Trends in the Indirect Tax landscape & the impact of BEPS

Transcription

1 Trends in the Indirect Tax landscape & the impact of BEPS Liesbet Nevelsteen (Deloitte) Eric von Frenckell (Laga) Charlotte Degadt (Laga) 20 October

2 Agenda Welcome & Introduction 8:00 8:15 Update on BEPS & impact on indirect tax :00 Indirect tax: update & trends 9:00 9:45 Q&A 9:45 10:00

3 Update on BEPS and impact on indirect tax

4 Update on BEPS

5 OECD/G20 BEPS project nears the finish line (1) 2013 Action Plan adopted 44 countries commit to develop 15 sets of recommendations ( Actions ) to address loss of corporate tax revenue from base erosion and profit shifting ( BEPS ) 5

6 BEPS 15 Actions (reminder) 1. Digital economy 2. Neutralising hybrids 3. Strengthen CFC rules 4. Limit interest/finance deductions 5. Counter harmful tax practices substance Establishing international coherence of corporate income taxation 6. Prevent treaty abuse 7. Prevent PE avoidance 8. Value creation intangibles 9. Value creation risk and capital 10. Value creation high-risk transactions 11. Data collection/analysis 12. Disclosure (aggressive tax planning) 13. Transfer pricing documentation 14. Dispute resolution 15. Multilateral instrument Restoring the full effects and benefits of international standards Ensuring transparency while promoting increased certainty and predictability Swift implementation

7 OECD/G20 BEPS project nears the finish line (2) 2014 Reports on 7 Actions approved by OECD Committee on Fiscal Affairs, G20 Leaders The 2014 Deliverables Result of public discussion drafts and consultations Recommended changes to: o Domestic laws o OECD Model Tax Convention ( OECD Model ) o OECD Transfer Pricing Guidelines ( TPG ) 2015 Final Reports released on all 15 Actions After numerous public discussion drafts and consultations Additional countries participated Awaiting approval by governments Final isn t entirely final Deloitte Global Services Limited 2015 For more information, contact Deloitte Touche Tohmatsu Limited 7

8 The 2015 final reports What is final? TPG changes are largely done OECD Model change recommendations have partly been finished What is not final? Individual countries must still decide extent to which they will amend domestic law in light of recommendations OECD and other countries must still: o Develop multilateral instrument for speeding incorporation of recommended OECD Model changes into existing bilateral treaties o Complete anti-treaty-abuse recommendations for OECD Model when Treasury Dep t finalizes US Model treaty updates o Report on attribution of profits to PEs in light of PE definition changes, transfer pricing of financial transactions, and several other items o Monitor each other for compliance with minimum standards Deloitte Global Services Limited 2015 For more information, contact Deloitte Touche Tohmatsu Limited 8

9 The global tax environment Responsible tax agenda Change in tax authorities approach to interpretation of existing tax law and tax treaties Unilateral tax law changes OECD BEPS action plan Stakeholder engagement/brand protection Increased tax audits and adjustments Possible double taxation Increased complexity/ compliance Uncertainty BEPS is part of the bigger picture Response Risk assessment to identify relevant focus areas Quantify potential risks/impact Develop strategy to respond to current and anticipated changes Stakeholder management

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11 Corporate tax rate competition Source: EU Commission

12 Financial crisis Public outcry VAT WE PAY, WHY DONT THEY

13 And our survey says 1. Has your business started considering the potential impact of BEPS? 17% 24% 9% 50% Yes - in some detail Yes No Don t know 12% 17% Close involvement 2. To what extent has this involved the indirect tax team? 40% 31% Limited involvement No involvement Don t know 3. What do you see the main indirect tax implication as being? 23% 26% 13% 25% 13% Impact on place of taxation Changes to compliance process Impact on supply chain No implications Don t know

14 How is BEPS relevant for Indirect Tax? It seems that Indirect tax is not specifically mentioned in BEPS Upon first read VAT is mentioned in some places in the OECD s 44 page Action Plan 1. In Action 1 which relates to taxation of the digital economy (lots of mentions) 2. In the middle of the words PriVATe InnoVATe DeriVATive So is there still a lot of thinking yet to be done on Indirect Tax?

