IP license agreement

Master distributor

• Takes and maintains ownership and title of products during transit

• Can own inventory for token duration

• Has limited margin

• Requires substance with respect to logistics

Stockholding LRD

• Contractually transfers “risk of loss” to POC/master distributor

Contract manufacturer

• Purchases raw materials

• Holds legal title to inventory

• Bears inventory risk

Principal operating company

• Sets overall business strategy

• Bears marketing costs and forex risk

• Approves manufacturing and distribution budgets

• Manages inventory Has significant substance


Production company • Purchases and converts raw materials into finished

goods • Determines manufacturing budget within

guidelines and detailed production scheduling • Holds legal title to inventory • Bears inventory risk

An alternative to buy-sell

Value added service fee models


Physical flows

Legal title

Production Company

(local)


Value Added Services Principal


Sales Company

(local)

MfgCo operated warehouse

Finished goods

Country Y Country Z

U.S. Parent

Raw materials

Distributor operated

warehouse

Business and IP license agreement

Supply agreement

Country X

Value added services principal

• Sets business strategy

• Licenses manufacturing and distribution rights to local companies

• Bears marketing costs

• Has significant substance

U.S. parent

• IP owner

• Licenses IP and distribution and manufacturing rights to franchisor

Sales company

• Sells to end customer; develops customer relationship

• Determines end prices within guidelines

• Bears associated risk and title Value added

services agreement Value added

services agreement


Services principal

Value added service fee models

Sales Company (local)

Value Added Services Principal

Services agreement Third-Party

Customers

Country X

Country Y

Value added services agreement


Physical flows

Legal title Service Provider (local)

U.S. Parent

Services agreement

Service provider

• Coordinates/provides local services

• Bears minimal risk and receives cost-plus compensation for services rendered

Value added services principal

• Centralizes beneficial ownership and control of IP rights

• Acts as centralized HQ for strategic commercial decision-making and risk-taking

• Develops business plan

• Provides direction and oversight to the service and sales companies

• Sets pricing corridors for sales companies

Sales company

• Contracts to deliver services to end customer; develops customer relationship

• Determines end prices within guidelines

• Acts as contractual party with customers

• Credit risk and management


The future of VAT / Global trends

24


VAT – Action Plan / the future

25

On April 7, 2016, the European Commission presented an Action Plan on VAT that aims to support business, tackle fraud and help the digital economy. Recent and ongoing policy initiatives • Removing VAT obstacles to e-commerce in the Single Market. • Simplification package to support the growth of small and medium-sized enterprises.

Urgent measures to tackle the VAT gap • Improving cooperation within the EU and with non-EU countries. • Making tax administrations more efficient. • Improving voluntary compliance • Improving tax collection

Towards a robust single European VAT area • Definitive VAT regime for cross-border trade.

Towards a modernized VAT rates policy • Provide more freedom for EU member states on VAT rate policies


Global updates and trends

(Technical) Legislative Changes

• VAT / GST introduction in Egypt / GCC / India

• Brexit

• BEPS environment (CbC reporting, PE positions)

• Indirect tax reform / rate increases (e.g. Colombia)

Compliance and Reporting Changes

• SAF-T / e-audit requirements in a number of countries (Malaysia, Norway, Poland etc.)

• Spain SII reporting obligations

• Move towards e-filing of indirect tax returns

Tax Authority Behavior

• Increased audit activity, recruitment and litigation

• Use of data analytics to support audit activity (e.g. in Brazil)

• Greater access to taxpayer systems (e.g. China)


Consequences of Brexit

Brexit

On June 23, 2016, the U.K. voted to leave the EU, and the government triggered the exit procedure on March 29, 2017, by invoking article 50 of the Lisbon Treaty.

Potential consequences of Brexit:

• The UK will no longer be a member of the EU single market. Moving persons, services, goods and capital in and out of the U.K. will not be as easy as it is now.

• Many U.S. companies chose the U.K. as an EU HQ and are considering whether this will continue to be viable.

• The U.K. benefits from the EU financial services passport, which allows companies with a regulated entity in one country to do business throughout the EU. Many EU HQs in the UK serve as an entry to the EU financial markets. Post-Brexit, it may not be possible from the UK.

• The U.K. regulators have a reputation as being flexible. Moving from the U.K. may mean dealing with other, less flexible, regulators.

