American Bar Association

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2 American Bar Association 15th Annual Tax Planning Strategies: U.S. and Europe Hotel Bayerischer Hof Munich April 17, 2015

3 American Bar Association European VAT and its Relevance for the Digital Economy in 2015

4 Concurrent Session B Co-Chairs: Rick Minor, United States Andrea Parolini, Italy Speakers: Patrice Pillet, Belgium Martin Lausterer, Germany Elisabeth Ashworth, France Gary Richards, United Kingdom Thomas Ecker, Austria

5 Introductory remarks VAT in the digital Economy 2015 «New» Compliance Rules for Digital Sales to EU Consumers The compliance situation with truly offshore sellers and enforcement E-books cases CJEU upholds EU Law Barring Reduced Rates PE, FE and the virtual permanent establishment discussions BEPS and VAT

6 European VAT and its relevance for the digital economy in 2015 Patrice PILLET EU Commission DG TAXUD VAT Unit 6

7 Context Significant growth in the Digital Economy Ability for a business to make supplies without a physical presence. Ensuring Taxation from the Digital Economy BEPS Discussions at the OECD The role VAT/Consumption taxes can play by taxing at the place of consumption

8 A brief history of taxation at destination for digital supplies OECD 1997 Ottawa principles 2003 OSS for supplies into EU MS VAT rates influencing establishment of etraders Agreement on the 2008 VAT Package 2015 Place of Supply Rules and MOSS

9 2015 Place of Supply Rules and Moss

10 2015 Place of Supply Rules and MOSS B2C supplies of electronic services, broadcasting and telecommunications taxed where the customer is established (Destination Principle). Business able to account in one MS in respect of supplies to other MS (where they don t have an establishment) The Concept of the OSS and how it works: - Registration - Returns - Payments - Audits

11 The Mini One Stop Shop EU scheme UK business or UK Establishment of a USbased business. - Not established in FR or DE. - Supplies electronic services(e.g. software) to private customers in FR and DE - VAT rate of FR and DE, - Registration for VAT through the MOSS in UK, - Returns and payments in UK, - Transfer of information / funds to FR and DE. UK Cy 11

12 The Mini One Stop Shop non EU scheme US Cy US business not established in any EU Member State (system already in place since 2003). - Supplies electronic services (e.g. software) to private customers in DE and UK, - VAT rate of DE and UK, - Registration for VAT through the MOSS in DE or UK or any other MS (MS of identification to be chosen by the supplier). - Returns and payments in this MS of identification. - Transfer of information to all MSs of consumption. 12

13 2015 Place of Supply Rules and MOSS Significant development in EU Tax legislation Successful implementation, first statistics Issues relating to microbusiness Problems identified : invoicing rules Need to follow up audit arrangements

14 EU Commission Expert Group on Taxation of the Digital Economy The mandate of the groups was to examine the best ways of taxing the digital economy in the EU. The Group reported to the Commission by End June. Main recommendations on VAT: Destination principle Extension to distance sales of goods of the single electronic registration and payment system Removal of small consignments exemption and single electronic registration and payment system

15 Main problems still to be tackled Distance sales : administrative burden Distortions of competition : imports / intra-eu and domestic ecommerce sales are not on an equal footing today. Compliance and fraud Treatment of micro-businesses / starts-up

16 The way forward The natural next step is a broader use of the single electronic registration and payment system, to cover all B2C distance supplies of goods and services (intra & extra EU). This has already been signaled in the EU Commission Communication on the Future of VAT (December 2011). The EU Digital Single Market Agenda Legislative proposal by end 2016, as a high priority Impact Assessment, as well as 2 studies already ongoing Need to assess the implementation of the 2015 rules

17 Conclusions VAT is part of the solution to ensure taxation from the Digital Economy. Vendor registration/remittance through a single electronic registration and payment system is a proven means by which to account for the taxes due. Need to address the known (avoidance friendly) weaknesses in VAT legislation.

