Ask me anything about VAT

Did you see my homepage at www.us-vat.com?

If you want to connect in person, there are plenty opportunities to reach out to me – I am only a click away.

You can send an email to mark@us-vat.com, or give me a call on 646-397-5855. You can use Skype – my skype name is markhoutzager.

Please sign up for my email list (under “Subscribe” in the right column) if you are interested in Value Added Tax in general, and its impact on U.S. companies in particular.

Also, because there are around 500 entries on this blog, you will want to use the search function. It is in the right column, under “Search here”.

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India: proposed GST explained

It is difficult to find a comprehensive explanation of how the proposed GST in India works. In this brief article, the author discusses two options and provides details of the “Concurrent Dual GST” that is currently on the table.

Have a look at http://taxguru.in/goods-and-service-tax/indian-model-goods-service-tax-gst.html

 

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Avoiding VAT fraud

The French tax authorities published a list of “red flags” that identify potential VAT fraud. These flags include:

  • Certain general characteristics of the supplier—e.g., invalid intra-community VAT number, engaging in operations that are not related to its normal activity, operating in a sector prone to carousel-type fraud
  • Characteristics of the transaction—e.g., an abnormally below-market price, no sales contract, large down-payments compared to the total amount of the invoice
  • Terms for payment—e.g., no bank account, demands for cash payments or for quick payments

The KPMG member firm in France has provided a detailed overview – of course these tips can be applied in any VAT country, not only France.

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A VAT in the U.S., tested

Tax reform has been the flavor of the year here in the U.S., and Democratic Senator Ben Cardin has thrown his hat into the federal consumption tax arena. Cardin launched a proposal for a “Progressive Consumption Tax” (“PCT”) – see http://www.cardin.senate.gov//pct.

The non-partisan Tax Foundation did a thorough job in slicing and dicing the numbers and their conclusion is very supportive of a federal consumption tax like PCT. Have a look here: http://taxfoundation.org/article/analysis-senator-cardin-s-progressive-consumption-tax

They say:

Assuming a 10 percent consumption tax rate, the Tax Foundation says the economy would grow by 4.4 percent over the long term. More than one million jobs would be created and after-tax wages would rise by 6.5 percent. But federal tax revenue would drop by $163 billion a year, even after accounting for the economic growth.

All income groups would see a rise in adjusted gross income under Cardin’s plan. Low-income earners would see the biggest raises, while gains for the upper-class would slightly out-raise the middle-class.

Republicans fear a federal consumption tax for government growth – won’t necessarily happen if the federal tax revenue drops – check.

Democrats fear the regressive effect of a federal consumption tax – won’t happen, particularly if the lowest income category can receive cash refunds with debit cards through the foodstamps / EBT system – check.

Another summary is here:
http://www.washingtonexaminer.com/the-first-pro-growth-democratic-tax-plan-in-50-years/article/2568129

Hat-tip to Dan Keller.

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ECJ: Only “economic activities” create the right to input VAT credit

As with most rulings of the European Court of Justice (ECJ), the most recent one was not earth-shattering for most member states (Larentia + Minerva mbH & Co. KG – case # C-108/14).

The question at hand was whether a holding company that is actively involved in the management of its subsidiaries is entitled to input tax credit – particularly for input tax on tax, legal advice in relation to the purchase of shares.

The answer was a resounding “yes”. Active management of subsidiaries is an economic activity. The holding is to that extent a taxable person, and if the taxable person does not make any VAT-exempt supplies, the input VAT is recoverable. The “extent” of economic activities is the driver for input VAT reclaim.

The condition for input tax reclaim is that it is only allowed to the extent that the holding company actively manages the subsidiary, i.e. only to the extent that the company has economic activities. Under circumstances, a holding company can be a “partial” taxable person – no active management means no economic activity, means no input tax reclaim.

Interestingly, the ECJ still does not require a company to have a commercial activity – an economic activity is enough to qualify. No goal for profit, however distant in the future, is required; there is no test for commercial viability of a business before input tax reclaim can (must!) be allowed.

Outside the world of holding companies this ruling has little impact. The Netherlands has a long-standing public ruling on including holding companies in a fiscal unity, which mirrors most of this case, and has been vetted by the ECJ in 2013 (case C-65/11, see https://tinyurl.com/q5oojfg) (Abbreviated to fit in this column). The ECJ has left it up to individual member states to determine whether active holding companies can be a part of a fiscal unity / VAT group, if such a thing exists in that member state.

PWC is doing a webcast on the subject on July 20 – see here to register: http://www.us-vat.com/blog/?p=1025

The text of the ruling is below.

