The Customs. Implications of e-commerce Transactions. Click to edit Master title style. GLCA - Global Legal Customs Association Customs Lawyer Network

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Click to edit Master title style

The Customs Implications of

e-Commerce Transactions

GLCA - Global Legal Customs Association Customs Lawyer Network

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Agenda

• 9.00am Introduction & Welcome

• 9.05am Panel 1: Customs Implications of E-Commerce Transactions

• 9.50am Panel 2: VAT, GST and Other Sales Tax Issues in E-Commerce

• 10.35am Coffee Break

• 11.00am Panel 3: Managing Compliance in E-Commerce Transactions

• 11.45pm Panel 4: What the Future Holds

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Introduction

“The Big Picture” – Issues Related to the Delivery of Goods Ordered Online

• Flow of Merchandise

• Type of Customer

• Type of Merchandise

• Tariff Classification and Valuation

• Entry Requirements

• Duty/Tax Liability

• Terms and Conditions

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The Customs Implications of e-Commerce Transactions

E-Commerce Models – B2C

• Start-ups and small businesses

• Stores run by Yahoo/E-bay/Amazon

• Larger companies

• Direct shipment by courier on behalf of company

• Use of 3^rd Party Providers

Example: Border Free, i-Parcel

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E-Commerce Models – B2C (con’t) Flow of transaction/title

– Company holds title until delivery to customer

– Company transfers title and import responsibility to customer prior to importation

– Company transfers title to third party in country for foreign sale/import/delivery

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E-Commerce Models – B2B

• Shipment to related/partner company in-country for distribution to customers

• Shipment to unrelated company for distribution to customers in-country

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Scenario 1 – B2C:

Online sale of Chinese-origin dress by UK purchaser from US seller

1. US seller imports dress into US from Chinese producer

2. US seller holds at distribution center until online sale to UK customer 3. Dress shipped from US to UK for delivery to UK customer

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Scenario 2 – B2B

Online sale of Italian-Made Dress sold by US company to Chinese partner for sale to Chinese customer

1. US company purchases and imports into the US a dress made in Italy 2. US company exports dress to Chinese partner for storage in Chinese

fulfillment center

3. Chinese consumer purchases dress online from US company and delivered by Chinese partner

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Customs Issues

• Importer of Record

– B2C – B2B

• Exporter/PPI

– Power of Attorney for Customs Broker

• “Signature” on POA

– Tariff Classification and Valuation

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Customs Issues (con’t)

Tariff Classification and Valuation for Online B2C

• When to classify/value

– Time of online sale or time of shipment

– Difficulty in arriving at correct classification at the time of online purchase

• Variance between duties/tax calculation at time of purchase and owed at time of importation

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Terms and Conditions

• Transfer of title/Risk of loss

• Importer of record/POA

• Returned Merchandise

– Tracking of goods for duty-free return – Costs associated with returns

– Value of goods v. cost of return

• Liability for incorrect entries for returned merchandise

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Other Issues Affecting Importing/Exporting

• Product Labeling/Marking

– Language

– Standards (care instructions, fiber content, sizing)

• Export Control Laws and Sanctions

– Iran/Cuban/North Korean Sanctions – Software/Technology Export Controls

• Capacity of Foreign Customs Authorities to Process Entries

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Other Issues Affecting Importing/Exporting

• Intellectual Property Rights

– Gray market goods – IP registrations – Counterfeits

• Corruption/Bribery Issues Associated with Facilitating Import/Export

– Foreign Corrupt Practices Act – UK Bribery Act

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Specific Customs Issues in other jurisdictions

• EU

• Asia

• Mexico

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VAT, GST and Other Sales Tax

Issues in e-Commerce

GLCA Customs Lawyer Network

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What to they have in common, besides the fact that they are fast …

VAT, GST and Other Sales Tax Issues in e-Commerce

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Sales taxes

Existing VAT systems EU VAT system Future VAT system General consumption taxes

GST system

Considering VAT system

No GST/VAT System or no consumption taxes Future GST system

Basics of Value Added Tax

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Introduction

E-commerce Online ordering

Offline delivery

Supply of goods

Indirect tax issues:

VAT / GST

Customs / anti dumping duties Other: Green taxes

IP taxes Online delivery

Supply of services

Indirect tax issues:

VAT / GST Other: gaming taxes

insurance taxes

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US

content supplier

France B2B / B2C

Mexico B2B / B2C

Singapore B2B / B2C

US

Online Delivery (Supply of Services)

• VAT / GST / Sales Tax

– Case study

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Online Delivery (Supply of Services) - EU

Supplier Customer Qualification of services

Method of payment

Who is he?

