VAT around the world in 90 minutes

Transcription

1 VAT around the world in 90 minutes Tax Executives Institute Houston, February 2017

2 Disclaimer This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. The views expressed by the presenters are not necessarily those of Ernst & Young LLP. This presentation is 2017 Ernst & Young LLP. All Rights Reserved. EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms, of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. Page 2

3 Today s presenters Robert Smith EY Americas VAT Leader US Global Trade Leader Ernst & Young LLP Irvine, CA Karen Christie Principal Ernst & Young LLP New York, NY Enrique Agresott Garcia Senior Manager Ernst & Young LLP Miami, FL Page 3

4 Robert Smith Robert Smith Americas VAT and US Global Trade Leader Ernst & Young LLP Irvine, CA Robert Smith is the leader of EY s Americas VAT practices. He is also head of Ernst & Young LLP s Global trade practice, having recently relocated back to Irvine, California. He has been with EY for 17 years and was EY Asia-Pacific Indirect Tax Leader for more than 5 years. Robert worked in Asia for over 15 years in Shanghai and Hong Kong and started the indirect tax practice at the EY member firm in China and has successfully built it into the market leader with a team of over 90 staff that includes former Officials, lawyers, accountants and industry experienced professionals. He has a wide range of VAT/GST experience coupled with customs and global trade knowledge dealing with indirect tax issues throughout the globe. Robert has practical experience assisting companies to manage their global indirect tax function in developing and developed markets. He has worked extensively on the recent Malaysia GST implementation and China VAT Reform to create high performing teams capable of successfully delivering a comprehensive suite of VAT/GST service options needed by global multinational companies operating in these countries. He has experience in many areas of indirect tax areas such as: global trade cost savings initiatives, VAT risk management; indirect tax processes, compliance, controversy; and many other areas. Robert spearheaded the development of many new service offerings to help his clients: China Customs training; VAT diagnostics tool; China VAT compliance tool; and VAT School educational services to raise the level of awareness and technical knowledge amongst his clients responsible for managing indirect taxes. Robert has worked closely with the Tax and Customs Authorities on VAT/GST and customs policy developments across the Asia Pacific region. EY regularly provided technical input and international perspective on certain important indirect tax technical matters so the Authorities could make more informed policy decisions. Robert developed and provided technical trainings presented to Customs Authorities in various countries around Asia Pacific to increase awareness of difficult commercial issues faced by businesses operating in Asia Pacific. He is a frequent speaker at conferences on global VAT and customs issues, having the last 15 years focused on China and around Asia Pacific. Robert is recognized for his subject matter knowledge in the area of indirect taxes and has written numerous thought leadership reports (most recently Strategically Managing Indirect Taxes in Asia Pacific) and led many global webcasts around the topics of VAT/GST and global trade. He is a regular contributor and presenter at AMCHAM, where he was previously the Co-chair of the Tax Committee, and other forums on customs and VAT. Robert has extensively written on and been quoted by various media outlets for China and Malaysia s VAT/GST regulatory developments. Robert has a Masters and a Bachelors degree in Professional Accounting, both from Brigham Young University. He has passed the US CPA exam and previously worked as an auditor that allows him to apply his audit knowledge and accounting skills to the area of VAT and customs. He is a licensed US Customs Broker and formerly worked as a customs advisor in the US. He proficiently reads, writes and speaks Korean and speak basic Mandarin.