18 EU VAT Effectiveness and Enforcement Dr Martin Lausterer Linklaters LLP Digital VAT Panel ABA Conference Munich April 17, 2015

19 EU VAT Effectiveness and Enforcement The VAT Directive and the Digital Economy Reduced Rates and Electronically Supplied Services The Cases Commission v France and Commission v Luxembourg Effects of an Infringement Procedure State Aid Procedure as Alternative Dispute Resolution Instrument? Commission Style

20 The VAT Directive and the Digital Economy The VAT Directive is the legal instrument to harmonize the laws of the Member States relating to turnover taxes; is addressed to the Member States and binding, as to the result to be achieved, upon each Member State.

21 The VAT Directive and the Digital Economy The VAT Directive was amended in 2003 as regards the arrangements applicable to (i) radio and television broadcasting services and (ii) certain electronically supplied services re a) place of supply for (i) and (ii) b) reduced rates for (ii)

22 Reduced Rates and Electronically Supplied Services Reduced Rates, Article 98 of the Directive Member States may apply one or two reduced rates. The reduced rates shall apply only to supplies of goods or services in the categories set out in Annex III (inter alia, supply of books on all physical means of support ). The reduced rates shall not apply to electronically supplied services.

23 Reduced Rates and Electronically Supplied Services Electronically supplied services VAT Directive Annex II: Indicative list of electronically supplied services VAT Implementing Regulation (effective 1 July 2006): services which are delivered over the Internet shall cover in particular the services listed in Annex I: (3) (c) the digitised content of books and other electronic publications;

24 The Cases Place of supply of electronically supplied B2C services (prior to 2015): place where the supplier has established his business. Place of supply for physical books is where the consumer is established. As of 1 January 2012 France and Luxembourg applied a (super-)reduced rate to the supply of electronic books: France 7% (5.5% from 1 January 2013), Luxembourg 3%.

25 The Cases The Commission reacted promptly and launched infringement procedures in July 2012 claiming that the application of a reduced rate is incompatible with the wording of the Directive which excludes the supply of digital books from the benefit of reduced rates. Finally, in September 2013, the Commission brought actions to the CJEU.

26 The Cases Court of Justice of the European Union Judgments C-479/13 Commission v France and C-502/13 Commission v Luxembourg: by applying a reduced rate to the supply of digital or electronic books France/Luxembourg has failed to fulfil its obligations under the Directive

27 Effects of an Infringement Procedure against a Member State The CJEU declares that a Member State has failed to fulfil its obligations under the Directive. The Member State has to change its legislation accordingly. The judgement has no retroactive effect. The motivation of the Member State for the infringement is not relevant.

28 State Aid Procedure as an Alternative Dispute Resolution Instrument? State aid The measure must be imputable to the State and financed through State resources; it must confer an advantage on its recipient; that advantage must be selective; and the measure must distort or threaten to distort competition and have the potential to affect trade between Member States.

29 State Aid Procedure as an Alternative Dispute Resolution Instrument? Incompatibility of state aid under Article 107 (1) TFEU also applies in the field of taxation. The state aid procedure under Article 108 TFEU has suspensory effect, i.e. the Commission may order the Member State to recover all unlawful aid from the recipient (the taxpayer).

30 Commission Style The Commission has challenged tax measures as state aid Increasingly in the BEPS world. State aid rules formal investigations against Ireland, the Netherlands, Luxembourg, Belgium Could the reduced VAT rate for electronic books be considered state aid and could it have been challenged more effectively?

