U P D A T E O N T H E I M P A C T O F T H E I N D U S T R I A L R E V O L U T I O N
V 2 . 0 F O R T A X
15 November 2018
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B R A Z I L
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SPED – Sistema Público de Escrituração Digital - was created to
standardize and computerize the relationship between the tax
authorities and the tax payers.
SPED consists of the modernization of the current procedures
used to duties compliance transferred from the tax payers to the
regulatory agencies. The signature of the document is made
through a digital certification that restricts the juridical validation of
the document to its digital form.
The system started to be developed in the year 2000 and was part
of an initiative to modernize tax and customs administration. It
began to be used by some companies in 2008 and in 2009
SPED represents an integrated initiative to promote a transparent
relationship between taxpayers and the Brazilian tax authorities.
Under SPED, from 1 January 2008, Brazilian corporate taxpayers
are required to record electronically every tax and accounting
operation and file such details with the federal, state and municipal
tax authorities.
B R A Z I L I S R A N K E D # 2 I N T H E
W O R L D A S P E R T H E T M F
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C H I N A
Good news first. China got rid of death penalty for tax evasion in 2011.
China is currently ranked # 1 in the world as per the TMF Financial Complexity Index
Anti-counterfeiting and full control of invoice data are the main objectives of China's Golden Tax System. It prevents the fraud of the Fapiao (special VAT invoice) and controls the issuance I verification of VAT by providing complete invoice data for inspection. The Golden Tax System consists of a terminal placed at the company and tax authority terminal. The invoicing section of the Golden Tax System is applied to the company terminal to issue Fapiao (VAT special invoices and normal invoices), which can reinforce the anti- fraud function and control the tax data in an electronic format. The tax authority terminal can receive and compare the company terminal through the internet and thus control the VAT invoices processed by the company.
August 2017 the Chinese government hasannouncedthat it plans to start using blockchain technology for collecting taxes and issuing electronic invoices.
G O L D E N T A X A N D B L O C K C H A I N
C O M P L E X I T Y R A N K I N G
G O L D E N T A X S Y S T E M O P E R A T I O N
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I N D I A
7 10th of Subsequent Month - Form GSTR-1
In Form GSTR-1, you need to declare the details of all the outward supplies of goods and/or services effected during the month. Invoice-wise details of outward supplies made to registered dealer and aggregate taxable value of supplies made to consumer are required to be declared. In case, taxable value of supply made to consumer is more than Rs 2.5 lakh and if it is interstate supply, you need to declare invoice-wise details.
11th of Subsequent Month - Form GSTR-2A
On 11th, the visibility of inward supplies is made available to the recipient in the auto-populated GSTR-2A. This is generated based on the outward supplies declared by your supplier in Form GSTR-1.The period from 11th to 15th will allow for any corrections (additions, modifications and deletion) in Form GSTR-2A.
15th of Subsequent Month - Form GSTR-2
After reconciling, any additional claim or correction as per Form GSTR-2A needs to be incorporated and submitted in Form GSTR-2 by 15th of
subsequent month. Based on the claim reported in Form GSTR-2, ITC will be credited to your E-credit ledger on provisional basis and post matching of invoice, it will be finalized.
I N D I A I S R A N K E D # 1 3 I N T H E
W O R L D A S P E R T H E T M F
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16th of Subsequent Month - Form GSTR-1A
The corrections (addition, modification and deletion) reported by you in Form GSTR-2 will be made available to your supplier in Form GSTR-1A. The supplier has to accept or reject the adjustments made by the customer by verifying with suppliers outward supply register.
20th of Subsequent Month - Form GSTR-3
On 20th, based on the Form GSTR-1 and Form GSTR-2, an auto-populated return GSTR-3 will be available for submission along with the payment.
Final Acceptance of Input tax credit in Form GST MIS-1 (finally!)
After the due date of filing the monthly return in Form GSTR-3, the inward supplies will be matched with the outward supplies furnished by the supplier, and then the final acceptance of input tax credit will be communicated in Form GST MIS-1.The following details will be considered in the matching of invoices:
GSTIN of the supplier GSTIN of the recipient Invoice/or debit note number Invoice/or debit note date Taxable value and
Tax amount
I N D I A I S R A N K E D # 1 3 I N T H E
W O R L D A S P E R T H E T M F
F I N A N C I A L C O M P L E X I T Y I N D E X
https://www.tmf-group.com/en/news-insights/articles/2017/august/india-gst-up-to-speed/ https://economictimes.indiatimes.com/small-biz/sme-sector/return-filing-under-gst-this-is-how-you-will-file-tax-returns-from-july-1/articleshow/58818715.cms9
W H A T I S H A P P E N I N G I N
E U R O P E O N E U L E V E L ?