- Entrepreneur - Public body Where is he based?

- EU Country of customer - Other EU country

non EU country

Who is he?

- B2B (Business) - B2C (Private use)

Where is he based?

- B2B (Establishment) - B2C residency

Distinction between (i) Electronic services

Website services Software Entertainment

E-books (ii) Other services Insurance, legal services

Impact of payment - Credit card, Pay pall, etc…

- Via telecom operator (sms)

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• B2B

USco Frenchco

US France

E-books

• Place of taxation: France

• Debtor of VAT: Frenchco

• Formal requirements: VAT registration EU VAT reporting - invoice

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• B2C

USco

US France

• Place of taxation: France

• Debtor of VAT: USco

• Formal requirements: - VAT registration (One stop shop)

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• B2C

USco Luxco

US

France E-books

• Place of taxation prior to (1/1/2015):

Luxembourg

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• B2C

USco Luxco

US

France E-books

• Place of taxation after (1/1/2015):

France

Luxembourg

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USco B2B Mexico

• Place of taxation?

Online Delivery (Supply of Services) – Other Jurisdiction?

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USco Singapore

B2B

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USco US

B2B

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USco Russia

B2B

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Flow of

goods Customer Content Transport Terms +

Conditions

Turnover per country

Goods originate from?

• US

• Local fulfillment center Fulfillment from

abroad = US Goods go to?

Know your customer B2B (Business) B2C (Private use) Where is he based?

Tax rates Goods vs. services

(e.g. Software)

Low value consignment

Return Policy RMA Reservation of title

Local Threshold

Online Ordering, Offline Delivery:

Supply of Goods

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Important questions

• Goods originate from US,

– fulfillment center abroad (same country) – fulfillment center abroad (different country)

• Goods go to …

• Content = VAT rate?

• Customer = exemption?

• Who’s responsible for transportation? (Special regimes?)

• Terms and conditions = local supplies?

Subject to VAT?

Supply of Goods

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B2B

Central Warehouse Europe or Asia or Amricas

Supply of Goods

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B2C

Supply of Goods

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B2C

Supply of Goods

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B2C

Supply of Goods

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B2C

Supply of Goods

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B2B

Local Warehouse DE

Supply of Goods

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B2B

Local Warehouse MEX

Supply of Goods

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B2B

Local Warehouse SIN

Supply of Goods

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B2B

Local Warehouse USA

Supply of Goods

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Managing

Compliance in

e-Commerce Transactions

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Multi-jurisdictional Commerce Requires Multi-Jurisdictional Compliance

• Customs

• Export and Import Controls

• Economic Sanctions

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Customs Law Issues

• Who will act as importer of record?

• Delivered Pricing to Consumers (practical steps needed to ensure purchaser is importer of record)

• Valuation

• Classification

• Tariff Treatment

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Export and Import Controls on Goods

• Understanding the control status of your inventory

• Classification of goods

• Which jurisdiction’s laws to apply?

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Economic Sanctions

• Home country sanctions

• Other country’s sanctions that may apply

• Denied party screening

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The 5 Keys to Building a Multi-jurisdictional Compliance Program

• The need for Senior Management Commitment

• Conducting a Risk Analysis

• Creating Policies and Procedures that are Proportional

• Dissemination & Education of the compliance program

• Monitor, Test & Reset

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1. Senior Management Commitment and Compliance Authority

• Need a clear and public statement of company policy from the highest authority

• Compliance funding must be adequate

• Key elements of management’s compliance statement

– That it is company policy, important and will be enforced – The consequences of failure to comply

– The official(s) within the company who are responsible – The people to whom the policy applies

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2. Risk Analysis

• Determining the rules in a multi-jurisdictional environment

• Considering how those rules might be broken within your corporate environment

• Focusing on what’s important

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3. Policies and Procedures that are Proportional

• Must develop rules for company activity (SOPs, Best Practices

& Policies)

• Policies must be available and understandable to those who must use them

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3(a). Typical Content for Policies

• The structure for compliance responsibility within the company;

• Instructions with respect to the documentary requirements for all declarations to authorities;

• Reporting requirements for employees who know of, or suspect, violations of the policies;

• Measures to ensure that information flows where it needs to within the company;