31 EU VAT and digital services Current and future issues from a French perspective, by Elisabeth Ashworth

32 table Rates issues : impact of the recent changes of VAT place of supply rules prohibition of reduced rates for electronic service : France and Luxembourg condemned What s next from an EU/French perspective? Means of collection and control New place of taxation rules and MOSS :skepticism of French suppliers with regard to the balance benefit/cost Non EU suppliers : the French Tax authorities have not yet announced clear strategy

33 Rates issues : impact of the recent changes of VAT place of supply rules for B2C (1/2) Before 2015: taxation rules cause competitive distortions among suppliers and between MSs Intra-EU transactions are taxable at the place where the supplier is established, while the normal VAT rate varies from 15% to 27% Only very few non EU suppliers are registered in France If established (FE) in another MS : taxation in the concerned MS to rate applying in that MS If non established in EU : VAT applies at the place and rate of the consumption through (or not) a one-stop-shop scheme but the number of companies registered in France is close to 0 but no data available

34 Rates issues : impact of the recent changes of VAT place of supply rules for B2C (2/2) From 2015, the taxation at the place of consumption would allow MS to apply a reduced rate without competition damage among EU suppliers Regardless of the place where he is established, the supplier must apply the VAT rate of the place where the consumer is established Same regime applies to EU and non EU suppliers No guidelines from French tax authorities

35 Reduced rates prohibition on ebooks confirmed by ECJ and remains Why France decided to apply reduced rate : to ebooks from 1rst January 2012 (5,5%) In the name of the principle of equal treatment To promote ebook competitiveness Be as attractive as Luxembourg? and to online newspapers (2,10%) In the name of the principle of equal treatment Since 2009, domestic press regulation (including subsidies) treats online and traditional newspapers as equals.

36 Reduced rates prohibition on ebooks confirmed by ECJ and remains ECJ Judgment C-479/13:France is condemned What needs to be noticed in the finding of the Court? ECJ refused to consider whether a paperbook and an ebook might be seen as identical by the average consumer (by contrast, see case C- 219/13, 11 September 2014 K Oy) When will France change its law to comply with the Directive provisions?

37 Reduced rates prohibition on ebooks confirmed and remains What s next? EU Commission to move forward in the infringement procedure engaged against France for super reduced rate on electronic newspapers A political agreement between for adding digital books, newspapers and other digital goods to Annex III of the VAT Directive unlikely in the short term Could suppliers challenge the validity of the VAT Drective in the light of the principle of equal treatment?

38 EU VAT and digital services: means of collection and control Skepticism of French suppliers with regard to the balance benefit/cost of the new B2C rules for digital services For a large majority of French companies, digital services still represent a small part of their business Most of them emphasize the disadvantages of the new place of taxation rules : More information is to be collected from consumers (especially for services for which the two items of non-contradictory evidence rule applies) More data to be collected, stored and provided on demand to tax authorities: applicable rates of all MSs, 10-year recordkeeping requirement, access to data for tax authorities, etc.

39 EU VAT and digital services: means of collection and control Skepticism of French suppliers with regard to the balance benefit/cost of the new B2C rules for digital services MOSS: Definition of fixed establishment in the field of digital services industry not clear yet (ECJ, case C-605/12, 16 October 2014, Welmory) French companies might prefer being identified in MS of consumption for the purpose of the refunding of input tax (under MOSS, need to apply for the non established reimbursement procedure) According to tax authorities few hundred companies have made election for the MOSS

40 EU VAT and digital services: means of collection and control Non EU suppliers : the French Tax authorities have not yet announced clear strategy French Tax authorities currently mainly concerned by the success of MOSS for EU business No specific guidelines nor announcement from the tax audit directorate concerning strategy towards non compliant non EU digital suppliers either in terms of enforcement nor of disclosure process But yet a quite aggressive tax audit policy challenging the presence of FE on French territory Extended limitation period, specific penalties for occult activities

41 VAT - Where, Whether and What (the intricacies of Cross-Border supplies from a UK perspective) Gary Richards Berwin Leighton Paisner LLP

42 VAT Where, Whether and What FCE Bank (C-210/01) Skandia (C-7/13) Welmory (C-605/12) VAT consequences of inter-branch crossborder recharges Interaction of VAT group rules with intrabranch recharges: (a) The Swedish model (b) the UK model (c) implications Whether integrated business models using IT create fixed establishments