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Four Core Components
E U V A T A C T I O N P L A N
R e c e n t a n d o n g o i n g p o l i c y i n i t i a t i v e s U r g e n t m e a s u r e s t o t a c k l e t h e V AT G a p T o w a r d s a r o b u s t s i n g l e E u r o p e a n V AT a r e a T o w a r d s a m o d e r n i s e d V AT r a t e s p o l i c yRemoving VAT obstacles to e-commerce in the Single Market
Proposed 1.12.2016 – see appendix
And SMEs VAT package
Proposed 18.1.2018 – see appendix
Improving cooperation within the EU and with non-EU countries Towards more efficient tax administrations
Improving voluntary compliance Tax collection
Proposed 30.11.2017
Definitive VAT regime for cross-border trade
Proposed 04.10.2017 – see appendix
More freedom for Member States on rates policies
Proposed 18.1.2018 – see appendix
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IMMEDIATE MEASURES:
Enhancing cooperation between Member States by supporting the sharing and joint analysis of
information
Improving tax compliance by cooperating with businesses to address fraud
Supporting the modernisation of tax administrations to prevent and fight fraud.
The ‘VAT Gap’ is estimated at around EUR 150 billion per year
A C T I O N T O T A C K L E T H E ‘ V A T G A P ’
2016 Measures to improve cooperation between tax administrations and with customs and law enforcement bodies and to strengthen tax administrations' capacity Proposed 30.11.2017
2016 Evaluation report of the Directive on the mutual assistance for the recovery of tax debts 2017 Proposal to enhance VAT administrative cooperation and Eurofisc Proposed 30.11.2017
2017 Proposal for the definitive VAT system for cross-border trade (single European VAT area, part of REFIT program) Proposed 4.11.2017
There is a total of 20 measures to combat the VAT Gap listed on the Commission’s homepage, e.g.
will also explore with Member States the possibility to develop an automated mechanism that would
allow a cross-matching between the data reported by each party of every single transaction.
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Implementing a joint processing and analysis of data in Eurofisc;
Implementing new joint actions in audit for tax administrations and improving their coordination by
Eurofisc;
Developing the exchange of information and intelligence between Member States tax
administrations in Eurofisc and law enforcement authorities at EU level;
Improving access to vehicle registration data;
Sharing VAT registration and customs information in relation to the CP42/63 between customs and
tax authorities
5 M A I N O P T I O N S W I T H S U B - O P T I O N S H A V E B E E N
I D E N T I F I E D
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What are the benefits of the preferred option (if any, otherwise main ones)? It is not possible per se
to precisely assess and quantify the benefits of the main preferred options.
Business: a better targeting of fraudsters could reduce compliance costs of businesses involved in
intra-EU trade.
What are the costs of the preferred option (if any, otherwise main ones)?
Business: no additional costs. The proposal will provide the conditions for a better use and analysis of
already available information.
Will there be other significant impacts?
This proposal will trigger new exchange and joint processing of VAT information, which could include
personal data. That may have an impact on fundamental rights. However, the new exchanges of
information and data processing envisaged by the initiative will be strictly targeted and restricted to what is
needed to achieve the objectives of the initiative i.e. combat cross-border VAT fraud in an effective way.
I M P A C T
– A S P E R C O M M I S S I O N
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It is important that innocent businesses aren’t caught in the cross-fire by being victim of too many
reports and audits, or even being seen as an accomplice to VAT fraud.
Amazon good example of that now in the EU. Outside the EU Australia, India and New Zealand are
seeking to impose primary liabilities for VAT/GST on platform providers – that is, the parties who
provide the infrastructure which facilitate e-commerce sales, either on their own account or as an
agent for third party vendors.
HMRC has already today published guidance (Notice 726) on the types of checks a business
should carry out in order to avoid being unwittingly liable: the legitimacy of customers or suppliers
(e.g. their trade history), the commercial viability of the transaction (e.g. the existence of a market
for the goods), the viability of the goods (e.g. the existence and condition of the goods).
With the proposed changes of more automated electronic controls of businesses’ data, and
the risk for innocent businesses to be held responsible for fraudulent activity, it will be more
important than ever to be on top of your VAT compliance process and to have sufficient
controls/checks built into it.
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The Government believes that relevant bodies should be criminally liable where they fail to prevent
those who act for, or on their behalf from criminally facilitating tax evasion.
The new offences will be committed where a relevant body fails to prevent an associated person
criminally facilitating the evasion of a tax, and this will be the case whether the tax evaded is owed
in the UK or in a foreign country.
Previously, attributing criminal liability to a relevant body required prosecutors to show that the
senior members of the relevant body were involved in and aware of the illegal activity, typically
those at the Board of Directors level.
The new corporate offence therefore aims to overcome the difficulties in attributing criminal
liability to relevant bodies for the criminal acts of employees, agents or those that provide
services for or on their behalf.
The Government recognises that any regime that is risk-based and proportionate cannot also be a
zero failure regime. If a relevant body can demonstrate that it has put in place a system of
reasonable procedures that identifies and mitigates its tax evasion facilitation risks, then
prosecution is unlikely as it will be able to raise a defence.