• Disciplinary consequences for non-compliance with the policy; and

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4. Dissemination & Education

• Distribution to those who are affected by the policy

• Training and retraining of the affected employees

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5. Monitoring, Testing & Resetting

• Day-to-day monitoring & testing

• Internal audits on a regular basis

• External audits

• Fix the problems that are discovered

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What the

Future Holds

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Global Focus on Tax

• New era of global tax focus may be said to result from a multitude of factors:

– Unstoppable effect of globalization

– Growth in cross-border transactions and complexity of tax laws – Financial and tax scandals

– Post-crisis shrink of revenues of governments and aggressive audit activity – Rise of good governance in tax matters and corporate social responsibility – Blur between legitimate tax minimization and abusive tax avoidance

– Enhanced role of inter and non-governmental organizations – Reinforced multilateral, bilateral and unilateral efforts

• Push for common model for reporting and automatic exchange of information

• European initiatives on tax

• FATCA

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Global Focus on Tax

OECD Main Works up to BEPS

1998 2002

2004 2006

2008

2008 2010

2009

2011 2010

2012

2011 2013

2013

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The Environment – Some Headlines

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BEPS Project

Introduction

Addressing Base Erosion and Profit Shifting (February 2013)

Action Plan on Base Erosion and Profit Shifting (July 2013)

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BEPS Project

Introduction

• OECD BEPS (Fast) Project Timeline

– OECD progress report for G20 Finance Ministers Meeting – February 2013

– G20 Finance Minsters welcome OECD progress report – February 2013 – G8 welcome BEPS work – June 2013

– Action Plan presented to G20 Finance Ministers – July 2013 – Implementation steps – 2013 up to 2015 (up to 2 ½ years)

The BEPS Project and Action Plan calls for fundamental changes considered necessary to aim at fixing the international corporate tax system and may [end up] “redefining the architecture

of international taxation, rules, tax treaties, guiding principles, recommendations, and decisions within the OECD”

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BEPS Project

What is about?

• Holistic review with international cooperation for 5 key

“pressure” points:

1. Reviewing the balance between source and residence taxation, namely on the area of digital goods and services (e-commerce)

2. Target arbitrage transactions, namely intra-group financial transactions, mismatches in entity and instrument characterization and (excessive) deductions of related party debt-financing

3. Tackling effectiveness of anti-abuse provisions, such as GAARs, CFC regimes, thin cap rules to prevent tax treaty abuse

4. Strengthening transfer pricing rules, in particular in relation to the shifting of risks and intangibles

5. Tackling harmful preferential regimes via transparency and substance,

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BEPS is Important Because?

Key phrases

BEPS calls for “fundamental changes to effectively prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it”

BEPS promotes “changes to the current mechanisms and the adoption of new consensus-based approaches designed to prevent and counter base erosion and profit shifting”

BEPS believes “new international standards must be designed to ensure the coherence of corporate income taxation at the

international level”

BEPS requests “realignment of taxation and relevant substance to restore the intended effects and benefits of international standards (…) and tackle harmful tax practices and aggressive tax planning”

BEPS asks for “transfer pricing rules to be improved to put more emphasis on value creation in highly integrated groups, tackling use of intangibles, risks, capital and other high-risk transactions to shift profits”

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BEPS Action Plan

Which actions?

ACTION 1 - Report on digital economy and possible actions - September 2014

• GOAL: Revaluating application of existing international tax rules to digital economy taking a holistic approach and considering both direct and indirect taxation

• Issues to be examined include:

– Ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules

– Attribution of value created from the generation of marketable location-relevant data through the use of digital products and services

– Characterization of income derived from new business models

– Application of related source rules and how to ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services

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BEPS Action Plan

Which actions?

ACTION 2 - Neutralize effects of hybrid mismatch arrangements - September 2014

• GOAL: Develop treaty provisions and recommendations regarding the design of domestic rules to neutralize effect (e.g. double non-taxation, double deduction, long-term deferral) of hybrid

instruments/entities

• Issues to be examined include,

– Changes to OECD Model to ensure hybrid instruments/entities are not used to obtain benefits of treaties

– Provisions that prevent exemption or non-recognition for payments that are deductible by payor – Provisions that deny a deduction for a payment not includible in income by the recipient

– Provisions that deny a deduction for a payment that is also deductible in another jurisdiction

– Co-ordination or tie-breaker rules if more than one jurisdiction seeks to apply such anti-abuse rules to transaction/structure

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BEPS Action Plan

Which actions?