5 Karen Christie Karen Christie Principal Ernst & Young LLP New York, NY Karen Christie is a Principal of Ernst & Young LLP and serves in EY Americas Indirect Tax Services group. The Ernst & Young LLP VAT Practice is a team comprising VAT experience from Europe, AsiaPac and LATAM, with access to EY s extensive global Indirect Tax network. The Ernst & Young LLP US VAT practices are located in New York, Chicago, Atlanta, Miami, San Francisco, San Jose and Irvine. Karen has been based in the US for the last 10 years and has an in depth understanding of the challenges faced by US Multinationals to effectively manage global indirect taxes. She provides guidance on best practice and assists US Multinationals with improving their global VAT accounting and compliance process and with the design and implementation of global VAT systems and a global VAT strategy. Karen has extensive experience of implementing ERP and tax engines and works closely with our systems implementation teams to advise on the global VAT design and implementation and adoption of analytics throughout the process to improve the VAT functionality of new systems. She has presented at numerous VAT and indirect tax conferences in the US and abroad. Karen has 15 years of experience in VAT taxes and in depth knowledge of the VAT systems in Europe, AsiaPac and LATAM. She is a member of the Institute of Chartered Accountants in England and Wales and gained her tax qualification from the Chartered Institute of Tax in the UK. She leads our Global VAT Data Analytics team in the US. This is a dedicated team which focuses on developing data analytical enabled services for clients. Global VAT data analytics can be adopted to significantly improve the entire VAT accounting process and includes: identifying VAT recovery opportunities, highlighting working capital improvements, identifying process inefficiencies and risk areas, highlighting ERP system weaknesses including system data integrity reviews, providing global visibility through advanced continuous global VAT compliance and reporting monitoring functionality, and supply chain modelling Page 5

6 Enrique Agresott Garcia Enrique Agresott Garcia Senior Manager Ernst & Young LLP New York, NY Enrique Agresott is a Senior Manager in Ernst & Young LLP s US VAT Practice and is based in New York. The US VAT Practice is a team comprising VAT subject matter professionals from Europe, AsiaPac and LATAM, with access to EY s extensive global Indirect Tax network. Enrique has over 25 years of experience in VAT and an in depth knowledge of indirect tax regimes across Latin America. Enrique is originally from Colombia where he started his career in 1991 working for a US Multinational Company in the Chemical industry. He also worked as a Tax and Customs official with the Colombian Tax and Customs Authorities for more than 8 years. After that, he worked with two other US Multinationals for almost 10 years, and moved to the US with the one of them, the largest tobacco company in the region, to be the Head of Latin America Tax Since 2012, he has been working as a tax consultant and has provided advice on indirect tax management through specific technical advice on the VAT/GST/Indirect tax implications on a jurisdiction by jurisdiction basis, with main focus in LATAM countries. He focuses on identifying indirect tax opportunities for clients from a cash flow, savings, efficiency, processes and risk management perspective with experience in supply chain management, global restructuring, transformation projects, M&A and cross border transactions, also supporting clients on their relationships with the local tax authorities. Bilingual Spanish and English, with advanced level of Portuguese. Page 6

7 Today s agenda Introduction to VAT Overview of requirements and challenges of VAT compliance Global VAT trends VAT compliance function of the future Hot Topics New VAT regimes India, GCC Border Adjusted Cash Flow Tax Brexit Page 7

8 Introduction to VAT Page 8

9 What is VAT? VAT - includes GST)/ HST, ICMS, IPI, ISS, PIS / COFINS, municipal value added taxes, withholding VAT and various other similar taxes In principle, every supply of goods and services is subject to VAT VAT is collected at every stage of the supply chain Tax charged on sales (output VAT) Tax paid on purchases (input VAT) In general, VAT system allows registered traders to deduct the tax charged on their inputs The actual VAT burden is therefore borne by the final consumer VAT is self-administered Page 9

10 The world of VAT VAT includes: GST/HST, ICMS, IPI, ISS, PIS / COFINS, municipal value added taxes, withholding VAT and various other similar taxes. Recent VAT system introduction: Bahamas and Malaysia, Gulf Cooperation Council (GCC), India (replacing existing multi-layered VAT system) Page 10 3

11 Global shift to indirect taxes VAT is an attractive way for governments to raise revenue Over 165 countries in the world levy a VAT New VAT regimes have recently been announced Standard VAT rates are increasing as the top personal income tax (PIT) and corporate income tax (CIT) rates fall in the European Union (EU) Source: Organization for Economic Co-operation and Development s (OECD) Consumption Tax Trends 2014 European Commission, 2014 Page 11