UK and beyond - Criminal corporate offence
N E W L E G I S L A T I O N I N U K A S P E R 3 0 T H S E P 2 0 1 7
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W H A T E L S E I S H A P P E N I N G
I N E U R O P E O N N A T I O N A L
L E V E L ?
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” S T A N D A R D ” ? S A F - T / X M L
Country Name Latest XML
Schema version Date
Based on SAF-T
version Organization Comments
Portugal SAF-T (PT) 1.04_01[3] December 2, 2016 SAF-T v1.0 Portuguese Tax Authority /
Autoridade Tributária e Aduaneira Luxembourg FAIA 2.01[2] March 13, 2013 SAF-T v2.0
Luxembourg Tax Administration / Administration de l’Enregistrement et des Domaines
(AED)
Law rule (memo) A-206 of December 24, 2008.[6]
France FEC ? January 1, 2014 N/A French Ministry of Finance
FEC FR adopted December 5, 2012 making it obligatory pr. January 1, 2014 for companies to supply file covering years 2011, 2012 and 2013.[7][8]However, France's usage of the term "Standard Audit File
for Taxation" has been adapted for a file format not based on the OECD SAF-T; their écriture compatible is proprietary. Austria SAF-T AT 1.01[9] January 31, 2009 SAF-T v1.0 Austrian Ministry of Finance /
Bundesministerium für Finanzen Decree of March 20, 2009 BMF-010102/0002-IV/2/2009.[9][10] Poland JPK[11] 1.0 July 1, 2016 SAF-T v2.0 Polish Ministry of Finance /
Ministerstwo Finansów
The new requirement comes into place on 1 July 2016 for large companies. Small and medium-sized businesses (less than 250 employees) will be required to implement the requirement by 1 July
2018.[12]
Lithuania SAF-T 1.00 July 1, 2015[13] SAF-T v1.0 State Tax Inspectorate /
Valstybinė mokesčių inspekcija
Article 16 of the Law on Accounting. Resolution No 699 of 1 July 2015 of the Government of the Republic of Lithuania. Order No VA-49 of 21
July 2015 of the Head of the State Tax Inspectorate under the Ministry of Finance.[14]
Norway Norwegian
SAF-T Financial 1.00 January 1, 2018[15] SAF-T v2.0
Norwegian Tax Administration / Skatteetaten
The Norwegian Ministry of Finance are considering adopting SAF-T to law.[15]
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S P A I N
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In essence, qualifying companies need to electronically supply data
from Spanish VAT books within four working days; where third-party
billing or customer self-billing is involved, the deadline is extended to
eight days.
It will be compulsory for all taxpayers who:
are part of a VAT group;
are considered a large size company (invoicing over €6.01 million a year) or are applying the monthly refund scheme i.e. REDEME group
For SII, taxpayers will need to provide:
Invoices issued and received VAT calculations
The application of the reverse charge Intra-community arrivals and dispatches
Certain additional information which at present is not included in such books (like description of the transactions, the VAT Period, etc.)
The method to rectify prior registry entries
S P A I N I S R A N K E D # 3 4 A S P E R
T H E T M F F I N A N C I A L
C O M P L E X I T Y I N D E X
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H U N G A R Y
P E N A L T I E S
Failure to meet this new real-time invoice data reporting may result in a penalty up to HUF 500,000 (approx. EUR 1,700) per invoice.
C O M P L E X I T Y R A N K I N G
Hungary is ranked #48 as per the TMF Financial Complexity Index (moving up soon?)
R E A L T I M E I N V O I C E R E P O R T I N G P E R 1 S T J U L Y 2 0 1 8
As of 1 July 2018, all companies with VAT number in Hungary will be required to report sales invoice data to the Hungarian Tax Authorities live. The obligation will apply to Hungarian B2B sales invoices in which at least HUF 100,000 (approx. EUR 340) VAT is charged. The invoicing software should be capable of immediate, real-time data transfer to the Tax Authority, without manual intervention. The reporting will need to be electronic, through the Tax Authority’s Online Invoicing Website, using a specific XML file format. If the reported data are incorrect, corrected reporting should be made within 72 hours. In case of malfunction in the taxpayers’ system exceeding 48 hours, the reporting should be carried out manually. The previous sales invoice data export reporting obligation (which was already effective as of 1 January 2016 in Hungary) will still be applicable and may be required to be presented to the Tax Authority at request.
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I T A L Y
Procedures
All relevant invoices will have to be issued and submitted to the Italian Revenue Agency’s eInvoicing platform, “Sistema di Interscambio” (SDI) which is the platform currently used to transmit e-Invoices to public bodies (sales invoices to public bodies have been required in electronic format only since 2014) and which will allow the Italian Revenue Agency to automatically collect details of e-Invoices.
In the specific starting from 1 January 2019 invoices shall be:
• converted into .XML format, in accordance with technical specifications (format is set out in Annex A of Ministerial Decree no. 55 of 3 April 2013) • signed with digital signature
• sent to the counterparty through the SDI system
Electronic invoices issued to privates should be made available to them through the Italian tax authorities web system. A copy of the electronic invoice or hard copy invoice should be made available directly from the issuers to the consumers. Afterwards consumers may decide to waive their copy of the electronic invoice or hard copy invoice.
