HMRC flooded with VAT registrations

The Scotsman writes:

“HM Revenue & Customs (HMRC) has seen 7,185 internet retailers register for VAT since new rules were introduced in September, forcing overseas companies to pay the tax or risk being blocked from trading in the UK.”

The full article is here: http://www.scotsman.com/business/companies/retail/online-sellers-scramble-as-1bn-vat-loophole-closes-1-4322649

Also see my earlier comments here: http://www.us-vat.com/blog/?p=1257

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U.S. tax reform: import tariff still on the table

From C-SPAN, House Ways and Means Committee Chair Kevin Brady (R-TX) insists that VAT is an export subsidy (transcript below from C-SPAN):

“REP. BRADY: WE HAVE MADE A STRONG CASE THAT FOR AMERICA TO COMPETE AND WIN AGAIN, WE NEED TO CHANGE THE WAY WE TAX.

AND ALL OF OUR COMPETITORS, THEY TAKE THE TAXES OFF THE GOODS AND SERVICES COMING OUR DIRECTION, SO THAT GIVES THEM THE ADVANTAGE OVER US HERE IN AMERICA. WE DON’T, SENDING OUR PRODUCTS AROUND THE WORLD, AND SO TODAY, WE LOSE IN AMERICA AND AROUND THE WORLD.

THIS IS THE KEY PART OF OUR TAX CODE. IT IS GOING TO STAY. AND I THINK BECAUSE TAX REFORM IMPACTS EVERYONE DIFFERENTLY AND INDUSTRIES DIFFERENTLY, WE WANT TO LISTEN TO, AND FIND SOLUTIONS, WITH THOSE WHO RELY A LOT ON IMPORTED GOODS COMING INTO AMERICA, AS WE THINK IMPORTS AND EXPORTS ARE BOTH IMPORTANT TO THE ECONOMY.

BUT WE WILL INSIST THAT THEY BE TAXED EQUALLY HERE IN AMERICA.”

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New GCC VAT: $25 billion collected annually

The VAT implementation in the Gulf countries are expected to rake in no less than $25 billion a year, says EY:

http://www.arabianbusiness.com/gcc-said-see-25bn-annual-revenue-boost-from-vat-launch-656070.html

The rate is expected to be 5%. The Gulf countries work towards introduction of VAT on January 1, 2018.

The IMF says that Oman will cash $1 billion in VAT (see the sidebox in the above link).

As a comparison, the UK (VAT rate = 20%) is expected to collect almost $150 billion in VAT revenue in the tax year 2016/2017.

Wow.

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Overwhelmed by VAT on electronic services: Wing it or comply?

U.S. based sellers of electronic services (you know: music, video, games, apps etc.) to individuals anywhere are overwhelmed by the VAT compliance requirements. They now have to account for VAT at the applicable local rates in the following countries:

  • All 28 EU member states,
  • Japan,
  • India,
  • South Korea,
  • South Africa and
  • New Zealand.
  • Update: Switzerland
  • Norway and
  • Iceland to be added to this ever increasing list 

Taiwan, Canada, Russia and Australia will be added to this list soon, and within the next 2-3 years this list will grow to at least 45 countries. Update: Some say that BEPS will inspire all 130+ VAT countries to adopt some form of tax liability for B2C e-sellers within the next 5 years.

As a result, B2C e-sellers will be required to identify their customers by country and calculate the VAT amount due for each customer. Online VAT registration and bi-monthly / quarterly online filings are required as well, plus, of course, online payment in the local currency.

In addition, they will need to set up a tax determination system, pulling the correct rates from a database or from the cloud.

Granted, most B2C e-sellers will qualify for the “simplified” filing option in the EU: register for VAT in one single country and use that registration to report the VAT liability in every EU member state. But that simplification still requires that VAT is calculated in each customer’s member state.

Also, when B2C e-sellers are selling through an aggregator like iTunes / Appstore, Google Play store, Digital River and the like, the aggregator applies a so-called commissionaire structure in most (but not all!) of the countries that require VAT registration. For VAT purposes, this commissionaire transaction means that the e-seller uses the aggregator as a buy-seller (a distributor). As a result, the e-seller does not transact with an individual, and therefore the B2C VAT rules don’t apply on the transaction between the seller and the aggregator. The aggregator is on the hook for the VAT on the sale to the individual – and the aggregator will add the VAT at the rate of the country of the individual to the final sale.

PayPal and other payment platforms do NOT typically act as an aggregator, so using PayPal etc. won’t help with minimizing the B2C VAT liability. Also, PayPal does not normally help you identify your customers – you have to pay extra for that.

If all this doesn’t help, and the B2C e-seller is liable to be registered in all of the above countries, there is really no way out.