12 Global increase in average VAT rates Average VAT rates in the EU and OECD Page 12

13 Global VAT under management example Scale of VAT under management over four years EXAMPLE VAT UNDER MANAGEMENT FOR A MULTINATIONAL COMPANY Non US sales in 2016 amounted to $ 13.5b and VAT throughput is estimated to represent 40% of this amount On average $ 4.8b of VAT passed through the company each year totalling to $ 19.5b* over four years that are generally open to audit Income tax paid each year was on average only $ 1.5b only 30% of the VAT under management amount Does the time you spend on each of the taxes reflect their magnitude and possible impact on the business? $6, $5, $4, $3, $2, $1, $0.00 Annual VAT under management

14 Overview of requirements and challenges of VAT compliance Page 14

15 Requirements and challenges International footprint means overseas VAT compliance and reporting obligations. New VAT systems have recently been announced. VAT and GST regimes while operating on similar basic principals often have varying rules. Variances between VAT regimes include: VAT rates Types of returns Due dates Reporting thresholds and methods Requirements to submit additional returns Even in Europe where all Member States operate under the same regulations there are differences in VAT compliance responsibilities. In LATAM, there are multiple overlapping taxes and very complex VAT withholding regimes. Lack of technology standardization, manual (labor intensive) processes. Lack of visibility from a regional and global standpoint. Electronic invoicing and reporting is required in more and more countries. Understanding VAT compliance requirements in each country is key to avoiding penalties and interests. Staying compliant puts a significant strain on businesses resources. A company in Germany that has cross-border supplies and acquisitions of goods may be required to submit 49 VAT compliance returns each calendar year. Page 15

16 Time spent to comply (compared to the EU) Number of times the time spent on consumption tax compliance (per region) exceeds the average time spent in the EU AMERICAS APAC EMEA -(non-eu) excl Source data: The World Bank/International Finance Corporation Page 16

17 Global VAT trends Page 17

18 What do we see in the market? Increasing focus on the risks and management of indirect tax Indirect tax being brought into the scope of global compliance frameworks either upon implementation or being retrofitted later Increasing requests for indirect tax solutions Move from an in-house to an outsourcing model Move from local empowerment to greater control and visibility regionally Regional (or global) indirect tax compliance framework requests Bringing indirect taxes into an existing regional shared services center (SSC) Managing compliance from a central Hub and twinning with an Advisor Hub Re-defining compliance scope in conjunction with centralisation and/or standardization Data analytics Increased interest in use of technology (data analytics and robotics) Page 18

19 Growing importance of Consumption Taxes Consumption taxes are rising throughout the world. VAT is a growing concern for companies doing business globally. Many governments use VAT as a tool for fiscal policy: Reduce to stimulate consumption Increase to reduce deficits More than 160 countries have a VAT regime. The US is the only country in the Organization for Economic Co-operation and Development (OECD) without VAT. Other countries considering VAT include many in the Middle East. The EU average VAT rate is approaching 21.5% (and rising) The trend is toward increasing rates and anti-avoidance measures to defend yields and reduce the tax gap. Page 19

20 Current trends in e-governance Tax authorities are requesting more detailed digital data from taxpayers: Brazil: transaction data, trial balance Mexico: transactional data, trial balance and suppliers Europe: Standard Audit File for Tax purposes (SAFT) China: Golden Tax system VAT monitoring system Russia: purchase and sales ledgers, VAT invoices on operations performed by taxpayers on behalf of another person, etc. E-Audits: E-Audits are becoming standard method in VAT/GST audit procedures globally. Page 20

21 Technology and government digital data e-audits Based on EY s survey in 38 countries e-audits are standard method or partly used in the VAT audit procedures in 74% of the countries Do the authorities carry out e-audits for VAT? What might trigger an e-audit? 8% Yes, e-audit is standard method e-audit is partly used in the audit 8% 29% Data discrepancy No e-audits e-audits done No specific triggers 26% 66% No 13% 26% Taxpayer's request Vat VAT refund 21% Volume of data 3% Page 21

