European digital services and Puerto Rico tax changes

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1 VAT News / Issue number 25 European Union p#1 / Europe p#3 / Middle East p#4 / Asia Pacific p#4 / Americas p#5 European digital services and Puerto Rico tax changes This edition of VAT News highlights the Advocate General s opinion on input tax deductibility for active holding companies, the European Commission s proposed strategy for a digital single market in Europe, the introduction of VAT rules for the supply of digital/online services in Australia, the potential delay in the implementation of a GST system in India, and the upcoming key indirect tax changes in Puerto Rico. European Union Court of Justice of the European Union (CJEU) Advocate General's opinion - joined cases Larentia and Minerva and Marenave Schiffahrts (C-108/14 and C-109/14, respectively) The Advocate General (AG) released its opinion regarding the VAT recovery entitlement of active or managing holding companies (i.e., holding companies involved in the management of their subsidiaries). The AG addressed whether management holding companies should be allowed to deduct input tax relating to acquisition and funding costs in proportion to the taxable turnover of their subsidiaries, and whether partnerships should be entitled to form part of a VAT group. The referring court suggested that input VAT incurred by active holding companies should be restricted, although such holding companies are making taxable supplies of management services. The court further stated that the acquisition and holding of shares in those subsidiaries should be treated as a separate non-business activity that limits the holding companies right to VAT recovery. However, the AG suggested that expenses incurred in connection with capital transactions undertaken by a holding company, which is involved with the

2 management of its subsidiaries, have a direct and immediate link to the holding company s business activity (i.e., active management) as a whole. Therefore, input tax incurred on such expenses should not be apportioned between the business and nonbusiness activities of the holding company. A partial restriction on input VAT recovery should only be applied when an active holding company engages in both taxable (e.g., active management) and VAT exempt (e.g., granting of inter-company loans) business activities. Regarding partnerships, the AG suggested that Member States should not make the formation of a VAT group subject to the condition that all the members must have a legal personality unless such a condition is necessary to prevent abusive practices, tax evasion, or avoidance. This case may have broad applicability for businesses with active, or managing, holding companies in the EU. To the extent the CJEU S judgement follows the AG s opinion, businesses that have a holding company structure, in which expenses are incurred by these holding companies, should carefully consider the impact of the court s final decision on input VAT recovery entitlement. European Commission European Commission s update on Cross Border Rulings project The European Commission (EC) has published updated guidelines on its Cross Border Rulings (CBR) project. Businesses planning complex cross-border transactions in one of the participating Member states can request a ruling from the state where they are established and registered for VAT. There are currently 15 participating Member states: Belgium, Estonia, Spain, France, Cyprus, Lithuania, Latvia, Malta, Hungary, Netherlands, Portugal, Slovenia, Finland, Sweden and the UK. The project is set to run until September 30, European Commission strategy for Digital Single Market for Europe The EC recently announced its Digital Single Market Strategy for Europe. The strategy aims to remove the barriers which currently hinder European Union (EU) based companies from growing and to assist such companies to be more competitive with the leading web based companies. In the context of VAT, the EC plans to make legislative proposals in 2016 to modernize EU VAT for cross-border e-commerce in goods and services, and to reduce the administrative burden on businesses arising from different VAT regimes. The VAT related initiatives include: extending the single electronic VAT registration and VAT payment mechanism (i.e., the Mini One Stop Shop introduced on January 1, 2015 for EU vendors of telecoms, broadcasting and electronic services) to intra-eu and non-eu online sales of tangible goods to private customers introducing a common EU-wide VAT registration threshold to assist small start-up e-commerce businesses allowing for a single VAT audit of cross-border business in the taxpayer s home country Belgium removing the VAT exemption for the importation of small consignments from non-eu suppliers to create an equal taxation between EU and non-eu suppliers. New administrative VAT Decision: discretionary portfolio management versus advisory management The Belgian VAT administration recently published a new administrative decision clarifying the VAT treatment of portfolio discretionary management and advisory management based on the ECJ case Deutsche Bank. PwC 2