Typical VAT attention points

• The EU VAT directive is not being repealed wholesale and its principles may still continue to apply after Brexit; some new legislation may be needed in the U.K.

• Leaving the EU market- import and export when trading with EU, but more VAT recovery rights for EU parties doing business with the U.K.

• Companies that transfer assets should analyze whether VAT is due on a transfer. With financial institutions only having a limited recovery right, VAT on a transfer may form a cost.

• Setting up business in another EU member state means

− New rulings and relationships with local tax authorities;

− Financial systems updates;

− Changes in supply chain and contracts with third parties;

− New suppliers; and

− New local legislation to adjust to (VAT recovery, VAT treatment of products).

BREXIT


Tax authorities’ focus on

technology

The trend in Europe is to move towards e-audits and the delivery of a standard audit file to tax authorities

In Australia, large businesses have been assigned a risk rating by the Australian Tax Office since 2010. This rating is derived from extending and enhancing data analytics and risk profiling techniques

In Brazil, the filing of corporate tax returns were eliminated in 2014 due to large amounts of required data that the tax authorities already maintain

In China, new regulations require large taxpayers to grant the tax authorities increased access to their internal tax risk control systems

In Mexico, monthly XBRL filing has been introduced In Malaysia, the

tax authorities have designated a standard file output to assist with GST audits

In Singapore, the tax authorities are looking at how technology tools can be used to e-file returns and to link together to enable businesses to automate all of their compliance processes


International debate on

technology in indirect tax

• Various OECD initiatives:

− 2015 BEPS action plan and VAT and GST guidelines

◦ B2C rules in a number of countries in Asia Pacific

◦ Increased information sharing (across borders and tax types

− 2016 OECD report on advanced analytics for better tax administration

− SAF-T standard (2005 - v1.0, 2010 – v2.0)

• 2016 European Commission Action Plan on VAT

• 2016 first CIAT (Inter-American Center of Tax Administrations) technology meeting


Developments Global/EU/Local

SAF-T

• OECD Guidance for the Standard Audit File – Tax, May 2005

• OECD Guidance for the Standard Audit File – Tax, April 2010

• ISO/PC 295 Audit data collection

• EU directive

• EU regulations

• Local laws on SAF-T

Global: OECD & ISO

Europe: EC and Fiscalis Working Group

Local: Individual countries


• Policy review: Controls and policy may need to be tightened due to the large volumes of data being requested by the tax authorities.

• Process manuals: Manuals will need to be updated for SAF-T items, and some definitions may need to be updated as part of this process to promote standardization.

• Training: Training will be needed for users directly involved in the SAF-T process and for other users around the business who may be posting transactions or maintaining master data.

• Roles and responsibilities: The roles and responsibilities will need to be as part considered as part of the project team and ongoing business, which may have an impact on resources.

• Data sources: Data may be coming from different systems and in different formats.

• Data collection: Data may have to be consolidated before testing/transmitting.

• Data limitations: Whether all of the data required can be provided and recognition that some transactions/data may be easier to obtain than others.

• Audit trail: Data for the file should be reconciled and an audit trail kept to prepare for a potential audit.

• Legacy systems: Some data may be coming from systems that are older or unsupported, which can create obstacles.

• Large volume: Significant amounts of data means the system will be open to increased scrutiny.

• Extraction programs: Consideration should be given to how these will work across multiple systems

• Assembly and storage: Files need to be pulled together and tested and how technology can help.

• ERP localizations: Data/transactions may not be standardized, even within the same systems.

• Local adjustments: Consideration needs to be given to how adjustments are reflected in the system and whether any currently are kept on spreadsheets. The timing of adjustments also may be a consideration.

• Reconciliations: Audit trails and reconciliations should be performed in the case of an audit.

• Extraction: A process will be needed for extracting, testing, storing and transmitting data, where required.

• Governance: Better controls may need to be implemented across systems.

• Impact: Impact on tax, finance and IT processes will need to be considered.

Transition to e-Audits

People Data

Technology Process


Questions and Answers

32


About this presentation

33

This presentation contains general information only and the respective

speakers and their firms are not, by means of this presentation, rendering

accounting, business, financial, investment, legal, tax, or other

professional advice or services. This presentation is not a substitute for

such professional advice or services, nor should it be used as a basis for

any decision or action that may affect your business. Before making any

decision or taking any action that may affect your business, you should

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firms shall not be responsible for any loss sustained by any person who

relies on this presentation

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