• European Union Court of Justice (EUCJ): RBS Deutschland case (double non-taxation in VAT)

“It is important to add that taxable persons are generally free to choose the organisational structures and the form of transactions which they consider to be most appropriate for their economic activities and for the purposes of limiting their tax burdens.

The Court has held that a trader’s choice between exempt transactions and taxable transactions may be based on a range of factors, including tax considerations relating to the neutral system of VAT (see Case C-108/99 Cantor Fitzgerald International [2001] ECR I-7257, paragraph 33). In that connection, the Court has made clear that, where it is possible for the taxable person to choose from among a number of transactions, he may choose to structure his business in such a way as to limit his tax liability (see

Halifax and Others, paragraph 73)”

http://curia.europa.eu/juris/document/document.jsf?text=&docid=83455&pageIndex=0&doclang=EN&

mode=lst&dir=&occ=first&part=1&cid=5966

ACTION 3 - Strengthen controlled foreign company rules - September 2015

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BEPS Action Plan

Which actions?

ACTION 5 - Counter harmful tax practices from transparency and substance perspective - September 2014 to December 2015

– GOAL: Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime

– EUCJ: Paul Newey case

“contractual terms, even though they constitute a factor to be taken into consideration, are not decisive for the purposes of identifying the supplier and the recipient of a ‘supply of services’ within the meaning of Articles 2(1) and 6(1) of the Sixth Directive. They may in particular be disregarded if it becomes apparent that they do not reflect economic and commercial reality, but constitute a wholly artificial arrangement which does not reflect economic reality and was set up with the sole aim of obtaining a tax advantage”

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BEPS Action Plan

Which actions?

ACTION 6 - Prevent treaty abuse - September 2014

• GOAL: Develop treaty and domestic provisions (such as GAAR) to prevent the granting of treaty benefits in inappropriate circumstances (double non-taxation) and better align rights to tax with economic activity

• Issues to be examined include

– Analysis of schemes such as low-taxed branches of foreign company (triangular cases), conduit companies, and artificial shifting of income through transfer pricing with focus on substance – Changes to the Model Tax Convention to tighten treaty anti-abuse clauses

– Recommendations on design of domestic rules to restore source taxation in a number of cases

• EU - General Anti-Abuse Rule (European Commission Recommendation of 6.12.2012 on aggressive tax planning)

– To counteract aggressive tax planning practices which fall outside the scope of specific anti-avoidance rules, Member States should adopt a general anti-abuse rule and are encouraged to introduce the

following clause in their national legislation:

'An artificial arrangement or an artificial series of arrangements which has been put into place for the essential purpose of avoiding taxation and leads to a tax benefit shall be ignored. National

authorities shall treat these arrangements for tax purposes by reference to their economic substance‘

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BEPS Action Plan

Which actions?

• EUCJ – Kefalas case (national general anti-abuse provision versus EU fundamental freedom of establishment)

“the application of such a national rule [Greek GAAR] must not prejudice the full effect and uniform application of Community [EU] law in the Member States (Case C-441/93 Pafitis and Others, cited above, paragraph 68). In particular, it is not open to national courts, when assessing the exercise of a right arising from a provision of Community [EU] law, to alter the scope of that provision or to

compromise the objectives pursued by it”

• EUCJ – Cadbury Schweppes case (abusive practice versus EU fundamental freedom of establishment)

“It is true that nationals of a Member State cannot attempt, under cover of the rights created by the Treaty, improperly to circumvent their national legislation. They must not improperly or fraudulently take advantage of provisions of Community [EU] law (Case 115/78 Knoors [1979] ECR 399, paragraph 25; Case C-61/89 Bouchoucha [1990] ECR I-3551, paragraph 14; and Case C-212/97 Centros [1999]

ECR I-1459, paragraph 24).

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BEPS Action Plan

Which actions?

However, the fact that a Community [EU] national, whether a natural or a legal person, sought to profit from tax advantages in force in a Member State other than his State of residence cannot in itself deprive him of the right to rely on the provisions of the Treaty (see, to that effect, Case C-364/01 Barbier [2003] ECR I- 15013, paragraph 71)”

On abusive practices: conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62004CJ0196:EN:HTML

EUCJ – Halifax case (abusive practice in the field of VAT)

“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”

http://curia.europa.eu/juris/document/document.jsf?text=&docid=56198&pageIndex=0&doclang=EN&mode

=lst&dir=&occ=first&part=1&cid=17260

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BEPS Action Plan

Which actions?

