Sales & Indirect Tax and Energy

Transcription

1 Sales & Indirect Tax and Energy Tuesday, October 22, 2013, National Practice Leader, Sales & Indirect Tax Agenda 1. British Columbia provincial sales tax ("PST") 2. GST/HST update 3. Energy issues case update 4. Manitoba PST rate increase 2

2 BC PST exemptions BC announced that all permanent PST exemptions that existed before July 1, 2010 will be re-implemented in the Regulations; Industry exemptions (most E&P equipment, certain oilfield services equipment, qualifying manufacturing machinery, catalysts/agents, etc.) have been clarified with release of regulations in March 2013; Qualifying businesses may enter into taxpayer agreements with BC in order to purchase tax-exempt and then selfassess PST on taxable purchases; no definitive guidance yet, but look to old PST publication involving Special Business Registration Numbers 3 BC PST exemptions BC PST will not apply to Sales of real property, such as residential housing or commercial real estate; or most services provided to real property admissions and memberships professional services (other than legal services) transportation fares (e.g., bus, train, ferry, airline) most intangible property except for software custom software that meets specific criteria 4

3 BC PST exemptions Exemption from BC PST for the following equipment and inputs: 5 Blowout preventers, boilers, casing, cementing equipment, coil tubing Drill pipe, collars, drill bits, diesel generators, engines, electric motors/drives Flare tanks and lines, flock tanks connected to drilling rigs Integrated fuel tanks, pump units and steam heaters connected to rigs Lights integrated with rig or as part of diesel generator unit Support matting part of drilling rig and limited adjacent areas Mud motors, tanks, mixers, pumps; drilling mud/fluids?? Measurement while drilling equipment, electronic drilling recorders, etc. Rotary and pump drives, separators, shale shakers, support buildings BC PST exemptions Water tanks, wellhead and related equipment/parts, etc. Drilling rigs and virtually all component equipment connected thereto Automated equipment at wellhead, plant or refinery used for production Compressors used at wellhead, plant or refinery, but not along gathering lines (unless processing) and not beyond the processing plant or refinery Computers and control panels used to monitor and control production Dehydrators, gas detection systems & flare stacks, disposal lines at plants Drilling stem and testing equipment, drums for chemical/fluids storage Fishing tools, fracturing equipment, perforating guns, line heaters Packers, pumpjacks, PVT, safety valves, SCADA equipment at well site/plants, separator vessels, snubbing units, vacuum tanks/systems 6

4 Documenting PST exemptions The PME exemption certificate (FIN492) now available for producers to have necessary documentation to provide to vendors to acquire PME exempt from PST; other forms mostly all released now; Can only be used on "blanket" basis with same supplier for same type of exempt purchases; otherwise exempt items must be specified each time; Purchases may be made exempt for goods, software and telecom services for resale or lease, or goods for incorporation into other goods provided the vendor notes the purchaser's PST vendor registration number on invoice; 7 Several new penalties apply with respect to vendors' books, records and various documentation deficiencies; $200 up to $500 first time, $500 up to $2,000 on second offense; Non-taxable services vs. real property services Services provided in connection with improvements to real property are PST-exempt, including those provided in respect of "affixed machinery" as enumerated in the PST Refund and Exemptions Regulations, unless removed from site; By default, contractor/service provider is user/consumer of materials and must self-assess PST on value of tangible personal property incorporated into real property; still causing issues in the industry; If contract or other written agreements stipulates that retail sale of materials occurs when services are performed, then contractor/service provider charges and collects PST on selling price of materials; 8

5 Non-taxable services vs. real property services The operation of tax on other non-taxable services works similarly, insofar as contractor/service provider is user/consumer of materials it provides to undertake services and must pay or self-assess PST on value of materials; Recently, Supreme Court of British Columbia decided on this very issue in Burlington Resources Canada Ltd. vs. British Columbia; appeal period still open; accords with similar cases, including Noble Energy vs. Colorado in respect of non-taxable services and materials provided as part of services; In Burlington, the issues involved cementing services and various well stimulation services and all held to be in respect of nontaxable services, with no tax liability to Burlington, but service provider (BJ Services) was liable for PST on its materials costs; no retail sale of materials occurred 9 Affixed machinery and real property services "Affixed machinery" generally includes machinery, equipment or apparatus used directly in manufacture, production, processing, storage, handling, packaging, display, transportation, transmission or distribution of TPP Must be installed in or affixed to real property and cease to be TPP at common law, but does not include TPP that is: HVAC, lighting in a building and sewage or elevators/lifting devices; Large enough it must be constructed on-site, expected to remain at the site, does not run on rails or tracks and does not move around, AND cannot be moved without dismantling or damaging building/structure; Other prescribed property as outlined in the Regulations 10