22 Technology and government digital data Brazil s indirect tax system Page 22

23 Technology and government digital data Brazil s indirect tax system Indirect taxes in Brazil: PIS Cofins IPI ICMS ISS II Description Federal social contributions Federal value-added tax (VAT) State VAT 27 states Municipal VAT 5570 municipalities Customs duty Taxable event Revenues or imports Manufactured products Movement of goods and supply of transportation or communication services Supply of services listed in the law Importation of products Rates Standard rate: 9.25% Other regimes: 0%, 3.65% 13.10% Rates range from 0% to 300%, according to the tariff code Rates vary according to the state of origin and destiny, import content, type of customer and type of product, usually range from 4% to 19% Rates range from 2 5% Rates range from 0 35% Credits Non-cumulative system: credits can be calculated with restrictions Cumulative system: no credits available Credits are limited to products used as inputs Credits are limited to products and services related to the company s core business No credits allowed No credits allowed Page 23

24 Technology and government digital data Brazil s indirect tax system Public Digital Bookkeeping System Digital Accounting Bookkeeping (ECD) Digital Tax Bookkeeping (EFD) Electronic Invoicing (NF-e) Came into effect in 2008 and keeps expanding Integrated initiative by the federal, state and municipal tax authorities: To promote a transparent relationship between taxpayers and tax authorities To rationalize, standardize and consolidate the accessory obligations To avoid tax evasion and prevent unfair competition Taxpayers are required to record electronically every tax and accounting operation for filing with the tax authorities Page 24

25 Technology and government digital data Brazil s indirect tax system Brazil collects more electronically derived tax and accounting data than any other country, enabling the tax authority to analyze your data to: Detect VAT discrepancies in real time Undertake electronic retrospective VAT audits Better identify VAT issues and audit gaps Cross-check between VAT data and accounting data from federal, state and municipal levels Support efforts to curb tax evasion Page 25

26 Technology and government digital data Mexico s VAT system Usage of technology and analytical solutions has become an essential part of the tax relationship. Electronic invoices, e-accounting, online filing of tax returns and payments, tax mail, electronic signature and electronic audits are tools that the authority is currently using to analyze information almost in real time. The new digital approach means for taxpayers to: Implement monitoring schemes to detect irregularities in real time. Have traceability of their information in order to respond on a timely basis the requirements of the authority. Page 26

27 Technology and government digital data Mexico s VAT system 100% of new taxpayers register online 20.6 million e-invoices are issued daily 8.9 million customs declarations are received every year 5.4 million companies and individuals issue electronic invoices every day 292,813 companies have communication with the tax authority through the digital tax mail Second half of 2016 beginning of e-audits and automated refunds Page 27

28 Technology and government digital data Mexico s VAT system Predictive models (i.e., network analysis) q Analysis in real time q Analysis of 100% data q Electronic audits Benchmarking between companies Business rules to detect discrepancies Page 28

29 Technology and government digital data Standard Audit File for Tax purposes (SAFT) SAFT is an international standard for electronic exchange of reliable accounting data from organizations to the national tax authority or external auditors. The standard is defined by OECD. The aim is to simplify tax compliance and audit requirements and the format recognized is XML. Austria SAFT compliant Luxembourg SAFT compliant France Mandatory electronic filing of audit files Poland SAFT compliant Norway SAFT compliant Romania Increased reporting requirements Form 394 (XML file, but not SAFT) May-05 Jan-09 Apr-10 Jan-12 Jan-13 Jan-14 Jan-16 Jul-16 Oct-16 Jan-17 TBC TBC SAFT Guidance papers issued by OECD Amended SAFT Guidance papers issued by OECD Portugal SAFT compliant Hungary Audit function VAT invoices Lithuania i.mas Slovenia SAFT compliant Spain Electronic VAT books (immediate information sharing system in XML, but not SAFT) GTCBAS May 2005.pdf SAFT April 2010.pdf In Belgium, Croatia, Finland, Germany, Malta, Slovakia, and UK discussions about SAFT are taking place. Countries such Sweden, Netherlands, Hungary and Czech Republic have their own standard and rules. Page 29