43 FCE Bank (C-210/04) - Issue FCE Bank (UK HQ) Recharge of internal costs 1 Whether there could be legal relationships between two parts of the same enterprise? 2 Whether recharge can constitute consideration for a supply? FCE Bank (IT)

44 FCE Bank - Analysis Article 9 (2006/112/EC) any person who independently carries out an economic activity (Note a person can include an entity without legal personality (Heerma: C-23/98 referred to in AG paragraph 36). This secondary establishment s lack of personality in its own right stands in the way of its ability to act autonomously. (AG paragraph 43) It is necessary to determine whether a branch may be regarded as being independent..., in particular, that it bears the economic risk arising from its business. (CJEU paragraph 35)

45 FCE Bank - Analysis Article 44 (2006/112/EC) The place of supply to a taxable person shall be where that person has established his business. However, if those services are provided to a fixed establishment located in a place other than where he has established his business, the place of supply shall be where that fixed establishment is located. Article 44 aims to establish a general criterion for determining the place of supply of [actual] services so as to avoid conflicts of jurisdiction between Member States (AG paragraph 49) The fact that a fixed establishment possesses resources necessary to supply services to the enterprise s customers does not sustain the conclusion that it conducts its business independently of the parent enterprise [such] that it falls to be treated as a taxable person in its own right. (AG paragraph 51)

46 Post FCE Bank Position US HQ 1 Recharges EU Branch EU Affiliate 1 Outside the scope of VAT (not supplies). 2 Place of supply outside EU. 3 Reverse charge in country of affiliate. 4 Either domestic supplies (if in same Member State, assuming no membership of a VAT group) or place of supply in Member State of recipient involving reverse charge.

47 Skandia (C-7/13) - Issue SAC US HQ Recharge of external costs External purchases Were recharges to a Swedish branch liable to Swedish VAT as taxable transactions (i.e. supplies) if the branch belongs to a VAT group in Sweden? SAC Swedish Branch (Skandia) Onward supplies Skandia Affiliates Onward supplies Skandia (Swedish VAT group) affiliates

48 Skandia - Analysis Article 11 (2006/112/EC) Each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links. Article 196 VAT shall be payable by any taxable person to whom services are supplied or by any person identified for VAT purposes in the Member State in which the tax is due if the services are supplied by a taxable person not established in that Member State. Swedish VAT legislation (paragraph 15 Chapter I of the Law on VAT 1994) a foreign taxable person is an operator which does not have its seat of economic activity, or a fixed establishment in Sweden two or more economic operators may be regarded as a VAT group, and the activity in which they are engaged may be regarded as a single activity.

49 Skandia - Commentary it follows that only the fixed establishment, in Sweden, of an economic operator may belong to a VAT group. (CJEU paragraph 16) Services provided for consideration by a company such as SAC to its branch must be deemed, solely from the point of view of VAT, to have been provided to the VAT group and as that company and that branch cannot be considered to be a single taxable person, the supply of such services constitutes a taxable transaction (EJEU paragraph 31)

50 Skandia Skandia US HQ SAC Swedish Branch (Skandia) Skandia VAT group/ affiliates Swedish VAT group

51 UK Style VAT Grouping (Base Case) Overseas Overseas branch Overseas (UK branch) UK Head Office UK UK

52 UK VAT (Skandia Type Group) Rules [Sweden] [Sweden] [Swedish] branch [Swedish] Head Office UK Head Office UK branch UK affiliates UK affiliates

53 Skandia Implementation European sales lists Reverse charges (particularly relevant to partly exempt business) Different rules for different EU affiliates depending on domestic VAT grouping rules (see e.g. UK/HMRC RCB 2 (2015)) Implications of a suggestion for VAT grouping of a branch in a Swedish style EU Member State Any anti-avoidance rules locally (e.g. section 43(2A) VATA 1994)

54 Welmory (C-605/12) - issue Polish Whether services performed by the Polish company services (albeit outside Poland at the place where the servers were located) to facilitate services provided to the Cyprus company (of running an electronic auction system with a Polish domain name) meant that the Cyprus company had a fixed establishment in Poland to which the supplies were made?