6 Affixed machinery and real property services Services provided to "affixed machinery" are exempt under the Regulations, therefore contractor/service providers pay PST on materials; but parts and services taxable if removed from installation site for repairs/maintenance Similarly, any services provided in respect of an improvement to real property, where materials cease to be personal property at common law; contractor/service provider pays or self-assesses PST on materials Important to determine whether services are in respect of "affixed machinery", real property or personal property as different PST outcome, particularly in respect of sales of "affixed machinery" vs. real property "Related service" is any service provided to TPP or any service provided to install TPP, except installation of TPP into real property or "affixed machinery" if ceases to be TPP at common law 11 Reorganizations and asset sales Similar to the previous BC PST regime, an exemption on otherwise taxable goods, equipment and machinery, exists under the new legislation on certain reorganizations or asset sales among related parties; Under former regime, amalgamations did not trigger a "sale" and no tax applied; however recent guidance from BC Finance suggests otherwise; new publication not yet available, so must rely on legislation and old pubs; Transfers of assets between parent and subsidiary (or sister corporations) should qualify for exemption as long as various requirements are met; 12 Other exemptions exist for transfers to new wholly-owned corporations as well as corporations that are not wholly-owned, provided criteria are met

7 Reorganizations and asset sales Transfers (including leases) of otherwise taxable assets within a "wholly-owned" group are exempt provided all the following criteria are met: Parent must own at least 95% of all classes of stock of subsidiary(ies); Parent and subsidiary(ies) must maintain this relationship for 8 months after the transfer; OR were related for 8 months prior to transfer, the transferor is dissolved or wound-up after the transfer and corporations remain related until dissolution or wind-up; and The otherwise taxable assets are "tax paid" assets or the asset was otherwise exempt from PST under the exemption provisions Caution when it comes to the sale or transfer of assets purchased during the HST regime as they are generally not considered to be "tax paid" assets that would otherwise qualify for the exemption; 13 Reorganizations and asset sales "Tax paid" assets generally include those assets purchased by the vendor that were previously subject to the former PST regime, the current PST regime or during the HST regime where an input tax credit or rebate/refund has not and can not be claimed; Even though assets may not be "tax paid" they may still be considered exempt under other provisions of the new legislation such as conditional exemptions (e.g. production machinery and equipment) and assets that are unconditionally exempt (e.g. most real property) Query whether "specified motor vehicles" (where 7% portion of HST not allowed) would be "tax paid" because only a partial ITC (the 5% federal portion of HST) was claimed; not clear, but unlikely to be "tax paid" assets 14

8 Input tax credits ("ITCs") on outsourced costs When a well owner does not want to disclose their identity to vendors or the public (i.e. the rest of the patch), a shell company will be used to procure goods and services; CRA has denied ITCs to the well owner given its name is not shown on the invoice, even though the shell company is an agent of the owner; For purposes of ITC documentary requirements, the shell company has to be a "duly authorized agent" to allow owner to claim ITC; 15 ITCs on outsourced costs Ensure that services agreement with the owner or custodian of the shell company provides for the agency and that a welldefined agency agreement be drafted to address "duly authorized agent" issue; Also ensure that any related agreements also contemplate the agency relationship and procurement responsibilities of the shell company; For partnerships, ensure that the entity (not just the managing partner) is named in the agreement since partnerships are persons under ETA 16

9 Joint venture agreements and ITCs Under the ETA, the joint venture ("JV") election permits an operator to account for all the GST/HST collectible on revenues (except those taken in kind by venturers) and ITCs on expenditures; However, the election only covers exploration, exploitation and marketing of the resulting output; CRA is finding situations where the election does not meet the requirements of section 273 or the Regulations, including where activity does not qualify or activities not as described in JV agreement 17 Top GST/HST audit issues for Calgary CRA 1. Recaptured ITCs (primarily for BC, but also ON) 2. ITCs generally (recipient issues, prescribed requirements) 3. ITCs for holding companies (section 186) 4. Joint ventures, bare trusts and qualifying activities 5. Non-resident (and resident) importation issues and ITCs 18

10 Burlington Resources Canada Ltd. vs. BC Burlington assessed by Consumer Taxation Branch for PST not paid on materials acquired in the course of procuring services for cementing and well stimulation from BJ Services; Burlington appealed the case on the grounds that contracts were for services and not for services AND the purchase of materials; among other key conclusions, court also found that no delivery of materials occurred from BJ Services to Burlington; Materials became property of Burlington only after services performed. 19 Burlington Resources Canada Ltd. vs. BC Case reflects similar findings from Noble Energy, Incorporated vs. Colorado Department of Revenue heard in 2010 where Noble applied for a refund of Colorado state sales tax which was denied and was appealed by Noble; The Colorado Court of Appeals allowed the appeal agreeing with Noble that there was no purchase of the materials used in fracturing services provided by various oil and gas well contractors 20

11 Burlington Resources Canada Ltd. vs. BC Principles arguably still apply today under new PST regime; but CTB unwilling to comment on outcome as province has now appealed; Issues still arising today in respect of this issue as certain contractors/vendors taking the approach of charging PST on materials to be safe; Similar issue with respect to contracts to "improve real property", but legislation provides for a deemed retail sale to have occurred with respect to materials provided in the course of providing such services 21 Husky Oil Operations Ltd. vs. Saskatchewan Similar to BC, various E&P companies operating in Saskatchewan (SK) acquired cementing services from BJ Services and were charged SK PST on the materials component and refunds were filed and denied; Refund denial appealed by Husky nearly 3 years ago, but has not yet been decided by the court; judge may be awaiting final outcome of Burlington case; different legislation, yet same principles apply; Re-wording of PST-13 bulletin for contractors pending, but no definitive comments from SK Finance; opportunity for similar claims? 22