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Greek debt crisis and VAT

Greece has agreed to “streamline” their VAT system and broaden the tax base to increase revenue – by July 15, which is this week. It looks like supplies of food and entertainment would move to the standard rate, but very little information is currently available or even confirmed.

NBC says:

“The Greek meal sales tax in the bailout proposal being considered Sunday by European leaders would boost it from the current 13 percent to 23 percent, while hotels would see room sales taxes rise from 6.5 percent to 13 percent.”

If there is more to report on Greek VAT, you will see it here. Yesterday’s agreement is below for your info.

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U.S. e-sellers: VAT due in Korea

This is in from PWC Korea:

PwC Korea advises that with effect from 1 July 2015, electronic services such as applications, music, films, etc provided either directly by a foreign service provider, or through an offshore open market app store, are subject to 10% Korean VAT.

A simplified VAT registration should be made within 20 days from the date of commencement of providing services under this regime. So an off-shore e-service providers will be required to be registered by 20 July 2015.

I thought this VAT liability only kicks in when U.S. companies are selling online services to individuals. For example, my impression is that no Korean VAT should be due if a U.S. multinational charges their Korean subsidiary for any electronic service. Let me know if this troubles you, and I will find out more.

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Uber and VAT: Employees vs. Contractors

Uber has over 160,000 drivers here in the U.S. only, and needless to say that their global reach is expanding rapidly. They are now faced with the question whether the drivers are employees or contractors. The answer has great impact for tax, and also for health benefits, labor regulations – you name it.

It is not a novel issue at all. Truck drivers, cabbies and similar commercial motorists face similar challenges, not to mention the increasing and diverse group of free-lance, “independent” consultants that only work for one single client.

Today (July 10) the New York Times discussed the Uber case – see the article here: http://nyti.ms/1J6JT7h. Uber says that the employees are independent, because they are free to pick their rides and have total flexibility. The drivers (or at least some of them) say that they are employees, because Uber dictates the circumstances under which they do their work. For more on the drivers’ position, have a look at page 4 of the pdf below – “Statement Of Facts”.

The lawyer for Uber says “That people have flexibility in their work hours does not make them independent contractors.”. That seems to be a narrow interpretation of the facts, but, on the other hand, there does not seem to be much more flesh to the idea that Uber drivers are independent.

For VAT, individuals can be taxable persons – there is no requirement of incorporation. Also, even if the work you do is illegal (like Uber in some countries), VAT is still due – have a look at the “Happy Family” case of the European Court of Justice (click the link for a pdf). The notion of a taxable person for VAT is different from a taxable person for income tax!

The determination whether a person is independent is key. The EU VAT Directive states in article 9(1):

‘Taxable person’ shall mean any person who,independently, carries out in any place any economic activity, whatever the purpose or results of that activity.

and in article 10, addressing the issue of independence:

The condition in Article 9(1) that the economic activity be conducted ‘independently’ shall exclude employed and other persons from VAT in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability.

So “working conditions, remuneration and the employer’s liability” all play a role in determining whether a person is a taxable person.

There are also a number of national and European court cases, that invariably point to VAT being a broad-based tax, and thus the definition of a VAT taxable person is very broad as well. Because I don’t know the minute facts of the Uber-driver relationship, I will stop here and reserve my opinion for a later moment.

But needless to say that even if a Uber driver is not an employee, but a taxable person for VAT (i.e. he is independent), not all is well. He might be a ‘small undertaking’, which would relieve him from many compliance requirements. And he will still need to understand the legal relationship with Uber and the customer – is Uber buying his services, or is the driver selling the services directly to the customer, with Uber as a disclosed intermediary? What about the legal and practical differences between the various Uber offerings (Uber-T, Uber POP, etc.)? All very interesting from an academic perspective, but unfortunately a major challenge in practice!

Obviously, the outcome of the U.S. lawsuit will not have any direct effect on the position of Uber drivers outside the U.S. But it will add ammunition to tax authorities who will want to test the “independence” of all contractors – be it drivers or other consultants!

BTW – the definition of taxable person for VAT/GST is largely the same across the globe. I provided the EU definition above as an example.

UPDATE: also see the comment below.

PS1: Although I’d love to be an independent VAT consultant for Uber, I have not recently provided them with any tax advice.
PS2: If you read Dutch, have a look here: https://dathetklopt.wordpress.com/2015/04/21/uberpop-chauffeur-draag-toch-gewoon-btw-af/. Unfortunately, the writer does not address the question of independence of the Uber driver.

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