For the transmission of electronic invoices taxpayers can rely on intermediaries.
Therefore taxpayers will be required in the next months to set their informatics systems in order to send and receive XML e-invoices through the SDI System” (an implementing decree may expand the list of acceptable formats on the basis of standards or rules recognized by the European Union)
R E A L - T I M E E L E C T R O N I C S A L E S I N V O I C I N G A S P E R 1 J A N 2 0 1 9
Transactions and subjects involved
E-invoicing will become mandatory for all B2B and B2C supplies of goods and services between parties established or VAT-registered in Italy (in the case of B2C, if the customer expressly requests an invoice).
Exceptions to the above are:
• invoices issued and received to/from non-established taxpayers who are not VAT registered nor VAT identified in Italy (cross-border operations will be in any case subject to a specific reporting which shall be submitted to the Authorities within the end of the month subsequent to the date of issuance or receipt of the invoice)
• transactions for which a custom bill is issued
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U K ( O H W A I T , S H O U L D T H I S B E I N
E U S E C T I O N ? )
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M A K I N G T A X D I G I T A L
In line with the tax digitisation projects of countries worldwide, the United Kingdom’s ‘Making Tax Digital’ (MTD) programme is designed to streamline tax filing and reporting processes for businesses and individuals. It will make access to information more readily available and replace the traditional paper trail with a digital one. In practice, MTD means that those with UK tax obligations will report in to the tax office – Her Majesty’s Revenue and Customs (HMRC) – through directly-linked software. The first phase of MTD begins on 1 April 2019, with the implementation of MTD for VAT. All VAT-registered companies and organisations in the UK with taxable turnover above the £85,000 threshold will need to meet the new reporting requirements. Other tax reporting – for example Corporation Tax – will follow VAT but not before April 2020 at the earliest.
At the moment when VAT returns are submitted to HMRC, they are typically prepared using third-party software. The necessary information is then transferred to HMRC via a different platform. In circumstances where HMRC may require more information, that process is also detached from the tax office’s main systems. From April, applicable businesses will need to do the following. Keep all accounting records in a spreadsheet or using customised software. Paper records will no longer meet the legal requirements. Use API (Application Program Interfaces)-compatible software to file their VAT returns.
Phase one implementation of MTD is designed to streamline the VAT filing process, make subsequent information more readily available to HMRC, and reduce the number of errors that are currently found in the returns, which the tax office says costs them a significant amount of money.
If you don’t choose to work with a service provider in preparation for the start of Making Tax Digital, the work to get ready to file VAT returns involves buying and installing relevant compatible software. Bookkeeping records must also be maintained in a way whereby all information is digitally linked (as per HMRC’s
definition).
As this is the first implementation of a new system, the UK business community is anticipating an unofficial ‘grace period’ of about one year for non-compliance with MTD. However, businesses that are late getting up-to-speed do potentially risk fines and penalties. By having all your data digitally presented to HMRC there will be much more visibility on any potential errors in your reporting.
MTD is just one more addition to the long list of countries throughout the world who are now are now every day introducing more and more tax transparency obligations, e.g. reporting VAT data digitally down to transactional detail, and even in some cases real-time.
On that note, Brexit transition starts on 29th of March and 1 April , if not an April fool, is first working day. Imagine that companies need to report all of their VAT digitally to HMRC (and thus much more visibility on their tax data) but based on what rules? New national UK ones or the old EU derived, how will interaction with rest of EU be now?
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U S E O F A I B Y T A X
A U T H O R I T I E S
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P O L A N D
STIR. System Teleinformatyczny Izby Rozliczeniowej (Clearance Chamber ICT System) In force as per 1 Jan 2018 - First example of AI making tax decisions independently?
Source: Filip Świtała
Director of the Polish Tax System Department
Tax Administration KAS
(analysis/freezing/deregistering/collection/unfreezing)
Missing
Trader
Several
buffers
Donkey Co.
Supermarket
Goods Goods Goods
Payment Payment Payment
Freeze 72h. Any country Goods ICA
„Friend” Co.
Commercial „representative”Source: Filip Świtała
Director of the Polish Tax System Department KAS
Central Tax Data
Warehouse (CDRP)
VAT list
Analytical-Audit entity Request of freezing and unfreezing Risk (STIR) score Risk (STIR) score Data on bank accounts Transactional data Data from CRDP Risk (STIR) score Data on bank accounts Transactional data Risk analysis
National
Clearing
Chamber (KIR)
Risk analysisSTIR
Banking sector
Transactional data Request of freezing and unfreezing Data on bank accounts Risk (STIR) score AML Freezing31
S P A I N
So how did Spain solve how to deal with all that data they now received from SII? Second example of AI assisting in making tax decisions?
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S O U T H K O R E A
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South Korea has introduced what is being called the world's first
tax on robots amid fears that machines will replace
human workers, leading to mass unemployment.