30 Technology and government digital data Do the Tax Authorities know more about your organization than you do through the electronically submitted indirect tax data? Do you know what the Tax Authorities are doing with your electronic indirect tax data? What are you doing to keep pace with authorities? Page 30

31 VAT compliance function of the future Page 31

32 VAT compliance function of the future Automated data processing: gathers, formats, collates and summarizes large amounts of data into a defined hierarchical tax structure to fit business needs. Suite of indirect tax automated reporting configurable to the needs of the BUSINESS Source data for VAT compliance Data warehouse Automated VAT reporting template Full suite of automated working papers supporting indirect tax returns Full suite of automated reconciliations exception and analytics reports Automatic upload of tax authority designated reports Full suite of trend analysis and diagnostic reports Automated indirect tax adjustments Monitoring of thresholds Direct debit Data reconciliations to ensure complete, accurate and timely data Bank account Page 32

33 Use of technology Data analytics and robotics Landscape Increased use of data analytics to effectively manage global VAT Current state analysis - strong insights into the effectiveness of the current tax function Identification of potential cash tax savings Optimization of working capital and cash flow Root cause analysis for errors and remediation plan Root cause for process inefficiencies Business case for supply chain enhancements Real time VAT compliance exception reporting Increased use of robotic process automation software (RPA) to automate repetitive manual process and reduce costs: Extract periodic VAT reports Automate manual adjustments Automate workflow management processes Prepare reconciliations Upload digital data to government interfaces Page 33

34 VAT data analytics Data Analytics Maturity Model Limited use of data analytics in tax compliance Simple spreadsheet formulas and tables Limited number of automated controls Rigid standard reports Simple Developing Use of custom-built BI tool functionality (in house or through a third party) as part of regular tax reporting process Flexible interactive reports/dash boarding to identify areas of cash opportunity, risk and process improvement Leading Practice Advance Future Single multi functional global and regional command & control center Predictive data analytics e.g. supply chain modelling and planning Real time automated correction of errors Limited use of BI tools to run periodic analytics Ad hoc analytics not fully integrated into tax reporting process Limited formal links between data analytics findings and filled VAT numbers Business Intelligence (BI) functionality within existing ERP environment (fully integrated inhouse solution) Flexible interactive analytics available to all tax and finance users and integration to business units. Functionality available through mobile/tablet applications Real-time monitoring of key VAT accounting and compliance processes. using structured and unstructured data Page 34

35 VAT data analytics Data analytics makes it possible to look at large amounts of transaction data to help identify: Cash savings Unclaimed VAT Overpaid VAT Wrong rate Prior exposures Unpaid VAT Over-claimed VAT Wrong rate VAT data analytics Process errors Incorrect tax codes Manual procedures Supply chain improvements VAT overview (supply chain mapping) Cash and cash flow improvements Page 35

36 VAT data analytics Continuous data monitoring VAT tracking and visualization tools allow you to monitor your global footprint and process. Global VAT liability Global VAT sales Page 36

37 Example of dashboards VAT analytics - general Company import overview Page 37

38 Example of dashboards VAT analytics - cash savings Local purchase without VAT The analysis of purchases posted without VAT provides a detailed perspective of the company transactions, such as the countries/states of suppliers, type of purchase (local, import, etc.), month of purchase, tax codes, number of vendors, etc. Page 38

39 Example of dashboards VAT analytics Mexican digital data e-invoices risk assessment e-invoices risk assessment CANCEL OUTLIERS NO OBSERVATIONS DUPLICATES CANCEL DUPLICATE BLACKLIST Assessment report TAX ID E-INVOICE ID BLACKLIST BEHAVIOR OUTLIERS Verify invoice credibility to reduce potential audit risks Identify duplicates and outliers to reduce incorrect payments to suppliers Verify the correct use of FX rates and measure the volume of your operations in other currencies Page 39