15 Highlights: BEPS and Indirect Tax Challenges of the digital economy Creation of digital PEs; re-evaluation of where consumption occurs Major changes to existing operating models and supply chains Businesses may have taxable presence for corporate tax where previously one did not exist; compliance changes Transfer pricing aligned to value creation Changes to how and where products are valued; new transfer pricing documentation Changes to intercompany financing arrangements Complex step plans, partial exemption, VAT grouping Data exchange/disclosure of tax planning More onerous rules, information sharing, cross-border tax authority challenges

16 Indirect Tax challenges The digital economy

17 Challenges of the digital economy Overview Digital economy cannot be ring-fenced BEPS risks, addressed in other Actions, are exacerbated by the digital economy Significant developments Generally concludes that other parts of the BEPS Package addressing mobile income effectively address BEPS concerns in the digital economy Does not adopt proposals discussed in 2014 Deliverable regarding Significant Economic Presence Test, Withholding Taxes, and Equalizing Levies Next steps Post-project monitoring process to be developed in

18 Insight

19 Transparency Country-by-country reporting Tax-by-Tax reporting? NL EUR 673mio VAT Spain 0,440mio VAT AUS 0,941mio VAT

20 Indirect Tax challenges Permanent establishments, operating models and supply chains

21 Key areas of focus Supply chains with limited risk distributors Supply chains with overseas commissionaire entities Toll manufacturing operations BEPS Centralised warehouses and/or packing activities Structures with overseas Principals which supply digitised content

22 Some indirect tax considerations Changes to inter-company transactions and supply chains can create new and unanticipated Indirect Tax compliance, cost and operational challenges Consequences might include new VAT regs, undesirable sticking VAT or customs duty or other circumstances which reduce the benefits being sought as a result of the restructuring Need to make sure any new operating or supply chain is indirect tax compliant in the ERP system Unfair tax competition between compliant/larger companies who register and smaller ones who operate under the radar The valuation of intercompany goods and services may be affected, with related impact on VAT, and particularly customs duty Changes to the treaty definition of Permanent Establishment for direct tax purposes and the interaction with VAT

23 PE: Dependent Agent PE Change to Article 5(5) of OECD Model: Dependent Agent PE Current Model where a person... is acting in on behalf of an enterprise and has, and habitually exercises, in a Contracting State, an authority to conclude contracts... in the name of the enterprise... that enterprise shall be deemed to have a permanent establishment. Final Report Language Adds or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise Contracts may be 1) for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, or 2) for the provision of services by that enterprise. Removes broader or negotiates the material elements of contracts language in last discussion draft. 23

24 PE: Excluded activities Change to the Article 5(4) list of activities excluded from PE definition in the OECD Model Every activity on the list of currently excluded activities would have to be of a preparatory or auxiliary character to be excluded Additional Commentary carried over from prior discussion draft, including Paragraph 22, which provides an example of activities involving a warehouse used for storage and delivery of goods sold online as not being of a preparatory or auxiliary character 24

25 PE: Article 5(4) and the Anti-Fragmentation Rule New Article 5(4.1) Foreign parent Foreign parent Foreign parent #1: 5(4) FPB #2: (5(1) FPB Closely related Foreign Enterprise #1: 5(4) FPB #2: (5(1) #1: 5(4) FPB FPB Closely related Local Enterprise #2: (5(1) FPB The Article 5(4) exception shall not apply to #1 if the same enterprise or a closely related enterprise carries on business at the same place of at another place in the same Contracting State (#2) and the business activities carried on by the 2 enterprises at the same place, or by the same enterprise or closely related enterprises at the 2 places, constitute complementary functions that are part of a cohesive business operation, and either One of the places constitutes a PE for the enterprise or the closely related enterprise, or The overall activity from the combination of the activities carried by the 2 enterprises at the same place, or by the same enterprise or closely related enterprises at the 2 places, is not of a preparatory or auxiliary character 25

26 Indirect Tax challenges Ensuring that Transfer Pricing outcomes are in line with value creation

27 Actions 8,9,10, and13 Action 8 Intangibles Action 9 Risks and capital Action 10 Other high risk transactions Action 13 Re-examine TP documentation Develop rules to ensure intangibles are appropriately priced in relation to use, creation or transfer within groups Develop rules to prevent BEPS by transferring risk among, or allocating excessive capital to group members Consider high risk transactions and when these should be recharacterised, and common base eroding payments such as co-management fees and head office charges Action plan to consider the rules regarding transfer pricing documentation with a goal to enhance transparency for tax administrations

28 Some indirect tax considerations The valuation of intercompany goods and services is likely to be affected Broad spectrum of outcomes from basic compliance to real supply chain and enduser/ consumer pricing implications New Transfer Pricing documentation reviewed to ensure Indirect Tax compliance understood, etc. Customs duty capacity for changes to the customs value (and possibility of increased duty payments) Customs/Global trade considerations serious sanctions for international trade non-compliance Possible new costs for FS businesses on international charges