The country will limit tax incentives for investments in automated
machines as part of a newly proposed revision of its tax laws.
It is hoped the policy will make up for lost income taxes as workers
are gradually replaced by machines, as well as filling welfare
coffers ahead of an expected rise in unemployment, according to
the Korea Times.
It has been reported that the robots in South Korea have
started developing its own algorithms on how to avoid this tax
(joke).
W O R L D ’ S F I R S T R O B O T T A X ?
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R O M A N I A
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R O M A N I A S P L I T P A Y M E N T S
1 October 2017, Romanian taxpayers registered for VAT purposes had option to apply the VAT split payment system. It became mandatory as of January 2018. Romanian tax authorities recently introduced by law, the value added tax (VAT) split payment system as part of its measures to combat tax evasion. The VAT split payment system will apply to all taxpayers, individuals or legal entities registered for VAT purposes in Romania, for all deliveries of goods and services rendered subject to VAT, for which the place of the taxable transaction is considered to be Romania.
In principle, it means that instead of paying the full amount of an invoice into one bank account, the total amount will be split by taxable base and VAT: the taxable base will be paid into the regular bank account
the VAT will be paid into a designated VAT bank account of the vendor.
Romanian taxpayers can choose to apply the VAT split payment system from 1 October 2017. It becomes mandatory for all taxpayers in the country as of January 2018.
Impact
Taxpayers that apply the VAT split payment system from October will be required to open one or more bank accounts with the Romanian State Treasury or with commercial banks, and designate to them the payment of VAT related to transactions performed with their vendors and/or customers.
After opening the designated bank account/s, taxpayers must notify their customers / vendors of the new bank account details before any payments are processed. Aspects of the VAT split payment system adoption that may impact taxpayers’ business include:
additional procedure to be applied for opening VAT bank account/s (documents and a signature specimen must be provided to the bank)
two payments are required for one transaction; strict tracking of the payments should be done by the customers in order to identify any case where VAT is not correctly paid
the outstanding report of accounts payable / accounts receivable must distinctly disclose the taxable base and the VAT fines in high percentages / amounts will be applied by the tax authorities in case of non-observance of the law.
Under the split payment system, the onus is on Romanian taxpayers to understand the types of transactions that can be performed through the VAT bank account.
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B R E A K I N G N E W S !
Taxation: Commission requests that ROMANIA end its VAT split payment mechanism
The Commission decided today (edit: 8 November) to send a letter of formal notice to Romania for applying
a split payment mechanism for VAT.
Since 1 January 2018, Romania applies this alternative VAT collection mechanism where VAT is paid to a
separate blocked account, causing a major administrative burden for honest companies doing business
there. This arrangement is mandatory for certain businesses which are required to open a separate blocked
VAT bank account. Their customers must split the payment of the invoice by paying the VAT separately to
the VAT account of the supplier. The taxpayer may only use the amount collected on the dedicated VAT
account to pay VAT to the Treasury and to its suppliers.
The measures run against both EU VAT rules (
Council Directive 2006/112/EC
) and the freedom to provide
services (Article 56 of
TFEU
). Today's Letter of Formal Notice follows a Communication also
adopted
today
from the Commission rejecting a request from Romania to derogate from EU rules in this area due to
concerns arising from the proportionality principle and compatibility with the Treaty. If Romania does not act
within the next two months, the Commission may send a reasoned opinion to the Romanian authorities.
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T A K E A W A Y S
We got the tech, the centralized one-stop-shop, our own local people in 80 countries,
but is it enough to be a good indirect tax service provider today?
41
More tax transparency than ever before down to transactional detail in real-time. Companies are the unpaid tax
collectors of this world and the responsibility for any non-compliance and missing taxes will fall on them.
There was never great visibility before (old school VAT return = balance sheet data) and to this date AI capable
of dealing with complex tax issues hasn’t been invented, and tax is complex by nature. Question is also should
these decisions ever be put in the ‘hands’ of robots?
If all the companies were using same ERPs and if all the tax authorities were using same technology enhanced
compliance checks throughout the world; then I would firmly believe in ‘fully digitalized solutions’ as the
answer, but that is not the case with the rapid introduction of new tax compliance requirements everywhere.
Tech and robots, will take over more and more care of the manual work and big data number crunching,
however, this will result in more work than ever before for tax consultants (humans) to deal with all this new tax
data that is surfacing from the number crunching.
No one size fits all, and companies need help early on in sorting out what is the overall solution that works
best for their company, which is the dawn of a new type of tax consultant. I believe a friend of mine calls this
the taxologist.
D I R E C T T A X M O V I N G T O W A R D S I N D I R E C T T A X T H E O T H E R T A X R E V O L U T I O N H A P P E N I N G T O D A Y
15 November 2018
44
B E P S
45
Economic Reality has been a long standing principle within indirect tax as stated numerously by the
ECJ, cf. C-653/11 Ocean Finance. Direct tax traditionally has been about ‘pro forma’, but this is
changing now (BEPS Action 8-10).