40 Example of dashboards VAT analytics - process improvement Canceled invoices profile Process improvement The company can analyse the timeline of the issuance of invoices (left graphic above) along the month and the timeline of the canceled document (right graphic above) on the following month. Additionally it is possible to identify the users that are canceling the documents (right graphic). Page 40

41 Robotics process automation

42 What is a robot? Robots leverage existing IT assets better Robots link and sit on top of existing IT assets and can typically be implemented without any changes to existing IT. Robots access applications the same way the human operator would. In addition to an initial implementation, small IT changes can lead to a significant performance and robustness improvement. Tax Associate s Desktop Robots provide a low IT footprint method of connecting IT systems Web Spreadsheets Word documents PDFs s Data & analytical tools Collaboration Enterprise automation Tax systems Revenue authority websites Service provider portals Investment manager portals Government / regulatory sites ERPs Loan systems Claim systems Upstream systems Analytics / reporting Innovation into ACTion Aug 2016 Tax compliance system Tax provision system Regulatory models Tax planning models Page 42

43 Benefits of robotic process automation The robot is an enterprise-class application that operates unattended to automate selected business processes: Can be deployed without altering existing IT systems. This lowers risks, aids rapid deployment and provides quick ROI Works 24/7 and can be ramped up in an instant to match volatile demand Emulates the actions of a user, and adheres to established controls (user credentials and passwords) Outperform employees for specific tasks many times over Includes exception handing and activity logging capabilities One time cost to implement a medium-complexity function = ~2-3 fulltime employees (FTEs) Annual cost to license 10 robots = ~1 FTE Annual effort to manage and maintain 10 robots = ~1 FTE Costs 1/3 of an offshore FTE Estimating the Opportunity Example: a 10 FTE medium-complexity function that achieves a 30% efficiency gain would save $600K over 2 years, or roughly a 175% return on investment. Note: assumes a fully loaded annual cost of $100K/FTE Page 43

44 Use of RPA in VAT compliance Examples of potential use of RPA in VAT compliance 1 Run multiple VAT reports from SAP 2 Automatically summarize the starting point for the preparation of VAT returns Significantly reduces labor hours for multiple manual reports extractions and reduces the risk of data extraction error Accelerates timeframes for VAT return preparation and reduces cost Do more faster and shorten critical path of VAT compliance Entering the ERP environment to extract additional information for validation (screenshots & invoices) Automate the workflow around the review of analytic checks. Filing of electronic VAT returns directly to tax authority. Reduce costly errors with quality and controls Reduce the time and accelerate the review process with enriched information Reduce the time spent by automating the creation of review schedules and e:mailing to responsible parties, creating reminders etc Large reduction in time to file returns, improved accuracy and automation of the confirmation process Improve audit trail (every step and issue could be logged), consistency, and control over errorprone manual activities that elevate risk, noncompliance, financial or reputational harm Reduce end-to-end time for recurring compliance, meet deadlines, and smooth VAT process by virtually connecting disparate systems and data sources Page 44

45 Hot topics India, GCC, Brexit Page 45

46 India The Indian Finance Minister has announced that July 1, 2017 appears to be a more realistic date for the implementation of the goods and services tax (GST) in India as the State and Central GST legislations are yet to be passed by the Indian Parliament. Indian GST was initially scheduled to take effect from April 1, The GST Council during its meeting on November 3-4, 2016 decided on a tiered GST rate structure 0%, 5%, 12%, 18% and 28%. The Council is yet to decide exactly what goods and services will fall in each category, however, the 0% rate will likely include essential items such as food; 5% rate will include items of mass consumption; 12% and 18% will include the majority of goods and services and 28% will include specific goods such as tobacco and tobacco products, carbonated beverages and luxury cars. Draft supplementary GST laws are proposed to be discussed and approved by the GST Council in its next meeting scheduled on February 18, Page 46