29 What can you do about this?

30 What can you do about it? Evaluate the possible indirect tax implications of activities performed by a related entity or third party Consider the systems challenges Evaluate Indirect Tax collection and reporting obligations based upon current activities BEPS and Indirect Tax Feed into internal discussions on the possible impact Help the wider business understand the Indirect tax effects for VAT and U.S. Sales & Use Tax Think about feeding into discussions with the OECD, legislators, or taxing authorities

31 Indirect Tax Update & trends

32 VAT on the agenda

33 VAT on the (political) agenda VAT/GST exists in > 100 countries & continues to be introduced VAT represents 20% of the global tax revenu, 7.5% of the EU GDP Trend of more & more qualitative audits, including exchange of information VAT/GST exists in > 100 countries & continues to be introduced Unilateral introduction of stricter compliance requirements Increasing case law of CJEU with high impact

34 Some numbers: VAT revenues in the EU 34

35 Some numbers: standard VAT rate Standard VAT rate 2007 vs Source: OECD(2012), Consumption Tax Trends 2012 Indirect Tax Perspective = everything 35

36 Some numbers: VAT GAP 2012: +/- 177 billion or 16% of total expected VAT revenues The difference between the expected VAT receipts if all the VAT which is due is collected and the actual VAT collected by Member States. 36

37 Some numbers: VAT recovery ratio Ratio between actual VAT revenue and revenue that would theoretically be raised if VAT were applied at standard rate to all final consumption. 1,20 1,00 0,80 0,60 0,40 0,20 0,00 Source: OECD(2012), Consumption Tax Trends

38 Indirect tax update

39 Indirect tax update Head office branch supplies VAT PE On the agenda VAT recovery for holding companies Use of exemptions & flash title supplies Increased focus on EX works supplies

40 Head office branch supplies Digital supplies to exempt businesses Skandia America Corp Branch1 Multinational Bank VAT group Main seat Branch4 Branch2 Subsidiary1 Branch3 IT services no VAT? Skandia Case C-7/13 (17 September 2014)

41 Head office - branch supplies CJEU: in that particular case: supply from head office to branch subject to VAT since branch member of VAT group Different interpretations in EU Member States or no interpretation yet EU VAT Expert group recommendations: Strict interpretation ( Swedish style VAT groups, involvement 3rd countries, inbound supplies) To be seen in context of abuse: only if no anti-abuse provisions implemented Change Directive to tax all head office branch transactions? Cf. OECD position General taxation of head office-branch supplies would constitute major VAT change Impact on VAT treatment flows, VAT registrations, ERP systems, etc. Possible impact on neutrality (cf. exempt businesses)

42 Head office - branch supplies Before Skandia decision After Skandia decision Not subject to VAT Ongoing uncertainty

43 VAT PE Requirements & relevance Liability to account for VAT Local reverse charge Sufficient degree of permanence Place of supply VAT grouping Suitable structure VAT fixed establishment Human & technical resources Licences & approvals Audit position & Risk profile Receive / supply goods or services Simplification for triangulation

44 VAT PE Although legal definition & high practical relevance >< concept not fully clear Different notions of established for different VAT rules? Purchase (passive) FE; Sales (active) FE; other? Suitable structure Determine in function of nature of business carried out? e.g. fully digitalised services vs. traditional supply of goods Also if merely auxiliary and preparatory activities? Some guidance in Welmory decision of CJEU

45 VAT PE: Welmory (C-605/12 16 October 2014) Invoice + Polish VAT? FE? Welmory Sp. Z.o.o Cooperation agreement Reverse charge service invoice (advertising, servicing, provision of information & data processing) Welmory Ltd. Goods Bids Sale of bids

46 VAT PE What can we learn from Welmory? Digital services: suitable structure requires computer equipment, servers & software Being able to receive & use the services for performing its economic activities Absence of human presence could suffice However reference to the national court, no fixed decision Not determining factors: Fact that economic activities of both companies, which are linked to a cooperation agreement, form an economic whole Fact that results of combined efforts essentially benefit consumers in Poland Required suitable structure could be owned by a third party Level of control of that structure to be determined Seems to allow to still distinguish purchase FE from sales FE (cf. auxiliary & preparatory)

