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EY: 2015 country summaries

EY published a bulky overview with VAT changes, by country. Claudio Fischer from EY Zurich wrote an interesting editorial with an unsurprising tag line:

“Ignoring recent developments in indirect taxes or not being compliant with indirect tax obligations has definitely become an expensive oversight for companies of all sizes, whether they are active in the local market or on a global level.”

Save a few trees, and don’t print this pdf:

Download (PDF, 2.93MB)

 

 

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ECJ: No reduced VAT rate on e-books

“Courts don’t make laws” is a pretty strict rule that applies in most countries. The role of justices is limited to explaining existing laws – this separation of powers between the legislative function and the judicial function of a government (championed by Montesquieu in the mid-18th century) applies in most developed jurisdictions.

So once again the European Court of Justice (ECJ) issued a predictable ruling: there is no rule in the EU VAT legislation that allows EU member states to apply the reduced rate on electronic services, including e-books. And countries are not free to make their own VAT rules. Alas, people from Luxembourg and France, your e-books will be taxable at the standard rate.

By the way, Italy applies the reduced rate on e-books as well. They changed rates on January 1, 2015 (click here for more info), and were not included in the Commission infringement procedure against Luxembourg and France.

Luxembourg had been charging 3% VAT on e-books, which will now increase to 17%. France had been charging 5.5%, which will now increase to 20%. Italy’s new reduced rate for e-books was 4% and will now be the standard rate of 22%.

Two things will happen now:

1. Member states will push for adding e-books to the list of supplies that can be taxed at a reduced VAT rate. This is an “annex” to the VAT Directive. Reuters reports that a EU Commission spokeswoman said:

“The Commission appreciates that member states may want to define their own priorities, including on culture policy, in their taxation policy. This should be done within the EU legal framework. This is why the Commission will address this matter through the extensive overhaul of the VAT system which is currently being prepared. We hope to be able to communicate on this next year.”

2. France, Luxembourg and Italy will have to think about what to do with supplies of e-books that in the past have been incorrectly charged with the reduced rate. There is plenty precedent for businesses to successfully take the position that they could rely on communications by the local tax authority that the reduced rate applies.

So I don’t fear for the past e-booksellers’ profit margins – but from now on these e-businesses will either have to absorb the additional tax  (14% additional in Luxembourg, 14.5% in France and 18% in Italy) as a cost, or they will have to increase their selling prices.

This change applies to US-based e-sellers as well. They too will now need to start charging the standard rate to their Luxembourg, French and Italian customers.

The ECJ decisions are below.

Download (PDF, 782KB)

Download (PDF, 782KB)

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Imports in Spain

Are you importing goods into Spain as a non-resident? From January 1, 2016 your customs rep won’t be able to claim import VAT on your behalf. See the news item here: http://www.vatassociation.org/vat-news/news-from-iva-members/137-import-vat-in-spain-no-longer-refundable-to-customs-representatives.

As a result, you should start the process of VAT registration in Spain (which is a pain as a non-resident – US companies need a local agent), get your customer to import the goods or – if you were planning to expand your Spanish business anyway – establish a local legal entity. That entity (Sociedad Anónima or S.A.) will then purchase the goods and subsequently import, warehouse and on-sell the goods as your local distributor.

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Get ready for SAF-T

SAF-T (Standard Audit File for Tax) is slowly but surely finding its way to tax authorities. This is a standardized communication between taxpayers and authorities. Initially this was limited to the submission of tax returns (and accessory filings, like the EU sales listings), but authorities increasingly use this standard for broader audit requirements, like submission of invoices and VAT worksheets.

SAF-T is generally part of an even broader effort of authorities to nudge companies to embrace a “Tax Control Framework” (TCF). The idea behind this is that companies have the tools available to better manage their VAT position. In addition, companies that apply TCF generally look for a more transparent relationship with the tax authorities. If you google “Tax Control Framework” you will find lots of reports and sample processes. Also see here: http://www.iota-tax.org/iota-news/tax-control-framework-the-netherlands.html for a comprehensive overview.

Taxback now reports on a new filing requirement in Hungary, which is in line with what we have seen in countries like Austria, Portugal (link in Portuguese) and Luxembourg, that have specific legislation on SAF-T requirements.

Starting January 1, 2016, business that are registered for VAT in Hungary (this includes non-residents) will be required to use specific software that will allow them to export invoices or data required to the tax authorities. The purpose of this is to ensure facilitation of audits for control purposes and to speed up transactions.

If you want to know more about improving global VAT management, please drop me a note. Over the past years I have been working with a couple of my global clients specifically on this matter. I will then talk you through the slide below, which is a great example of how important VAT management is for your global organization.

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VAT on warranties?

Here is a great example of a very practical, day-to-day VAT question that is going to be decided by the European Court of Justice (ECJ).

In my previous post I noted that rulings of the ECJ are often predictable. The discussion here is not yet about a ruling, but rather an opinion (a draft ruling) by the Advocate-General. The case is Mapfre C-584/13. See here for the source: http://tinyurl.com/k9rwfjs (I had to shorten the link or it wouldn’t fit on the page). It is not yet available in English.