6.Will MNEs have to restructure their business in light of the BEPS outputs?
This should not be the case for groups whose legal and tax structures reflect the underlying economic reality.
55. What are the main revisions in transfer pricing rules?
The work has focused on strengthening the guidance on applying the arm’s length principle to ensure outcomes where profits are
aligned with the value created through underlying economic activities. This work has focused on several key areas, such as:
• Transactions involving intangibles, since misallocation of the profits generated by valuable intangibles has contributed to BEPS;
• Contractual allocation of risks, and the resulting allocation of profits to those risks, which may not correspond with the activities
actually carried out;
• The level of returns to funding provided by a capital-rich MNE group member, where those returns do not correspond to the level of
activity undertaken by the funding company;
• Recharacterisation of transactions which are not commercially rational; and
• Service fees and commodity transactions.
B E P S
– E C O N O M I C R E A L I T Y
46
Economic Reality has been a long standing principle within indirect tax as stated numerously by
the ECJ, cf. C-653/11 Ocean Finance. Direct tax traditionally has been about pro forma, this is
changing now (BEPS Action 8-10).
107. Another key criticism that has been expressed is that the arm’s length principle and the underlying separate
entity approach cannot take account of the reality of MNE Groups functioning as a single firm operating under
common control. Can the arm’s length principle take account of this economic reality and if yes, how does it do that?
Nearly everyone seems to agree that taxes should be paid where value is created. The arm’s length principle is fully aligned
with this goal, and the improvements we’ve made to the guidelines on how to interpret it further strengthen it. For example, it’s
no longer possible to argue that all the profits from exploiting an intangible should accrue to mere legal ownership of the
intangible, where that ownership is separated from the meaningful value-creation activities of the group.
B E P S
– E C O N O M I C R E A L I T Y ( C O N T I N U E D )
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B E P S
– N E W P E
http://www.oecd.org/ctp/beps-frequentlyaskedquestions.htm
BEPS 7: New PE definition? = Evolving VAT FE definition + C-605/12 Welmory?
48. What is changed in the definition of permanent establishment?
Changes address techniques used to inappropriately avoid the existence of a PE, including via replacement of distributors with
commissionaire arrangements or through strategies where contracts which are substantially negotiated in a State are not
formally concluded in that State because they are finalised or authorised abroad, or where the person that habitually exercises
an authority to conclude contracts in the name of a foreign enterprise claims to be an "independent agent" even though it is
acting exclusively or almost exclusively for closely related enterprises. They also address strategies based on the specific
exceptions in Art. 5(4) of the OECD Model Tax Convention by restricting these exceptions to preparatory or auxiliary activities
and by addressing the fragmentation of business activities between closely related enterprises.
Fixed establishment
Under Council Implementing Regulation No 282/2011 of 15 March 2011, a fixed establishment means any establishment other
than the place of establishment of a business, characterized by a sufficient degree of permanence and a suitable structure in
terms of human and technical resources to enable it to provide the services which that fixed establishment supplies. In the
judgment of 16 October 2014 in C-605/12 Welmory Sp. z o.o., the Court of Justice implies that the resources need not belong
to the company in order to create a fixed establishment of that company (i.e. a fixed establishment may be created by a third
party’s resources). However, the foreign entity should have control over the resources.
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BEPS 7: The Principal Purpose Test = The Halifax Abuse of Law Doctrine within VAT
B E P S
– E C O N O M I C R E A L I T Y
MLI Article 7 (BEPS 6)
– Prevention of Treaty Abuse 1. Notwithstanding any provisions of a Covered Tax Agreement, a
benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to
conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes
of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that
benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered
Tax Agreement.
Halifax (ECJ C-255/02) - For it to be found that an abusive practice exists, it is necessary, first, that the transactions
concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and
of national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the
purpose of those provisions. Second, it must also be apparent from a number of objective factors that the essential aim of the
transactions concerned is to obtain a tax advantage.
https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf http://curia.europa.eu/juris/document/document.jsf;jsessionid=DED5117B38381D54110D62A98075E3AC?text=&docid=56198&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=3625823
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Within indirect tax we have had the tax authorities cross-reference the VAT return, ECSL and Intrastat
reports between member states, which has been one of the primary sources for tax audits if there were
any discrepancies.
81. How will the information be provided to tax authorities?
The master file and the local file will be delivered by MNEs directly to local tax administrations. Country-by-Country Reports should be
filed in the jurisdiction of tax residence of the ultimate parent entity and shared between jurisdictions through automatic exchange of
information, pursuant to government-to-government mechanisms such as the Multilateral Convention on Mutual Administrative
Assistance in Tax Matters, bilateral tax treaties, or Tax Information Exchange Agreements (TIEAs). In limited circumstances, secondary
mechanisms, including local filing can be used as a backup.