47 Gulf Cooperation Council (GCC) GCC members include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). Currently no VAT or similar consumption tax in GCC. Just this week, the six-member GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and UAE) ratified the GCC unified VAT framework agreement, confirming the implementation of VAT in the region from January 1, Finance Ministry officials have already begun sharing the text of the VAT framework agreement with key business sector leaders and have indicated that a 5% VAT will apply on all goods and services other than basic food items, medicine, and medical supplies. Page 47

48 Brexit So what happens now? On June 23, 2016, the people of the United Kingdom voted in a referendum to leave the EU. Formal withdrawal talks will only be triggered when Britain invokes Article 50 of the Lisbon Treaty, which puts other EU leaders on notice that the UK intends to leave. The UK will have two years from when it invokes Article 50 to negotiate its separation from the EU. November 2016 US Presidential Election Once notice given, negotiations start and clock is running when to give notice? March 2017 Dutch general election April-May 2017 French Presidential Election August-October 2017 German Federal Election Treaty provides for two years, could be shorter if agreed or longer if extended by unanimity June 2016 July 13, 2016 March ? April 1, 2019? 2019? Little may change immediately but now is the time for action. By understanding the possible risks and opportunities, businesses can effectively prepare for the path ahead. Referendum New Prime Minister Theresa May appointed Prime Minister with responsibility for negotiating the UK s exit. UK to trigger Article 50 The formal process of negotiating exit begins. Deal reached? EU Commission negotiates the withdrawal, for approval by the Council of Member States after ratification by the EU Parliament. UK exits? It s unclear whether the withdrawal agreement or a separate one would cover the UK s future relationship with the EU. Extension granted? Only possible in the event of a unanimous agreement. Page 48

49 Border adjusted cash flow tax Page 49

50 The border adjusted cash flow tax The House GOP Blueprint transforms the current corporate income tax into a destination-based tax on domestic consumption and can best be described as resulting in a 20% border adjusted cash flow tax (BACFT). The Blueprint views these changes as pro-growth: Improves US competitiveness and the US balance of trade Lowers the tax on the return to investment and savings Border adjusted means the BACFT is applied to all domestic consumption and excludes any goods or services that are produced domestically but consumed elsewhere (i.e., excludes US exports from the tax base while including imports): Cash flow from exports (i.e., US export sales) is excluded from the tax base. Cash flow used to purchase imports is included in the tax base (e.g., no cost of goods sold deduction). The value-added taxes (VATs) imposed in most other countries are examples of border-adjusted taxes. Page 50

51 How the Blueprint transforms current corporate income tax The Blueprint s BACFT represents a major departure from the current corporate income tax system. Current state Corporate income tax levied on firm profits Calculation of tax: Profits defined as revenue minus costs Taxed at 35% rate Capital investment depreciated over period Tax on profits earned overseas minus credit for foreign taxes paid (worldwide tax regime) Major modifications: BACFT Destination-based tax on domestic consumption 20% corporate tax rate (25% tax rate on pass-through owners income) Capital investments fully expensed Corporate net interest expense deduction eliminated All special business provisions repealed except for R&E credit and LIFO Corporate AMT repealed Border adjustability exempting exports and taxing imports Territorial tax regime and tax on previously untaxed accumulated foreign earnings Page 51

52 Is the BACFT similar to other taxes? The BACFT has many similarities to the Growth and Investment Tax (GIT) recommended by President Bush s 2005 Tax Panel: Many of the choices made in designing the Blueprint were previously made for the GIT in The final 2005 Tax Panel Report may provide valuable background on the BACFT: From an economic perspective, when coupled with an individual tax on employee compensation, the BACFT produces results similar to a subtraction-based VAT (like that imposed by Japan) but would operate quite differently than either a traditional VAT or a traditional corporate income tax. Page 52

