Indirect Tax Update - January 2017

Breaking news from the RSM Indirect Tax Group, including updates from the GCC, EU, Netherlands, Hungary and China. Download here or read below.

European Commission

Opinion on the Action Plan on VAT 

The European Economic and Social Committee has welcomed the Commission’s recently published proposed “Action Plan on VAT”, pointing out that a move towards a more ‘destination’ basis of VAT accounting will create a level playing field for all suppliers in the same national market. It particularly recognises the importance in this context the plans to deal with the development of e-commerce and extend the ‘one stop shop’ principle for businesses to deal with overseas VAT obligations.

It also says that the future system of reduced rates must combine flexibility and legal certainty, be transparent, and for the sake of simplicity, the number of reduced rates and exemptions must be limited. It prefers an extension and regular review of the list of goods and services eligible for reduced rates and allowing Member States greater freedom on the number of reduced rates.

Proposals to modernise cross-border e-commerce

On 1 December 2016, the European Commission unveiled a series of measures to improve the VAT environment for e-commerce businesses in the EU. The proposals will allow consumers and companies, in particular start-ups and SMEs, to buy and sell goods and services more easily online. These are as follows: 

New VAT rules for sales of goods and services online:

Currently, online traders have to register for VAT potentially in all the Member States into which they sell goods. It is estimated that these VAT obligations cost businesses around €8,000 for every EU country into which they sell and are therefore seen as a barrier to growth. 

To address this an extension to the VAT One Stop Shop is proposed, a form of which already exist for sales of electronic and telecoms services to private individuals in the EU and which has been proved successful with more than €3 billion in VAT being collected through the system in 2015. It is estimated that extending the One Stop shop in this way, will save companies administration costs of up to 95% giving an overall saving to EU business of €2.3 billion and increasing VAT revenues for Member States by €7 billion. 

Simplifying VAT rules for micro-businesses and startups:

A new yearly threshold of €10,000 in online sales will be introduced under which businesses selling cross-border can continue to apply the VAT rules they are used to in their home country. This will make complying with VAT rules easier for 430,000 companies across the EU, representing 97% of all micro-business trading cross border. A second new yearly threshold of €100,000 will make life easier for SMEs when it comes to VAT, with simplified rules for identifying where their customers are based. The thresholds could be applied as early as 2018 on e services, and by 2021 for online goods. Other simplifications would allow the smallest businesses to benefit from the same familiar VAT rules of their home country, such as invoicing requirements and record keeping. The first point of contact will always be with the tax administration where the business is located and businesses will no longer be audited by each Member State where they have sales. 

Action against VAT fraud from outside the EU:

The Commission has decided to remove the current exemption from import VAT for low value goods imported into the EU, recognising that this results in anti-competitive practices and abuse of the system where high value goods are undervalued or incorrectly described in import paperwork with the result that they to benefit from this VAT exemption. The Commission has therefore decided to remove this exemption. 

Equal rules for taxing e-books, e-newspapers and their printed equivalents:

Current EU rules allow Member States to tax printed publications such as books and newspapers at reduced rates or, in some cases, super-reduced or zero rates. However this would not extend to digital and e-publications, meaning that these products would be taxed at the standard rate as a supply of services. Once agreed by all Member States, the new set-up will allow – but not force – Member States to align the rates on e-publications to those on printed publications.

Temporary application of a generalised reverse charge mechanism

The Council of Europe has adopted the Directive allowing Member States to operate a temporary ‘reverse charge’ derogation whereby a Member State may, subject to pre-defined conditions relating to the Member State’s VAT gap, apply a Generalised Reverse Charge Mechanism (GRCM) to all goods and services with an invoice threshold of more than EUR 10,000 thereby making the customer liable to account for the VAT due, rather than the supplier.

According to 2014 figures from the EU, there are a number of countries whose VAT gap analysis (the gap between expected and actual tax revenues in a particular country) significantly exceeds the EU median, and therefore would be entitled to use the GRCM for domestic transactions. According to the latest figures, the countries in question are: Bulgaria; Czech Republic; Greece; Italy; Latvia; Lithuania; Hungary; Malta; Poland; Romania; and Slovakia – no figures are available for Cyprus or Croatia.    