12 Manitoba PST rate increase transitional rules Effective July 1, 2013, the Manitoba PST rate will increase to 8% for a temporary period of 10 years to pay for much needed "infrastructure"; Given Manitoba's stingy exemptions for industry, this will represent almost a full 1% increase to oil producers in the province until 2023; Transitional rules will be important for those inputs where the PST must be self-assessed around the transition period as well as purchases of taxable goods and services from PSTregistered vendors 23 Manitoba PST rate increase transitional rules The new 8% rate will apply to goods purchased after June 30, 2013, but not for goods that are fully paid for or purchased prior to July 1, 2013 and where delivery is taken after June 30, 2013; For lease payments made/billed before July 1, 2013 are subject to the 7% rate while those that are payable after June 30, 2013 are at 8%; General services completed before July 1, 2013 are subject to the 7% rate, even if billed or paid after June 30,

13 Manitoba PST rate increase transitional rules Where contracts for services are entered into before April 17, 2013 and the work is done before November 30, 2013, the 7% rate will also apply For contracts entered into after April 16, 2013 for services that start after June 30, 2013 will be subject to the 8% rate; For services provided to TPP, where the contract is entered into after April 16, 2013, the consideration for services provided around July 1, 2013, must be segregated as to the "before and after" transition period; 25 Manitoba PST rate increase transitional rules Where pre-april 17, 2013 contracts involve services provided after November 30, 2013, they are subject to the 8% rate; holdbacks released after June 30, 2013 are also subject to the 8% rate For most taxable professional services provided (based on time incurred) after June 30, 2013 are subject to the 8% rate even if billed after that time; time incurred before July 1, 2013 subject to the 7% rate; Special rules exist for utility-type services such as telecommunications, gas and electricity and also real property contracts 26

14 Manitoba PST rate increase transitional rules For taxable insurance contracts, those with effective dates before July 1, 2013 will be taxed at 7%; those effective after June 30, 2013 at 8%; For indefinite term and group contracts, any premiums paid before July 1, 2013 are taxable at 7% regardless of period of coverage; For refunds on returned goods or cancelled sales must follow the rate of tax originally charged on the sale; if 7% rate paid on initial purchase, then any refund of tax after June 30, 2013 would also be at 7% 27 Manitoba PST rate increase transitional rules Special rules exist for real property contracts for contracts entered into before April 17, 2013 and completed before November 30, 2013; 7% rate applied by the contractor to cost of the materials incorporated up to November 30, 2013, however if materials acquired after June 30, 2013 and 8% is paid on purchases, then eligible for a 1% refund; For all other real property contracts (e.g. those entered into after April 16, 2013 or completed after November 3, 2013), the tax rate applies to materials based on when purchased from a registered supplier or taken from exempt inventory 28

15 Manitoba PST on engineering services Manitoba typically taxes qualifying (i.e. taxable) engineering and geo-scientific design services related to real property at 30% of the total value of "taxable services" that "relate to Manitoba"; However, Manitoba taxes qualifying engineering and geoscientific services related to tangible personal property ("TPP") at 100% of the total value of "taxable services" that "relate to Manitoba"; Given Manitoba deems certain "otherwise real property" to be TPP; PST can apply on engineering of various installations and construction 29 Manitoba PST on engineering services Manitoba defines TPP to include: machinery, equipment, an apparatus or a storage structure other than a warehouse, grain elevator or other storage building prescribed by regulation that is installed on, under or in, or attached to, buildings or land and used in manufacturing, producing, processing, storing, handling, packaging, displaying, measuring, monitoring, transporting, transmitting or distributing tangible personal property, or in providing a service TPP includes most oil and gas assets compared to what is otherwise considered to be real property by common law standards in BC & SK 30

16 Manitoba PST on engineering services Manitoba outlines its views on TPP vs. real property in its Information Bulletin 008, which is an extensive, but not exhaustive list of what constitutes TPP vs. real property; Manitoba's PST Bulletin 008 includes all types of pipelines, electrical systems and components, fire protection systems, various pumps, storage tanks, etc. 31 Questions and discussion Southern Alberta Sales and Indirect Tax Suite 900, th Avenue SW Calgary, AB T2P 0T5 T David.Crawford@ca.gt.com 32

17 "The information and examples contained within these presentation materials has been prepared by Grant Thornton LLP for information only and is not intended to be relied upon, a complete description of any tax issue or the opinion of our firm. Changes in tax laws or other company specific factors could affect, on a prospective or retroactive basis, the information contained within these presentation materials." You should consult your indirect tax adviser to obtain additional details, to discuss whether the information in this presentation applies to your specific situation or to obtain specific tax advice and/or a tax opinion. 33