• UK - House of Commons (Committee of Public Accounts) – “Tax Avoidance–Google” (June 2013) – After a hearing on the subject, it contains criticism to Google, Big Four firms and HMRC

http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/112/112.pdf

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BEPS Action Plan

Which actions?

ACTION 7 - Prevent artificial avoidance of permanent establishment status - September 2015

– GOAL: Develop changes to definition of PE to prevent the artificial avoidance of PE status in relation to BEPS – review threshold for foreign entities operating in source jurisdiction giving rise to PE and focus on substance

– Issues to be examined include

– Use of commissionaire arrangements and interpretation of the treaty rules on dependent agent PE – Use of artificial fragmentation of operations among multiple group entities to qualify for the

exceptions to PE status for preparatory and ancillary activities

ACTION 8 – Aligning Transfer Pricing results with value creation - Intangibles - September 2015

ACTION 9 – Aligning Transfer Pricing results with value creation - Risks and Capital - September 2015

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BEPS Action Plan

Which actions?

ACTION 11 – Methodologies to collect/analyze data on BEPS and actions - September 2015 ACTION 12 – Require disclosure of aggressive tax planning arrangements - September 2015

– GOAL: Develop risk assessment tool for mandatory disclosure rules for aggressive or abusive transactions, arrangements or structures (drawing from experiences of countries that have such rules) – Issues to be examined include

– Modular design allowing for maximum consistency but allowing country specific needs and risks – Focus on international tax schemes and co-ordinate with work on co-operative compliance (enhanced

sharing between tax authorities)

• Example: DOTAS rules in the UK (Disclosure of Tax Avoidance Schemes - http://www.hmrc.gov.uk/aiu/)

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BEPS Action Plan

Which actions?

ACTION 13 – Re-examine transfer pricing documentation - September 2014

– GOAL: Develop rules regarding transfer pricing documentation to enhance transparency for tax administration (common template with global allocation of income, economic activity and taxes paid amongst jurisdictions) and also address minimization of compliance costs for business

ACTION 14 – Make dispute resolution mechanisms more effective - September 2015

– GOAL: Develop solutions for obstacles to solving treaty-related disputes under MAP, address absence of arbitration provisions and limited access to MAP/arbitration (shift to mandatory and binding arbitration provision)

– EU: trial of cross border VAT ruling requests for complex transactions -joined by 14 countries-. No guarantee that States involved will agree on the correct VAT treatment

ACTION 15 – Develop a multilateral instrument - December 2015

– GOAL: Analyze tax and public international law issues for putting forward an (innovative) multilateral instrument designed to implement BEPS measures (bulk implementation) and avoid lengthy process of

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Other Actions in the EU

• February 2014 - European Commission launched the negotiation with Russia and Norway on administrative cooperation agreements regarding VAT for mutual assistance in combatting cross-border VAT fraud

• Legal basis: Council Regulation (EU) 904/2010 of 7 October 2010 on administrative cooperation and combating fraud in the field of VAT

• Exploratory talks have been initiated with Canada, Turkey and China

• Dialogue with the US to improve mutual cooperation in fighting fraud in indirect taxes

• Unilateral initiatives:

– France: i) revamp concept of PE in the digital economy (a PE would be created each time internet user data is collected in a domestic market; ii) tax on online advertising; iii) tax on business-to-business purchases of online services;

– Italy: web tax (not properly a tax but rather a data gathering tool regarding cross-border online advertising services)

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BEPS Action Plan

Conclusions and points going forward

• OECD Action Plan builds on key points from report of February 2013 but adding more focus and ambitious roadmap for further work

• Future outcome varies from “possible actions” (study on digital economy) to “hard changes” (Changes to Model and domestic laws) reflecting difficulty of each action

• OECD consensus-based approach underlying action plan

• Each target action is set but leaving sufficient leeway for future working groups and co-ordination (between actions)

• Action Plan highlights need of principles such as clarity and predictability of BEPS solutions to be workable

• Action Plan warns that unilateral measures (instead of consensus) could lead to “global tax chaos”

OECD’s Outcome Other actions

• OECD - Request for Input Regarding Work on Tax Challenges of the Digital Economy - November 2013

• Compilation of comments received in response to Request for Input - January 2014

• Standard for Automatic Exchange of Financial Account Information - January 2014

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THANK YOU