Andy Ilsley, RSM UK

Netherlands

Opportunity for non-established businesses reclaim up to 5 years of Dutch VAT incurred

The EU Principal VAT Directive (‘PVD’) sets out the rules for a refund procedure of VAT incurred on purchases of goods or services by businesses based in another EU member state, and, separately, those based outside the EU. 

Companies established in another EU member state need to submit a digital form to their own local tax authorities to apply for a refund. If all conditions are fulfilled the local tax authorities will pass on this form to the foreign tax authorities. The refund has to be submitted to the local tax authorities by September 30 of the year following the year in which VAT has been incurred. 

Whilst this deadline is strictly enforced in other Member States, the Dutch Tax Authorities allow EU taxable persons to reclaim Dutch VAT up to five years back. Some countries will not forward the refund form to the Dutch Tax Authorities after 1 October. In that case, a written request to the Dutch Tax Authorities should be submitted.

If the business in question is based outside the EU, a retrospective claim is also possible by submitting a separate form by which the Dutch VAT refund request is applied. This form will need to be accompanied by a declaration of entrepreneurship, original invoices and import documents. An application form must be submitted by June 30 of the year following the year in which the VAT has been incurred. In practice the Dutch authorities will grant refunds going back 5 years.

What this means

If any non-established company has incurred Dutch VAT within the last 5 years that has not yet been recovered, it may be possible to still file a refund request. As this opportunity is subject to the discretion of the Dutch Tax Authorities there is no right of appeal with the courts possible against the decision of the Dutch Tax Authorities, if the request was submitted after the formal deadlines of September 30 (EU taxable person) or June 30 (non-EU taxable person) of the following year. 

In practice therefore, a refund request will however be taken into consideration and be reviewed the same as a request that was filed within the formal deadline periods. Affected businesses should therefore review the extent of unrecovered VAT incurred in this period and consider a claim on this basis.

Changes to Bad Debt Relief VAT claims

From 1 January 2017, the legislation regarding VAT refunds in case of bad debts has changed. It is now quicker and more straightforward to claim back VAT accounted for on transactions made for which the customer has not paid.

Previously, an entitlement to a VAT refund would only arise when it became clear, and could be evidenced, that an amount receivable had not been paid and would not be expected in the future. For example: in the situation of bankruptcy (confirmed by a curator) or upon receipt of a statement from the bailiff that stated that the outstanding debt would not be paid by the debtor. To claim the VAT refund, businesses would be required to submit a specific refund request. This request had to be filed within one month after the period in which the entitlement to a VAT refund arose.

From 1 January 2017, under the new legislation the business that has not been paid has an automatic entitlement to claim bad debt relief one year from the time that payment was originally due, without having to make a formal claim. The VAT refund due to bad debts can be claimed by including the amount in the regular VAT return of the period in which the entitlement to the VAT refund arises. Therefore the earliest opportunity to claim a refund under the new rules will be January 2018, unless there is evidence of non-payment before that date under the current rules. 

It is important to note that, by the same token, businesses that have not paid for supplies after a period of a year from when due, would also be required to pay back any of the VAT deducted. Therefore the opposite effect applies to the non-paying customers that have deducted the VAT but not paid the amount due. They will have to repay the VAT at the latest one year after the date on which the payable amount became due. This is subject to a specific transitional rule for the repayment of VAT by non-paying customers. The VAT on amounts that were due in 2015 (or earlier) which have not been paid, becomes payable in January 2017.

What this means

Businesses are encouraged to ensure that their VAT reporting systems are capable of tracking when payments are due, so that the claim to bad debt relief can be automatically adjusted (and of course any subsequent payment would mean that VAT would be due to be accounted for again at that point. If businesses are, on the other hand, slow to make payments for goods and services, they will also need to ensure that any input tax claimed at the outset is paid back at the appropriate time.