The case is that a company sells warranties independent of the underlying supply (in this case the sale of a second-hand car). The question is if this is an exempt insurance transaction or a taxable “general service”. Reference is made to Article 2 and Article 13(B)(a) of the Sixth VAT Directive.

The Advocate-General follows the well-trodden path of separating independent supplies where possible. He concludes that if the warranty is provided by a third party, the service is VAT exempt. In practice, this means no VAT on the warranty fees, but there may be an impact on any repair expense further down the road. If the repair is directly related to the exempt insurance, then the VAT on the repair is not recoverable.

On the other hand, if the sale of the warranty is directly related with the underlying supply (in this case the sale of the second-hand car), then the warranty is taxable as a part of the payment for the car. That means that if the warranty is sold at the same time, on the same agreement and on the same invoice, it is part of the sale and thus taxable.

But what if the car salesman sells the warranty not in his own name but “on behalf of” the insurer, at the same time of the sale, but with a separate agreement and separate invoice? The Advocate General doesn’t address this question, but I would say that the supplies (used car and warranty) are then sufficiently separated.

Like in the Skandia case, the Mapfre draft ruling is very predictable. At least in Dutch case law there are a couple of Supreme Court precedents that I know of, and I’m sure that other EU countries have similar case law. The Advocate General could also simply have ruled that this is a so-called “acte clair” and that the ECJ should not waste their time on this question.

Much more interesting is the question of whether the VAT on the future repair expense, paid for by the insurer, is recoverable, and by whom. Surely some EU country has case law about that question.

24 hours waranty

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Skandia: A Storm In A Teacup

One of the main character traits of the European Court of Justice (ECJ) is that their rulings are generally rather predictable. This may sound odd – if the rulings are predictable, why would local courts bother to refer questions to the ECJ in the first place?

The main reason is to have national regulations or local practices reconciled against the VAT Directive and codified – written into stone so that every tax inspector and tax payer in the European Union can better comprehend the tax rules. Also, asking for a ruling is helpful in cases where a certain tax practice is common and clear in some EU member states, but still up for discussion in others.

The Skandia ECJ case is a great example. I have briefly highlighted the ruling in my post here: http://www.us-vat.com/blog/?p=887, where I added a pdf file of the actual ruling.

The gist of the ruling is this: Supplies by a head-office to a foreign branch are within the scope of VAT if the branch is part of a VAT group / fiscal unity.

Now the UK authorities confirm that:

“Businesses must treat intra-entity services provided to or by such establishments as supplies made to or by another taxable person and account for VAT accordingly:

  • services provided by the overseas VAT-grouped establishment to the UK establishment will normally be treated as supplies made in the UK under place of supply rules, and subject to the reverse charge if taxable

  • services provided by the UK establishment to the overseas VAT-grouped establishment will normally be treated as supplies made outside the UK under place of supply rules. Therefore they will need to be taken into account in ascertaining input tax credit for the UK establishment. If the supplies are reverse charge services, they should be reported on the trader’s European Sales Listing of such supplies”

and there is more guidance on this shortly:

“HMRC will confirm which other member states will operate Swedish-style ‘establishment only’ VAT grouping following the Skandia decision as soon as possible, and update guidance accordingly.”

For the entire text of the UK guidance see here: https://www.gov.uk/government/publications/revenue-and-customs-brief-2-2015-vat-grouping-rules-and-the-skandia-judgment/revenue-and-customs-brief-2-2015-vat-grouping-rules-and-the-skandia-judgment

Michel Schrauwen over at Deloitte in the Netherlands confirms that the Dutch position won’t change either:

“We thus feel it is logical that if a Dutch head office that forms part of a Dutch VAT group receives supplies from an overseas fixed establishment, these transactions will also basically continue to be tax-free.”

See here for his analysis: http://www2.deloitte.com/nl/nl/pages/tax/articles/court-of-justice-judgment-skandia.html

By the way – all this only applies to cross-border services. The VAT liability on supplies of goods between head-office and a foreign branch follow the shipment of the goods. Therefore, these are zero-rated in the country of the head-office. At the receiving end, import VAT or the intra-EU acquisition rules apply.

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Puerto Rico: 16% VAT from April 1, 2015

Tax-News.com reports on Puerto Rico is taking bold steps towards tax reform: lower income tax rates and a real VAT from April 1, 2015.

“In addition, it is proposed that those on incomes below USD35,000 would get a refund of VAT, and those on incomes below USD20,000 would receive a full refund. Prescription medication, groceries, private property leasing, and public schools would be exempt from all taxes, [said Puerto Rico’s Governor, Alejandro García Padilla].

“With this tax system overhaul we can help direct the island’s revenues towards the future, and ensure that we will borrow less, pay our current debts, and pay down the debt previous administrations committed to without the appropriate means for repayment,” he concluded.”

See more at: http://www.tax-news.com/news/Puerto_Rican_Income_Tax_Rates_To_Fall_Under_VAT____67265.html

Quite a few people that are involved with or affected by this tax reform have been critical of the chances of success – nevertheless it would be great to see how this all works out.

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