U.S. e-sellers always ask what the chances are of getting caught. Frankly, at this time these chances are not very significant. Some EU countries will send e-mails to these companies, saying that the authorities noticed that the e-seller is selling to individuals, stating the applicable law and gently asking to register for VAT and pay the VAT due.

I am aware that some countries are working with the U.S. Internal Revenue Service and other U.S. government agencies in order to go after the major culprits. I have not heard of anyone within the U.S. government being receptive to this, nor have I heard of a successful pursuit. It seems that there are very few treaties that would allow such action. But overseas authorities will go after the culprits in some form – what about company executives being held at immigration on their family vacation to Paris?

The biggest deterrent to non-compliance that I have seen thus far is the following. Most of these B2C e-sellers are audited at some point – either for an IPO, or due diligence of a suitor, or perhaps by their own internal or external auditors. If these companies do not report VAT on their overseas sales, they are basically overstating their overseas revenue with 21% (average VAT rate in the EU) – penalties excluded. This is a “body” that no sane CFO wants to have lingering in his closet.

There are plenty of businesses here in the U.S. and in Europe that can help B2C e-sellers set up their VAT accounting system, register for VAT and manage routine VAT compliance. I don’t provide this kind of services, but drop me a line if you want recommendations, tips and/or tricks.

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Taiwan next to implement VAT on e-services

If you are selling electronic services from the U.S. to individuals overseas, your global compliance requirements are about to increase.

We are talking about game and software developers, sellers of online music, video and the like – Taiwan will be added soon to the list of countries where these traders have to register for tax.

Tax-news.com writes:

“Foreign online suppliers selling cross-border goods and electronic services to end consumers will have to register for tax in Taiwan through a permanent establishment, or appoint a VAT or turnover tax representative. The permanent establishment or agent will be required to file the necessary tax returns. Significant penalties are to be imposed for non-compliance.”

See more at: http://www.tax-news.com/news/Taiwans_Parliament_Approves_VAT_On_Online_Retailers____72961.html

PS: Don’t forget: 18% VAT on B2C e-services in Russia starting January 1, 2017!

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Border adjustments: VAT misunderstood

Have a look at today’s NY Times article: http://nyti.ms/2hG3nt6 on U.S. tax reform.

I find it simply amazing that the eminences grises of the U.S. tax scene – folks like Sullivan, Auerbach and Graetz – don’t want to understand that import VAT is NOT a tax cost to importers. In a VAT country, import VAT is almost always recoverable, creditable or otherwise refunded.

An ever increasing number of customs authorities don’t even want to cash your import VAT payment: there are reverse charges all over the place in various forms – speak to importers into the EU, Australia, Singapore and elsewhere. Even China is working on some sort of import VAT relief.

Imports are “taxable” by design, because otherwise individuals would simply buy in another country and avoid tax on their domestic consumption. But that does not mean that imports are taxed for businesses. Because their use the imports for business purposes (typically resales), the import VAT is not a cost.

And yes, there is a zero-rate on exports. The reason for the zero-rate is simple: VAT is not designed to be a cost for businesses.

The NY Times writes:

“A central idea is that goods would be taxed based on where they were consumed rather than where they were produced, meaning that imports would be taxed by Washington while exports would not. Tax experts call this a destination-based consumption tax.”

This is nonsense. Imports are only an intermediary step in a destination-based consumption tax. A destination-based consumption tax is designed to put the final tax burden on consumption by individuals at the place of their residence. “Taxable” imports by businesses (with tax recovery) is merely the first step in a much bigger indirect tax system.

In order to meet the WTO requirements, the import tax must be 100% recoverable, and followed by a Value-Added Tax, or Goods and Services Tax (they are similarly designed) throughout the rest of the domestic supply chain.

Or just increase customs duties into the U.S. already and call it a day.

Auerbach wrote a report on border adjustments – See here: https://www.americanactionforum.org/research/14344/

Or download his paper directly from here:

Download (PDF, 702KB)

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U.S.: Progressive Consumption Tax updated

Politico’s Morning Tax writes:

“IT’S BACK: Sen. Ben Cardin (D-Md.), who has been pushing what he calls a progressive consumption tax for years, is back out with another version. Cardin, a member of the Senate Finance Committee, said he’s tweaked his consumption tax some since last releasing it in 2014 and wanted to release the new measure now so it could influence the tax reform debate next year.

The Maryland Democrat’s framework is designed to be at least as progressive as the current U.S. system, with a 10 percent tax rate on consumption. The tax system would also cut the corporate tax to 17 percent, exempt family income up to $100,000 from the income tax and offer rebates to lower-income taxpayers. Cardin’s also bringing his plan back after consumption taxes played a fairly pronounced role in the most recent GOP primary — think Ted Cruz and Rand Paul.”

See for more here: https://www.cardin.senate.gov/pct and here:

Download (PDF, 115KB)

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