Liesbeth de Groot, RSM Netherlands

China

New VAT Regime - Clarification of the implementation requirements on cross-border services eligible for VAT exemption

On 24 March 2016, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly released Caishui [2016] No.36 “Notice on the Comprehensive Roll-out of the Business tax (BT) to Value Added Tax (VAT)”(“B2V”). It indicates that from May 1, an overhauled VAT system replaces the hitherto inefficient BT rules.  

It also clarifies the VAT exemption policies for cross-border taxable activities for newly defined B2V industries and adjusts the scope of cross-border taxable activities that was previously included in the B2V Pilot Program. The scope of taxable activities that fall to be VAT exempt on this basis include the following:

Furthermore, on 12 May 2016, the SAT issued a bulletin [2016] No.29 named Administrative Measures on VAT Exemption for Cross-border Taxable Services under the B2V Pilot Program (Trial). It further outlined the detailed implementation requirements for cross-border taxable activities and standardises the record-filing procedures for cross-border taxable activities eligible for VAT exemption.

There are several points to note in this respect:

1. Bulletin [2016] No.29 provides two methods (Positive list and negative list) to further clarify what is meant by “consumed completely outside the territory of China”. This should aid understanding and thereby lower the compliance risk. 

For instance, positive list: Bulletin [2016] No.29 stipulates that “aviation ground services, port services, freight and passenger depot services, salvage services, handling and removal services provided to overseas entities engaged in international transportation services and Hong Kong, Macao and Taiwan transportation services on stopping over at  airports, ports, depots, airspaces, inland waters, territorial waters within the territory of China are regarded as logistics supporting services which are consumed completely outside the territory of China. 

2. Bulletin [2016] No.29 stipulates that “if the actual service recipients of professional technical services are within the territory of China, such services are not regarded as consumed completely outside the territory of China”.

Bulletin [2016] No.29 clarifies the procedural requirements for cross-border taxable activities:

• For initial VAT exemption recording, the taxpayers should submit relevant record-filing documents and complete the procedures within the filing period.
• The tax authority stamps the VAT exemption filing form and return to the taxpayers as an evidence.
• The taxpayers are able to select the zero-rating or exemption treatment for the 4 categories of cross-border taxable activities qualifying for zero-rated VAT treatment.

On 4 November 2016, the SAT released a bulletin [2016] No. 69 named “Announcement of the State Administration of Taxation on Issues Relating to Provision of Construction Services Overseas” further clarify the requirements of record-filing documents as well as the determination of tax base, which is effective from that date.

1. Resident individuals and entities are not required to provide documents proving that construction services are provided outside China when filing the exemption with the competent tax authority providing that the contracts specify the overseas place of the construction services.
2. In order to prove that tourist services are provided outside China and therefore VAT exempt, immigration details of either service provider or service recipients (tourists) must be presented when filing the VAT exemption.
3. To obtain VAT exemption of international transport services, taxpayers are required to provide a description of the business and a copy of the relevant applicable tax treaty or agreement on international transportation.

Lastly, the announcement clarifies the rules how to calculate the tax base for VAT purposes of the following:

1. The services provided by the examination centers for overseas entities, the amounts paid to overseas entities are deductible.
2. In determining the VAT taxable amount of visa services, the fees and other amounts paid to embassies are deductible.
3. An importer agent importing VAT exempt goods may also deduct the amounts paid for consigner for VAT filing purpose.

What this means

VAT has undergone a significant recent overhaul in China, and businesses with activities there should review such activities closely from a VAT perspective, especially in light of the complex administrative changes noted. RSM China can assist in reviewing VAT exemption documents and advise on the correct implementation of VAT.

Flame Zheng, RSM China

Hungary

Changes in the administrative requirements in Hungary from 1 July 2017 

Proposed changes to the requirement to provide real time invoice data to the Hungarian Tax Authority (HU TA) have now been postponed until 1 July 2017. 

From that date businesses issuing invoices with a VAT value of more than HUF 100,000 (EUR 320) (including all modification invoices that relate to the original invoice) must report these invoices online in real time to the HU TA. This requirement also applies to the Hungarian VAT registrations of all overseas (non Hungarian) entities.

ilure to comply with this obligation could result in a penalty of up to HUF 500,000 (EUR 1,700) for each undeclared invoice. 

