Tax authorities suffer from budget cuts

A letter to the editor in this morning’s Dutch daily “De Telegraaf” pretty much sums up what tax authorities world-wide have been suffering from: lack of money.

An auditor with a 40-year track record at the Dutch revenue service says that the operations of midsize and larger companies have become so complex, that with the current budget a thorough tax audit is almost impossible. The politicians want a smaller revenue service, but the number of companies has only increased.

The auditor also mentions that  the current population of tax inspectors is simply not up to the task of ensuring that the correct amount of tax is collected.

From my perspective, these thoughts are spot on. Where I am involved with VAT audits, inspectors hardly take the time to get to understand how the company’s operations work, and are solely focused on “denying as much input tax credit as possible”, or “rejecting as many zero-rated exports as possible”. Sometimes it seems like indirect taxes are too “embedded” in the company’s complex global operations for a tax auditor to really understand. Direct taxes are a bit more removed from the supply chain and seem easier to review.

This structural complexity, but also the lack of audit risk, may be among the reasons why VAT is not very visible to a company’s CFO and even the tax department, even though an average MNC’s VAT risk is easily 25%-45% of its global sales.

Also, the much-heralded initiative of the Dutch revenue service to agree on a “tax covenant” with large companies does not seem to have taken off. This is an on-going agreement where the tax man agrees not to bother a company too much, provided that the company voluntarily discloses all potential tax issues.

Unfortunately I don’t have an English translation of the letter – Dutchies can refer to this link:

http://www.telegraaf.nl/watuzegt/22270056/___Belasting_innen_raakt_uit_zicht___.html

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OT: The conference call visualised

What would a conference call look like if all attendees would be in the same room: a cool idea (it’s an ad for leadercast.com).

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South Africa kicks off VAT on online sales

Last week the tax man in South Africa published draft legislation that taxes online sales to South-African residents. Although the rules look pretty straight-forward, there are lots of open ends. A couple of initial thoughts:

  • How do they want a U.S. online seller to register in South Africa? There is currently no mechanism to register, file returns and pay taxes for non-resident businesses.
  • This applies to sale to both South-African resident individuals as well as businesses. A reverse charge for the latter would be much simpler.
  • In the EU only “automated” online sales (f.e. downloads of software) are covered by the e-commerce VAT rules. Non-resident sellers of for example one-on-one teaching (say via Skype) are not required to account for VAT. The South African rules include this type of services, which can be challenging if an exemption applies for classroom teaching.

The rules are slated to take effect from April 1, 2014.

Have a look here for more info:

http://www.bdlive.co.za/business/2014/01/31/government-wants-to-levy-vat-on-foreign-e-commerce-firms

http://www.news24.com/Technology/News/SA-eyes-VAT-on-e-books-apps-games-20140131

The document is here:

Download (PDF, 217KB)

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No physical export? No zero-rate!

Over the past years, I have been working with a number of companies that use manufacturers in Asia. Typically, these manufacturers would be so-called “OEMs” which stands for Original Equipment Manufacturers. These companies would produce parts or even finished goods that would be branded with my clients’ brands.

The bulk of these OEM goods would be exported from the country of manufacturing. However, recently the trend seems to be to aggregate parts into the country of manufacturing, and then either assemble into finish product, use parts for repairs, or sell parts or finished goods outright to a distributor who picks up locally (“ex-works”).

The “ex-works” incoterm is the poison pill for cross-border trade. For the sale of goods, VAT looks at the ship-from and ship-to addresses. If they are in the same country, VAT is due – even if the bill-to party is in another country.
See https://en.wikipedia.org/wiki/Incoterms for more info on incoterms.

In my example, this leads to a VAT liability of the OEM. He will have to charge VAT to the buyer, simply because the OEM drop-ships within the same country.

The buyer, in his turn, needs to understand his tax position in the OEM country. If the local laws allows for a non-resident to register for VAT, then the buyer can attempt to charge VAT to the next party in the supply chain. That way, he can offset the VAT incurred on the OEM purchase. However, in a number of countries outside the EU, a VAT registration may create an income tax liability as well, and thus create further tax headaches.

Buyers from OEMs often strong-arm OEMs into zero-rating their local deliveries, and with tough competition and limited margins OEMs often were forced to oblige. And ever so often the OEMs got away with charging the zero-rate on local deliveries.

As Taxand reports, this practice has now come to an end in Thailand. The Supreme Court has ruled that on these local deliveries local VAT is due, even if the buyer is outside the country. Taxand provided a clear and concise report, that is copied below in pdf.

The Thai experience is not unique. The same rules apply in virtually all VAT countries, and I would not be surprised if authorities in countries like Philippines, Vietnam and Taiwan would follow suit and put more VAT pressure on their local OEMs.

I wrote earlier about ex-works and VAT issues herehttp://www.us-vat.com/blog/?p=835

Download (PDF, 232KB)

 

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Argentina restricts online shopping

No more international purchases if you live in Argentina. New rules put a 50% customs duty on items bought from international websites, on top of the 35% additional charge on international credit card transactions.

And, even worse:

“The real problem is that the item is received in customs now instead of at your home. Each time you go to customs, you need to spend three or four hours.

“I lose half a day’s work, which is unacceptable.”

BBC News – Argentina restricts online shopping as foreign reserves drop.

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Mexico border VAT rate increase

Mexico shelved its beneficial VAT rate for the border region – now all of Mexico has a standard rate of 16%.

“As a result, economists and local government officials in Texas are eyeing millions in additional dollars being spent by Mexican residents who are willing to cross the Rio Grande to save on items from toilet paper to electronics. But until United States Customs and Border Protection puts additional resources in place to improve cross-border traffic, leaders and business owners say, what should be a boon could be little more than a bump.”

Read all about it in the NY Times: http://nyti.ms/19E1O9P

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EU VAT rates

The new list of VAT rates in the EU as per January 13, 2014 is now available.

Download (PDF, 318KB)

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