55 Welmory (C-6-5/12) - Analysis Article 44 as for Skandia According to the settled case law on Article 9 of the 6 th Directive, the most appropriate point of reference for determining the place of supply is where the taxable person has established his business. It is only if that does not lead to a rational result (or creates a conflict with another Member State that another establishment may come into consideration (CJEU - paragraph 53) That interpretation is also valid in relation to Article 44 (CJEU - paragraph 54) Article 11 of the Council Implementing Regulation (282/2011) A fixed establishment shall be characterised by a sufficient degree of permanence and a suitable structure in terms of business and technical resource to enable it to receive and use services supplied to it for its needs. So, to be considered, as having a fixed establishment the Cypriot company must have in Poland suitable to use the services for [the Cypriot company s] business, namely running the electronic auction system in question and issuing and selling bids. (CJEU paragraph 59)

56 Welmory - Analysis Article 11 continued The fact that a business such as carried on by the Cypriot company can be carried on without requiring an effective human and material structure in Polish territory is not determinative. Despite its particular character, such a business requires at least a structure that is appropriate in terms of human and technical resources, such as appropriate computer equipment, services and software. (CJEU paragraph 60) The fact that the economic activities of the two companies, which are linked by a co-operation agreement form an economic whole and that their results are of benefit essentially to consumers in Poland is not material for determining whether the Cypriot company possesses a fixed establishment in Poland. The services supplied by the Polish company to the Cypriot company must be distinguished from those supplied by the Cypriot company to consumers in Poland. (CJEU paragraph 64)

57 Welmory - Analysis Article 22 (of (EU) 282/2011) to identify the customer s fixed establishment to which the service is supplied, the supplier shall examine the nature and use of the service provided Where [the preceding test is not conclusive] the supplier shall pay particular attention to whether the contract, order form and VAT identification number [supplied] identify the fixed establishment and whether [that] establishment is paying for the service. [Where still not resolved] the supplier may legitimately consider the [supplies] where the customer has established his business.

58 Concluding Remarks Domestic legislation and EU concepts can interact unexpectedly Impact of direct tax (e.g. response to BEPS) interaction with VAT Still not a harmonised tax Continuing to invoke direct tax concepts Case law contains ammunition for taxpayers and tax authorities

59 Digital economy VAT BEPS initiatives Thomas Ecker Austrian Federal Ministry of Finance

60 OECD BEPS Action Plan Action 1: Adress the Tax Challenges of the Digital Economy Remote (digital) supplies B2B B2C Import of low valued goods

61 Remote (digital) supplies B2B Especially relevant if business cannot fully recover input VAT Risk of distortions of competition and loss of VAT revenue Issues: Place of taxation Treatment of multi-location enterprises

62 Remote (digital) supplies B2B Supplier Issue: if place of taxation e.g. in supplier country VAT rate of supplier country Customer Input VAT rules of supplier country

63 OECD International VAT/GST Guidelines Guideline 3.2 (main rule): for B2B supplies, the jurisdiction in which the customer is located has the taxing rights over internationally traded services or intangibles. = jurisdiction where the customer has located its permanent business presence (para. 3.6) Special rules (Guidelines 3.5 and 3.6)

64 Remote (digital) supplies B2B business agreement MLE (head office) Supplier use of service MLE (PE) Issue: if place of taxation e.g. in head office (HO) country VAT rate of HO country Input VAT rules of HO country Problematic if supply HO-PE not taxable