3 Discretionary portfolio management Discretionary portfolio management, consisting of analyzing and monitoring the assets of client investors and purchasing and selling securities, qualifies as a single service subject to VAT. No VAT exemption is applicable in this case. Advisory management Advisory management, consisting of personalized recommendations on transactions with securities, in which the client decides whether to proceed with a purchase/sale of securities, is subject to VAT. If the client investor requests the same portfolio manager to proceed with the purchase/sale of securities, only the brokerage fee should be VAT exempt. If the advisory management and the purchase/sale of securities are remunerated by a single price, the price should be separately stated to distinguish between the service and advisory management fee, and the brokerage fee on the purchase/sale of securities. This decision will be effective July 1, Following the ECJ case Deutsche Bank in 2012, most of the portfolio managers have already adapted their invoicing structure and agreements. In light of this new decision, however, agreements should be reviewed to comply with the new administrative decision. Italy Simplified Intrastat reporting for supplies of generic services Italy has introduced simplified Intrastat declarations for the supply and receipt of general services. In particular, it is no longer necessary to report the number/date of invoice, type of supply, or the method of payment. Tax authorities guidance on requesting usual exporter exemption On April 13, 2015, the Italian tax authorities announced changes to the usual exporter exemption. This exemption allows usual exporters to import goods into Italy without paying import VAT. These changes allow qualifying businesses to now submit a single advance declaration to the Italian authorities for all imports it will carry out during a particular year, within a certain threshold. Previously, qualifying businesses were required to submit a declaration for each import (businesses can still elect to declare each import). Businesses who qualify for this exemption in Italy should consider the application of this administrative simplification. Europe Norway Planned zero percent VAT rate for e-newspapers and media The government has announced its intention to introduce a VAT exemption (with credit) for all media distributing news. The VAT exemption will include e-newspapers on tablets and mobile phones, and all news involving text, sound and image, including all media that mainly provide news services (e.g., TV news channels). The distinction between zero-rated distribution on paper versus taxable digital distribution at a rate of 25% has been a considerable competitive disadvantage for digital distribution. The intention of the government is to promote the distribution of news reporting and social debate, irrespective of the nature of the technology used. Businesses engaged in the purchase or sale of the above mentioned transactions in Norway should be aware of the proposed change in VAT treatment. Middle East Israel Tax Authority draft Circular on internet sales A draft Circular has been issued by the Israeli Tax Authority ( ITA ) which indicates that foreign suppliers may be required to register for Israeli VAT when there is a PwC 3

4 strong link between the internet based services supplied and their use and application in Israel. This policy is not a change in VAT law, but may indicate the ITA s approach in such cases. This is another example of a country looking to tax electronic type services where they are received. The change in approach could mean foreign businesses which operate in this sector in Israel are challenged by the ITA to register for Israeli VAT with respect to any such activity. AsiaPac Australia Digital imports taxed as of July 1, 2017 The recently announced Budget informed taxpayers of a new law in relation to the GST treatment of digital products and other services imported by Australian consumers. The new law applies to supplies made on or after July 1, 2017 and effectively broadens the scope of the connected with Australia test to capture supplies of anything other than goods and real property supplied to an Australian consumer (broadly defined as an Australian resident not carrying on a business). There will be a simplified GST registration process for affected suppliers. Comments on the draft legislation are invited by July 7, The new rules are extremely broad in their interpretation in that they will cover supplies of digital products and other services imported by consumers, such as streaming or downloading movies, music, apps, games, e-books, as well as other services such as consultancy and professional services. The new law discusses taking all reasonable steps to obtain information about whether or not the consumer is an Australian consumer. However, it is going to be extremely difficult to provide evidence without any guidelines on suitable proxies for ascertaining the residency status of the customer. The Australian Tax Office (ATO) is expected to work with taxpayers in the lead-up to the new law to assist in this process and to understand the information businesses routinely collect from their customers in the course of their normal business activities. There are likely to be significant implementation issues regarding requesting information from customers about their Australian residency and GST registration status. Any extra steps in the online purchasing flow are likely to negatively impact the customer experience. There are provisions in place (based on a series of tests about the purchasing process) to shift the GST collection burden away from the supplier and onto the intermediary in the supply chain (the electronic distribution service ), which will capture most online marketplace arrangements. This collection mechanism will not apply when the supplier is located in Australia or the service is physically performed within Australia. Non-established businesses supplying digital and other services electronically to Australian consumers are advised to carefully consider the impact of the new legislation on their arrangements. India GST Constitution Amendment Bill delay Following the recent passage of the GST Constitution Amendment Bill through the Lower House, the Bill has now been referred to a select committee in the Upper House. This development may delay the proposed April 1, 2016 GST implementation date. Once the Constitution has been amended and the GST Council has issued the draft GST law, the States will have the liberty to enact their local GST laws. At this point there could be a further delay since it is unlikely that the States will enact a new law until all their officers are reasonably acquainted with it. There is a small body of officers in each State whom are extremely familiar with GST, since they have been working with the Empowered Committee for the last few years. However, the majority PwC 4