53 Comparison with traditional tax models Tax base Imposition Current corporate income tax Modified accounting profit Any revenue recognition BACFT Modified cash flow Domestic consumption Tax paid by Income earner Cash-flow earner Timeframe Annual Annual VAT Value-added (sales revenue less cost of inputs) Domestic consumption Business collects (borne by consumer) Transactional (with periodic reporting) Page 53

54 Comparison of VAT and BACFT border adjustments Border adjustments with VAT: At import: VAT imposed Subsequent sale: seller collects VAT from buyer on gross sales revenue, credits VAT paid on inputs (including VAT paid at import), and remits the balance to the government On export: transaction exempt, any VAT paid on inputs (including VAT paid at import) is recoverable Border adjustments with BACFT: At import, either: Impose tax on the imported products or services, like a VAT, or No basis for the imported products (i.e., no COGS deduction) and no deduction for the imported services On export: exclude US export sales from taxable receipts Tax is imposed on annual cash flow, deductions from revenue allowed for domestic expenses (e.g., salaries paid, COGS, capital expenditures, ordinary and necessary business expenses) Page 54

55 Mechanics of BACFT border adjustability Overview Border adjustments are a way to tax imports and refund (or credit) taxes paid on business purchases used in the production of exports. Under the BACFT, revenue from US export sales are not taxable, and the cost of imported goods and services are not deductible (or taxed separately). Note: The arrows below are cash flow directional. Purchases and expenses Sales receipts Import Domestic No deduction Deductible US business Exempt Taxable Export Domestic Imports into US Domestic expenses Exports out of US Domestic sales No cost of goods sold (COGS) deduction associated with imported goods Cost of imported services not deductible Domestic expenses generally deductible Includes salaries/wages, capital expenditures, business expenses No tax on revenue associated with exported product Pay tax on revenue associated with product Page 55

56 Mechanics of BACFT border adjustability Example Note: The arrows below are cash flow directional. Purchases and expenses Sales receipts Import Domestic $400 $150 $200 purchases $100 salaries and expenses US business $850 Export Domestic Current system Income $ 1,000 COGS (600) Expenses (100) Taxable income $ 300 Tax rate 35% Tax $ 105 After tax income $ 195 BACFT Taxable receipts $ 850 COGS (200) Expenses (100) Taxable base $ 550 Tax rate 20% Tax $ 110 After tax income $ 190 Page 56

57 Why use border adjustments? Some believe that our tax system disadvantages exporters in comparison to those resident in foreign countries that impose a VAT. The World Trade Organization (WTO) rules generally view a government s exemption of export sales from tax as an impermissible export subsidy: Exemption of exports from taxes normally due on domestic consumption are allowed. This exemption applies to VATs and also permits the refund of prior stage VAT collected when a product is exported. These rules have historically been viewed as allowing exemption of indirect taxes while not allowing exemption of direct taxes. The Blueprint states that the border adjustment approach is intended to be WTO compliant, thus eliminating the disadvantage. Page 57

58 Alignment of tax and trade policy objectives Many of the trade topics raised during the presidential campaign centered on perceived inequities faced by US companies competing internationally. The border adjustment provisions of the BACFT are viewed by some as addressing these same concerns, including: The perceived inequity of foreign-produced items being exempt from VAT, while US goods receive no similar treatment The need to encourage exports, making the US a more preferred location of production Incentivize US manufacturing to remain in the US and in effect impose a tax on imports by including imports in the tax base (consistent with stated goals for the End the Offshoring Act proposal) The direction of future trade proposals could well be impacted by the results of US tax reform. Businesses active internationally will want to monitor both trade and tax proposals and consider potential interactions on their businesses. Page 58

59 Challenges facing Blueprint s border adjustability provisions The Blueprint s border adjustability provisions are expected to face a variety of challenges, including: Compatibility with WTO export subsidy rules Offsetting impact of currency adjustment Industry impacts Modeling outcomes is essential. Page 59

60 Thank you Page 60