There is a surprising kink in the cable of the VAT / business tax reform in China. VAT is being withheld on royalties paid to foreign companies – see the articles below.

This is a serious matter, and so wide-spread that two of my clients have already complained about it.

Here is the issue: Chinese company uses copyrights/patents etc. from a U.S. company. Chinese company pays the U.S. company royalties. On the licensing service supplied by the U.S. company 6% VAT is due. This is collected by way of a reverse charge (self-assessment), by the Chinese company. So far, this is fine.

The U.S. company agreed that the royalty payment (license fee) would be “exclusive of any taxes”. This means that taxes must be added by the Chinese company. For the VAT, the expectation would be that the Chinese company has the right to credit or deduct the VAT on the license fee. Thus, VAT would not be a cost to the Chinese company. This is not in dispute.

According to the new rules, the Chinese company must withhold 6% VAT from the payment. Again, this VAT is recoverable to the Chinese company.

The solution is of course to change the license agreement in such a way that the U.S. company is compensated for the withheld VAT.

If you have any experience with this, please let me know!

Hollywood surprised by tax from China – L.A. Biz.
Hollywood Studios Clash Over New China Tax – WSJ.com.

I have been following KPMG’s annual VAT survey for a couple of years now, and frankly speaking the results blow me off my feet every year.

Insights from the survey this year include:

• Eighty-three percent of all respondents still have to establish VAT/GST performance goals that are visible and meaningful to the CFO.
• There is a significant shift towards tax departments taking ownership or accountability for VAT/GST globally.
• Sixty-four percent of businesses do not have a Global Head of VAT/GST
• Significant opportunities are being missed
• Businesses with effective VAT/GST management are still in the minority.

The fact of the matter is that I see exactly the same non-developments with most of my own clients. Yes, there might be an uptick in tax departments taking ownership of VAT, but how surprising is that?

Over the past 10 years or so, there have only been a handful (I am not kidding) of global businesses (GE and Amazon for example) that have taken VAT seriously and built a comprehensive strategy. That approach allows them to transition the tax department from a reactive “VAT Fire Department” into a trusted, pro-active business and consulting partner to various stakeholders in the global organization.

Perhaps it is time for auditors (i.e. the Big 4) to start putting more pressure on CFO’s to develop a stronger VAT function. Better VAT management improves shareholder value. In the M&A space I already see positive developments, where potential suitors demand a transparent and efficient VAT implementation.

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For my number-crunching readers:

The average standard VAT rate in the EU27 is 21.3% in 2013, slightly up compared with 2012.

In 2013 compared with 2012, six Member States increased their VAT rate, and only Latvia reduced it.

In 2013, the standard VAT rate varies from 15.0% in Luxembourg and 18.0% in Cyprus and Malta to 27.0% in Hungary and 25.0% in Denmark and Sweden.

EUROPA – PRESS RELEASES – Press Release – Taxation trends in the European Union The overall tax-to-GDP ratio in the EU27 up to 38.8% of GDP in 2011 Labour taxes remain major source of tax revenue.

Probably no VAT increase this July in Italy:

The new administration will seek to avoid a scheduled increase in the value-added tax and suspend collection of a controversial property levy known as IMU, Letta said.

via Letta Plans to Respect EU Budget Rules as Tax Cuts Prepared – Bloomberg.

Daniel Keller, who is a Friend Of The VAT Blog, wrote a comprehensive summary of global VAT registration requirements.

Daniel says:

It is important to note that the requirements (or even the ability) to register vary from country to country – some countries require registration for making any taxable supplies within their borders; some permit non-residents to voluntarily register; and others refuse to allow non-residents to register under any circumstances.

Have a look at his article here:

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The New York Times published an insightful article, see http://www.nytimes.com/2013/04/29/us/politics/bill-on-sales-tax-for-internet-purchases-divides-republicans.html?smid=pl-share

Here are the background materials for the VAT session in Avalara’s A-List meeting in Boston, April 23.

The most recent copy of the EU VAT Directive:
http://eur-lex.europa.eu/Result.do?T1=V3&T2=2006&T3=112&RechType=RECH_consolidated&Submit=Search

also see under “VAT Resources” in the right column.

“VAT under management” at Unilever:
http://www.us-vat.com/blog/?p=457

E-business and VAT:
http://www.us-vat.com/blog/?p=449

Also, don’t forget to sign up for the VAT Newsletter:
http://www.us-vat.com/blog/?page_id=255

Slides:

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