From 2014 businesses issuing invoices from their Hungarian VAT number have been required to inform the authorities about the invoicing software they use. The invoicing software used must comply with strict requirements such as sequential numbering of the invoices, etc. Failure to use the appropriate software and failure to report it results in administrative penalty of up to HUF 500,000 (EUR 1700). Examples of inappropriate invoicing software include the use of Microsoft Excel or Word.

From 2016 the invoicing software must also be capable of collecting data in pre-defined format to the HU TA in case of the tax audit. The HU TA has issued detailed guidance on what the Standard Accounting File (SAF) should look like, and more specifically which fields should be reported and how. 

As the continuation of this process, businesses issuing invoices using invoicing software will also be required to provide real time data regarding these invoices from 1 July 2017. 

The HU TA has not yet published the details and specification of the exact real time reporting process. Howeven, under one of the scenarios currently being discussed, the invoicing will be cloud-based, i.e. the invoice must be either uploaded to the HU TA’s server for approval prior issuing or issued directly from the HU TA web portal. Under an alternative scenario, the invoice is issued at the issuer’s PC and automatically reported to the HU TA. Either way, the new requirement assumes additional IT development in terms of the invoicing software on the side of the taxpayers issuing invoices.

What this means 

Affected businesses with operations and a VAT registration in Hungary will need to make invoicing software capable of real time data transfer by 1st of July 2017 at the latest.

It is likely that the new real time reporting obligation will be closely linked to the existing obligation to provide data in the XML format (also known as Standard Accounting File or SAF). We recommend a review of the SAF export function and extending it further to satisfy the new requirement. Our team of IT and VAT experts can help you understand these requirements better and provide details of the enhancements needed once the HU TA publishes specification of such communication.

Dániel Sztankó, RSM Hungary

Gulf Co-operation Council (GCC) States 

VAT has been enthusiastically adopted as the indirect tax system of choice throughout the world and the latest jurisdictions to announce that they are joining the VAT club are the member states of the GCC. These are Saudi Arabia, Kuwait, The United Arab Emirates, Oman, Qatar and Bahrain.

During 2016, the GCC announced that an implementation date of 1 January 2018 had been agreed and that the standard rate of VAT would be set at a relatively modest 5%.  

As with most VAT systems, it is anticipated that there will be a range of reliefs from VAT in the form of either exceptions from the charge to VAT or exemptions from VAT in key areas such as basic foodstuffs, healthcare and education.

However, the detailed provisions have yet to be released and whilst we can predict the likely impact for business based on experience of VAT in many other countries, a full business-by-business assessment will have to wait until formal announcements are made.

What this means

Businesses within the GCC:

The majority of GCC-located businesses will have little or no experience with any form of sales taxation, let alone VAT, so the key areas will be:-

• Senior management to understand the financial and economic implications of VAT as it will affect their business; and,
• Planning internal systems which will allow them to deal with the basics of VAT accounting. 

Systems must include both the accounting system itself and finance personnel.

An accounting system does no more than process data and the critical link in the VAT chain is the human resource and good finance personnel will help a business to determine the:-

• correct VAT treatment of sales and other income;
• appropriate VAT defaults to customer and supplier accounts;
• urate and timely production of invoices; and,
• processing of purchases to identify the recovery or otherwise of the VAT charged.

Much will depend on the final form of the keenly awaited VAT legislation.

Non-GCC Businesses with Establishments within the GCC:

The GCC states are extremely active in worldwide commerce and, as a result, many non-GCC businesses have established a presence in the GCC to facilitate trade.

Non-GCC businesses will now need to consider the extent to which any GCC presence will created an establishment and, potentially, a VAT liability in the GCC state in question.

In addition, it is possible that certain transactions in goods or services may be deemed to take place within the VAT jurisdiction of the GCC and, in themselves, give rise to a GCC VAT registration and accounting liability.

Again, we will need to see the final version of the legislation before determining the extent of any risk.

Martin Dane, RSM UK