82. How will the information be used?
Taken together, the three documents (the Country-by-Country Report, TP master file and TP local file) will require taxpayers to
articulate consistent transfer pricing positions, and will provide tax administrations with useful information to assess transfer pricing
risks, make determinations about where audit resources can most effectively be deployed, and, in the event audits are called for,
commence and target audit enquiries.
B E P S
– M F / L F / C B C = V A T R T N / E C S L / I N T R A S T A T
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BEPS Action 1: Addressing the tax challenges of the digital economy. The OECD’s idea is for
electronic services to be taxed in the country in which the consumer is resident or in which
consumption takes place which is identical to the EU VAT thinking.
13. Where should VAT be paid in the digital age?
In the country of consumption. The report outlines the challenges related to collection of VAT on cross-border B2C
transactions. Building on the International VAT/GST Guidelines, it recommends that VAT on these transactions is collected in
the country where the customer is located and provides mechanisms to do so in an efficient manner.
14. Are more fundamental changes needed to deal with the tax challenges of digital economy?
The report recognises that the changes brought about by the digital economy also raise more systemic challenges regarding
the ability of the current international tax framework to ensure that profits are taxed where economic activities occur and where
value is created. These challenges relate chiefly to nexus and to the role of data in the modern economy and cut across direct
and indirect taxation, both in terms of the challenges and in terms of the potential solutions.
B E P S
– E C O N O M I C R E A L I T Y
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D I G I T A L T A X
– E U I N I T I A T I V E
The European Commission has made two legislative proposals:
The first initiative aims to reform corporate tax rules so that profits are registered and
taxed where businesses have significant interaction with users through digital
channels. This forms the Commission's preferred long-term solution.
The second proposal responds to calls from several Member States for an interim tax
which covers the main digital activities that currently escape tax altogether in the EU.
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D I G I T A L T A X
– E U I N I T I A T I V E
53
D I G I T A L T A X
– E U I N I T I A T I V E
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D I G I T A L T A X I N E U O N N A T I O N A L L E V E L
Italy
The Italian 2018 Budget Law “Tax on digital transactions” (“Web Tax”) will be levied at a 3% rate on the
value of each digital transaction, will be due due by residents and non-resident enterprises rendering more
than 3,000 digital business to business transactions in a calendar year and will not be creditable from the
Italian income tax and will be settled by the buyers of the services
Spain
The Spanish Government will proceed with a proposal to introduce a digital services tax along similar lines
to the European Commission's proposed interim digital tax. Under the measure, a three percent tax will be
imposed on certain digital services provided by companies with global sales exceeding EUR750m
(USD867m) and sales of more than EUR3m within Spain. Revenue from the selling of online advertising,
digital intermediary and brokerage services, and personal data would be included in the scope of the law.
UK
The chancellor is proposing a 2% tax rate against the sales that large digital companies make in the UK. Mr
Hammond said that the digital services tax would be imposed on companies that are profitable and generate
"at least £500m a year in global revenue“ and announced that it should go live April 2020.
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D I G I T A L T A X I N A S I A A N D L A T A M
India
Equalization levy was introduced in 2016. The applicable rate of tax is 6% of the gross consideration to be
paid, applies to online advertisement or any provision for digital advertising space or facilities/ service for the
purpose of online advertisement and is withheld at the time of payment by the service recipient to the
non-resident provider
Singapore
Digital services imported by consumers will be subjected to GST from January 1, 2020.
Malaysia
The Institute for Democracy and Economic Affairs (IDEAS) predicts that there might be two types of taxes
that will be introduced. One would be a “direct tax” that target the profits of foreign digital companies doing
business in Malaysia. And another probably an “indirect tax” that is a consumption tax (like the Sales and
Services Tax or SST) to foreign companies selling digital goods and services into Malaysia, paid by the
users.
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U S - S A L E S & U S E T A X
On June 21, 2018, The Supreme Court of the United States issued a ruling in the South Dakota v Wayfair Inc.
case that states may charge sales tax on purchases from out of state sellers, even if the seller has no nexus
(physical presence) in that taxing state.
The Supreme Court’s decision, based on the
Commerce Clause
, stated that states could not impose the collection of
sales tax on retailers if there was no nexus in the state. Nexus has been defined not only by the existence of an office or
warehouse, but also by the existence of employees or some other physical connection.
Under the Wayfair decision, even though Wayfair argued that the complexities of having to comply with each state’s tax
codes would place an enormous burden on retailers, the court held that the physical presence rule gave an unfair
advantage to online resellers due to the present reality of e-commerce. This resulted in the loss of billions of dollars in tax
revenues for the states to where product was being shipped, if the retailer had no nexus in the state.
Therefore, the states could assert nexus existed even if a seller had no physical presence in a state, requiring sellers to
collect and remit sales tax. While the decision was in favour of South Dakota, this sets a precedent for other states to
follow South Dakota’s lead and create economic nexus rules.
https://www.tmf-group.com/en/news-insights/articles/2018/september/us-supreme-court/
Effectively this brings Sales & Use Tax so much closer to VAT/GST as the missing input tax
credit side in reality is equal to reverse charge B2B
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T A K E A W A Y S
58
Throughout the world the political will is there to tax goods and services where they are actually consumed
based on economic reality, i.e. in reality the EU VAT model.