47 VAT PE Today: not all questions answered > uncertainty for businesses But also opportunities National evolutions (rulings, case law, etc.) Notion of VAT PE subject to further investigation of EU VAT expert group: determine criteria for VAT PE being able to perform the full supply vs. preparatory & auxiliary? TP remuneration type (cost plus vs. profit split)? technical resources prevail over human presence? business dependent? Possible impact of BEPS Action 7? To be continued

48 VAT recovery of holding companies Larentia & Minerva (C-108/14, C-109/14) Costs acquisition participations (EUR 764k VAT) DE tax authorities reject 77.69% of input VAT Administrative + commercial services Larentia & Minerva Holding L&M: Attraction of EUR 25M new capital, 77.69% invested in subs Administrative + commercial services Sub 1 Sub 2 48

49 VAT recovery of holding companies Larentia & Minerva Confirmation of principle of VAT recovery for holding companies actively managing their subsidiaries for consideration Unless (part of) the services rendered to the subsidiaries should be considered as VAT exempt Mixed holding companies (managing some subs but not all, passive managment): partial rejection of VAT recovery apportionment between economic and non-economic activities based on an investment formula, a transaction formula or any other appropriate formula 49

50 VAT recovery of holding companies Larentia & Minerva Former practice: often VAT recovery limitations because of out of scope activities rejection based on pro rata including dividends can now be countered: assess possibility to reclaim previous non-recovered VAT Positive development for holding companies and private equity investment funds: improve ability to recover VAT By developing service activities in those companies (which are now sometimes in other companies) Attention point upon restructuring of holding companies 50

51 VAT exemptions & flash title supplies Background Traders established in one country trading goods situated in/moving between many countries VAT exemptions (with credit) are crucial to minimising VAT registration requirements and cash flow implications of trade: Exemptions for intra-community transactions Exemptions on exportation / importation Exemptions related to international transport Exemptions for transactions relating to international trade (warehouses / tax suspension) 51

52 VAT exemptions & flash title supplies Fast Bunkering Klaipeda UAB (C-526/13) Sale Sale VAT exempt? VAT? 148 (a) VAT Dir FBK (LT) INTERMEDIARIES CUSTOMER Fuel physically delivered by FBK to vessel operator; legal ownership (and invoices) through intermediary Likely that legal ownership only passed to intermediaries once fuel delivered to vessel operator Fuelling intermediaries prefer not to be charged VAT and to have no domestic VAT registration / credit position 52

53 VAT exemptions & flash title supplies Fast Bunkering Klaipeda UAB 53

54 VAT exemptions & flash title supplies Fast Bunkering Klaipeda UAB Question referred Article 148(a)- exemption (with credit) on goods supplied for fuelling and provisioning of vessels: Must this provision mean that exemption from VAT is available to both The supplies to the vessel operator; and also The supplies to the intermediaries where the ultimate use of the goods is known in advance (and duly evidenced in accordance with national law)? 54

55 VAT exemptions & flash title supplies Fast Bunkering Klaipeda UAB A judgment of two halves: (a) Velker remains good law Velker (C ): exemption may only apply to the final supply to vessel operator exemption is not applicable to supplies to intermediaries However (b) FBK s facts differed from Velker Transfer of ownership in FBK s case may have taken place only at end of loading > ownership does not transfer to intermediaries until vessel operators are entitled to dispose of fuel (as owners) Therefore, intermediaries have at no time been in position to dispose of fuel Paragpraph 52: Transactions carried out by FBK: Cannot be classified as supplies to intermediaries, but instead Should be regarded as exempt supplies to vessel operators National Court to determine whether ownership transferred at the earliest at the same time when vessel operators able to dispose of fuel 55

56 VAT exemptions & flash title supplies Fast Bunkering Klaipeda UAB Decision raises a number of questions What could a direct supply from supplier A to vessel operator C mean? A Supply/Invoice? contract B Supply/Invoice? contract VAT exempt invoice? Supply of right to dispose goods C Could this be applied to commodity chain transactions more generally? Are there other situations in which an intermediary never obtains right to dispose of goods? How will individual tax authorities respond? 56

57 Increased focus on EXW supplies VAT Exempt IC supply These EXW supplies often treated erroneously Absence of transport information / documents EXW supply not recognized in ERP system (e.g. customer master data, pricing, Incoterm) EXW supply not duly implemented in tax logic

58 Increased focus on EXW supplies Consequences of unrightfully claiming of exemption: Underpayment of local VAT in relation A-B Liability for late payment interest Possible requirement to correct the past Intragroup & vis-à-vis customers Need for additional VAT registrations Change of ERP system to reflect EXW supplies Possible high (VAT) bill

59 Questions?

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