5 have been busy administering the current taxes and will require extensive training. Although the implementation date of April 1, 2016 appears unlikely, the delay may nonetheless be welcomed by some since it will present an opportunity for businesses to be better prepared for the new GST regime. Americas Puerto Rico Upcoming indirect tax changes The Governor of Puerto Rico (PR) signed into Law House Bill 2482, known as Act 72, on May 29, 2015 ( Act 72 ). Effective July 1, 2015, Act 72 increases the Sales and Use Tax ( SUT ) from 7% to 11.5%. Moreover, starting on October 1, 2015, the SUT will have a broader basis since certain services to other businesses and designated professional services will be subject to a 4% SUT. Act 72 also establishes that effective April 1, 2016, the SUT system is replaced with a Value Added Tax (VAT) regime. Act 72 also authorizes a newly created commission to evaluate alternatives to the SUT and VAT systems. Key features of the proposed VAT system include, but are not limited to: The VAT rate would be 10.5%. The Municipal SUT (1%) will continue to apply. VAT at 0% will likely apply for export sales (of both goods and services), and sales of raw materials, as well as articles and equipment acquired by a manufacturing plant holding an exemption certificate. VAT exemptions will likely apply to a wide range of supplies, including sale and import of prescription drugs and other medical goods, sale of food and food ingredients, sale and certain other transactions related to real property, sale of printed books, etc. Net input VAT is likely to be recovered through a credit system. In certain cases, cash refunds will be permitted. Businesses with operations in Puerto Rico should consider the impact of the proposed VAT regime on their overall business activities and monitor these developments closely. PwC 5

6 Let s talk For a deeper discussion of how this issue might affect your business, please contact: Tom Boniface US VAT Leader +1 (646) thomas.a.boniface@ us.pwc.com 300 Madison Avenue New York, NY, Tom Boniface, New York +1 (646) thomas.boniface@us.pwc.com Evelyn Lam, New York +1 (646) evelyn.g.lam@us.pwc.com Nathan Trautwein, San Francisco +1 (415) nathan.a.trautwein@us.pwc.com Raymond van Sligter, San Jose +1 (408) raymond.v.sligter@us.pwc.com Reena Reynolds, Chicago +1 (312) reena.k.reynolds@us.pwc.com Irina Sabau, New York +1 (646) irina.sabau@us.pwc.com Sinead Hughes, Chicago +1 (312) sinead.hughes@us.pwc.com Our global indirect tax network PwC has a global network of 1,900 indirect tax professionals in 130 countries worldwide, including a dedicated VAT team located in the U.S. who is available to provide real-time VAT advice. This News Alert does not provide a comprehensive or complete statement of the taxation law of the countries concerned. It is intended only to highlight general issues, which may be of interest to our clients. For issues relating to this VAT News, please contact your local Indirect Tax Practice advisor or the specialists listed above. Global VAT Online Many of the developments above are described in more detail on Global VAT Online (GVO), PwC s online subscription service which provides up-to-date business critical information on VAT/GST rates, rules, and requirements around the world. This information will help you maintain control, mitigate risk, and improve the overall effectiveness of your VAT/GST function. GVO s news service provides timely updates on worldwide VAT/GST developments, along with a facility to deliver news to your desktop via RSS feeds, newsflashes and a weekly newsletter. It also includes commentaries on new legislative proposals, decisions on recently concluded cases, hyperlinks to related subjects, and case law and official documentation. For further information, please speak to your usual PwC advisor or the US VAT team above. Visit the GVO Website PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details. SOLICITATION This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC 6