All the principles from VAT in the EU and many lessons learnt from decades of European Court of Justice
Case Law will provide means of interpretation.
There will be a boom in Permanent Establishments as the VAT definition of Fixed Establishment (which is
now broader) will be closer to the new definition of Permanent Establishment, also due to the new digital
economy.
We will most likely start to see more disputes as countries will start fighting over the revenues and there
won’t be an ultimate decider on these new matters similar to the ECJ which ultimately may result in double
taxation.
Direct and indirect tax will merge, and in order to be a good tax consultant in the future you need to be able
to knowledgeable in both disciplines.
T H A N K Y O U
Whilst we have taken reasonable steps to provide accurate and up to date information in this publication, we do not give any warranties or representations, whether express or implied, in this respect. The information is subject to change without notice. The information contained in this publication is subject to changes in (tax) laws in different jurisdictions worldwide.
None of the information contained in this publication constitutes an offer or solicitation for business, a recommendation with respect to our services, a recommendation to engage in any transaction or to engage us as a legal, tax, financial, investment or accounting advisor. No action should be taken on the basis of this information without first seeking independent professional advice. We shall not be liable for any loss or damage whatsoever arising as a result of your use of or reliance on the information contained herein.
This is a publication of TMF Group B.V., P.O. Box 23393, 1100 DW Amsterdam, the Netherlands (contact@tmf-group.com). TMF Group B.V. is part of TMF Group, consisting of a number of companies worldwide. No group company is a registered agent of another group company. A full list of the names, addresses and details of the regulatory status of the companies are available on our website: www.tmf-group.com.
© May 2017 TMF Group B.V..
Johannes Laxafoss
Global Head of Tax, TMF Group +45 288 707 27
johannes.laxafoss@tmf-group.com
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Please click embedded video for overview of Consultancy Solutions
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▪
Due to tax authorities every day introducing more and more tax transparency obligations, e.g. reporting VAT data in transactional detail, and even in some cases real-time; we have listened to our clients’ demands and developed a market-leading thorough approach for VAT/GST risk & recovery reviews so that you are fully prepared for any inspections from the tax authorities.▪
Contrary to other service providers in the market we understand that it is not enough to just look at the recovery side isolated, as the tax authorities never do that, and thus our solution is an end-to-end combined AP & AR review where we will highlight all exposures, and also any recovery opportunities.▪
One of the key strengths of our approach is that we use software to number crunch all of your data - not just highlight tax issues from samples - and thus capture all anomalies for our VAT/GST consultants to analyse and solve.▪
Lastly, should you ever decide that you want us to not only look at your VAT on sales and purchases retrospectively for you, but also want our assistance in making sure you are at all times being VAT/GST compliant; you are only one short step away once we have completed our work, as we are utilizing the same technology platform for on-going VAT/GST compliance filings for our clients.Key Deliverables
Summary of recoveries, including recoveries schedules, posting details, source documents. Summary of exposures, including exposure schedules, posting details, source documents. Summary of current workflow on processing import transactions and reporting of these. Summary of current VAT/GST compliance processes, current workflow and possible weaknesses.
Summary of formal assessment of invoice requirements
Summary of assessment of available documentation, to proof export and dispatch of goods cross border.
Process improvement recommendations.
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The Organization for Economic Co-operation and Development (OECD)'s BEPS initiative has resulted in a significant increase in focus on transfer pricing compliance matters on a global basis. Tax authorities have been quick to implement increasing documentation obligations on taxpayers as part of a concerted effort to protect their country tax base.▪
While one of the broad intentions of the OECD’s revised and updated transfer pricing guidelines is to provide a path forward for a consistently applied documentation framework, countries are legislating transfer pricing documentation requirements across varying timeframes, to differing degrees and with substantial local nuances or unilaterally applied measures.▪
The transfer pricing compliance environment is dynamic and provides significant challenges for companies to be consistent, transparent and efficient, while still adhering to the strict requirements in every country in which it operates. Thesechallenges can bring unexpected risks, and also missed opportunities.
▪
The purpose of the TMF BEPS-compliant transfer pricing health check is to identify key risks and potential opportunities in the global group’s transfer pricing structure from a local country standpoint.▪
Risk mitigation: lower the likelihood of transfer pricing audits, avoid transfer pricing adjustments, avoid transfer pricing litigation and protect from transfer pricing related penalties.▪
Exploit opportunities: Identify opportunities to better optimise tax positions, lower transfer pricing compliance costs, build process efficiencies and provide greater transparency to management.Key Deliverables
Legal entity transfer pricing profiles High-level transfer pricing financial summary Intercompany transaction matrix
Transfer pricing global compliance requirements report Transfer pricing policy summary and economic coverage analysis Transfer pricing documentation gap analysis and heat map Country-by-country reporting impact statement Intercompany contract review summary