65 OECD International VAT/GST Guidelines Guideline 3.4: when the customer has establishments in more than one jurisdiction, the taxing rights accrue to the jurisdiction(s) where the establishment(s) using the service or intangible is (are) located. Two methods Direct use/delivery method Supplier Recharge method MLE (HO) MLE (PE)

66 Collection B2B services Reverse charge customer liable to remit VAT Zero-rating / non-taxation if customer has full input VAT deduction Simplified registration and compliance regime usually used if no distinction B2B vs B2C not explicitly mentioned in Guidelines

67 Remote (digital) supplies B2C Supplier If place of taxation e.g. in supplier country VAT rules/rate of supplier country Consumer No VAT revenue for consumer country

68 OECD International VAT/GST Guidelines Public consultation Guideline 3.1: For consumption tax purposes internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption. Guideline 3.6: For the application of Guideline 3.1, the jurisdiction in which the customer has its usual residence has the taxing rights over B2C supplies of services and intangibles Special rules: Guidelines 3.5, 3.7 and 3.8

69 Collection B2C services Render compliance simple Simple registration / compliance regime Registration, returns, payments, etc. Invoicing rules, etc. Proportionality Ensure collection of tax Exchange of information and tax recovery Crucial question: Who is supplier?

70 Collection B2C services Legal basis for exchange of information and tax recovery OECD/CoE Multilateral Convention on Mutual Administrative Assistance in Tax Matters Art. 2 (1)(b)(iii)(C) general consumption taxes Income tax treaties if VAT included (see Arts. 26 and 27 OECD Model) Tax Information Exchange Agreements if VAT included Other bi- or multilateral agreements

71 Collection B2C services Other options for authorities use of technology to identify taxpayer criminal charges involve payment providers shut down websites?

72 Import of low value goods Most countries have VAT exemption for import of low value goods Mostly based on per-import-threshold thresholds vary considerably EU: ; Australia: 1,000 AUD Trade-off Cost of collection Compliance burden VAT Revenue Prevent distortions Digital economy aggravates problem

73 VAT and digital economy Admin. cooperation Easy compliance Change in VAT policy

74 VAT and digital economy Admin. cooperation Easy compliance Change in VAT policy

75 OECD Materials OECD/G20, Action Plan on Base Erosion and Profit Shifting, Published on July 19, 2013 OECD/G20, Addressing the Tax Challenges of the Digital Economy, Action 1: 2014 Deliverable, Published on September 16, 2014 OECD, OECD International VAT/GST Guidelines, published on April 18, 2014 OECD, Discussion Drafts for Public Consultation, International VAT/GST Guidelines, Guidelines on place of taxation for business-to-consumer supplies of services and intangibles, provisions on supporting the guidelines in practice, 18 December February 2015 OECD/Council of Europe, Multilateral Convention on Mutual Administrative Assistance in Tax Matters, as amended by the Protocol amending the Convention on Mutual Administrative Assistance in Tax Matters, which entered into force on June 1, 2011 OECD, Model Tax Convention on Income and on Capital (OECD: 2014) OECD, Model agreement on exchange of information on tax matters, released April 2002

76 Concluding Remarks Proliferation globally of Offshore Seller VAT Regimes US response as a non-vat jurisdiction VAT tax on the seller or the consumer? Increased relevance of the intersection of corporate tax and VAT

77 Thank You! Rick Minor Firm: Outside Counsel International Andrea Parolini Firm: Maisto e Associati a.parolini@maisto.it Patrice Pillet Firm: EU Commission DG TAXUD VAT Unit Patrice.Pillet@ec.europe.eu Martin Lausterer Firm: Linklaters LLP Martin.Lausterer@Linklaters.com Elisabeth Ashworth Firm: CMS Bureau Francis Lefebvre elisabeth.ashworth@cms-bfl.com Gary Richards Firm: Berwin Leighton Paisner LLP Gary.Richards@blplaw.com Thomas Ecker Firm: Austrian Federal Ministry of Finance thomas.ecker@bmf.gv.at