EY Tax & Legal News. Issue 1/2018. Tax and Legal Services

Transcription

1 Issue 1/2018 EY Tax & Legal News Tax and Legal Services 2 Corporate and Personal Taxation 2017 update to OECD Model Tax Convention Opinion of the Advocate General rejection of the social security certificate 4 Value Added Tax Margin scheme on accommodation and travel services extension of its application to business-to-business transactions CJEU Judgment C 132/16 Iberdrola Deduction of input VAT in respect of services incurred for construction and improvement of a property belonging to a third party 6 Legal news New Act on Personal Data Protection effective as of May 2018 Reversal of the European Court of Human Rights (ECHR) Chamber decision on employee monitoring Proposal for new rules on privacy protection in electronic communications 10 News in Brief

2 Corporate and Personal Taxation 2017 update to OECD Model Tax Convention On 11 July 2017, the Organisation for Economic Co-operation and Development (OECD) released the draft contents of the 2017 update to the OECD Model Tax Convention (the OECD Convention) and its Commentaries, work on which has been ongoing since The 2017 update was approved and the condensed version of the 2017 OECD Convention published on 21 November 2017 and 18 December 2017, respectively. The 2017 update comprises the treaty-based recommendations developed through the Base Erosion and Profit Shifting (BEPS) project, and a few other changes not developed as part of the work on BEPS. In particular, these include: A new Article 29 (Entitlement to Benefits) aimed at preventing treaty abuse, which includes a limitation-onbenefits (LOB) rule (simplified and detailed versions), an anti-abuse rule for permanent establishments (PE) situated in third states and a principal purposes test (PPT) rule Tightening of conditions in Article 5 (PE) and its Commentary under which a PE should be established, aimed at preventing artificial avoidance of PE status An amended Article 25 (mutual agreement procedure) and related Commentaries to reflect the MAP arbitration procedure developed in negotiation of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) The update also includes a few additional changes to the Commentaries, in particular: To Article 4 (Resident), related to the issue of whether a house rented to an unrelated person can be considered a permanent home available to the landlord for purposes of the residency tie-breaker rule To Article 4 intended to clarify the meaning of habitual abode for the purposes of the residency tie-breaker rule A new paragraph added to the Commentary on Article 5, which indicates that registration for the purposes of VAT or a tax on goods and services is, by itself, irrelevant for the purposes of the application and interpretation of the PE definition Finally, the 2017 update also includes changes and additions made to the observations and reservations of OECD member countries and the positions of non-oecd economies. Implications The OECD Convention is the basis for many bilateral tax treaties. Although not legally binding, together with its Commentaries it represents the majority opinion of OECD member countries and hence significantly influences the interpretation of double tax treaties. Taxpayers are therefore advised to observe changes in the 2017 update and assess what impacts it may have on both their current or planned tax structures and operations. If you would like more information or have any questions regarding this issue, please contact the author of this article or your partner or manager at EY. Marta Onuščáková marta.onuscakova@sk.ey.com tel.: EY Tax & Legal News Issue 1/2018

3 Opinion of the Advocate General rejection of the social security certificate The Advocate General of the Court of Justice of European Union (CJEU) recently published his opinion in Case C-359/16, in which a Belgian court had rejected certificates, issued by Bulgarian authorities, confirming employees participation in a social security system ( certificate ). According to current EU legislation, a social security certificate can only be rejected by the Member State which issued it. Thus, should the CJEU adopt the opinion of the Advocate General, it could lead to a shift in the settled case-law. Background A Belgian company employed practically no staff for a number of years and outsourced all manual labour to Bulgarian companies which had no activities in Bulgaria. Those Bulgarian companies provided their employees with Bulgarian social security certificates (certifying that they were contributing to the Bulgarian social security system) and assigned them back to Belgium, where no social security deductions were made. The Belgian authorities opened an investigation and later submitted a request to the Bulgarian authority for withdrawal of the social security certificates, to no avail. Subsequently, the Belgian authorities concluded that the certificates had been obtained fraudulently, as they did not reflect the reality of the situation, and ceased accepting them. event of fraud, the court of the host Member State may cancel application of a social certificate issued by another Member State. Next steps The opinion of the Advocate General is not legally binding and this issue is still subject to the CJEU s review. However, it generally corresponds with stricter conditions for the posting of workers, which have recently been implemented. Moreover, should it be adopted by the CJEU it might change the current case-law. We will continue to monitor the case and keep you informed of its further developments. If you would like more information or have any questions regarding this matter, please contact the author of this article or your partner or manager at EY. Matej Oravec matej.oravec@sk.ey.com tel.: Based on the EU legislation, as long as social security certificates have not been withdrawn or declared invalid by the issuing authority, the institutions of the host Member State are bound to accept them. Additionally, a host Member State s court is not entitled to question the validity of a social security certificate. Despite the above, the Advocate General supported the conclusion of the Belgian authorities and stated that in the 3 EY Tax & Legal News Issue 1/2018

4 Value Added Tax Margin scheme on accommodation and travel services extension of its application to business-to-business transactions The approved amendment to Act no. 222/2004 Coll. on Value Added Tax extends the range of entities required to apply the special VAT scheme to include those which: Procure goods and services for the purpose of a journey / travel from other taxable persons ( accommodation and travel services ) Act in their own name towards customers, whether they are taxable or non-taxable persons Under the margin scheme, the VAT base is determined as the difference between the sale price and aggregate amount of travel, accommodation and other services purchased from third parties. The place of supply is where the provider is established. Therefore, in many cases the previously applied reversecharging of VAT by the customer will not be possible and Slovak VAT will need to be paid at the standard rate of 20%. The provider must not state the amount of the VAT they pay under the margin scheme, they must only include information on the invoice that the margin scheme is applied. Juraj Ontko juraj.ontko@sk.ey.com tel.: Jana Ontkovičová jana.ontkovicova@sk.ey.com tel.: The margin scheme does not apply only to travel agencies and travel agents in the traditional sense, but to all VAT payers who procure travel services such as accommodation and transport in their own name. This may include services linked to the organization of an educational, marketing or other event, where the costs are recharged to group companies, third parties or to participants. The margin scheme also applies to situations with a zero or negative margin, where no obligation to pay VAT arises. The most important change is the introduction of an obligation to apply the margin scheme in situations where customers are taxable persons (businesses). So far, the scheme has been applied by providers of services rendered to non-business customers (travelers). The margin scheme brings an additional administrative burden to VAT payers associated with tracking and keeping separate VAT records, changes to the way how invoices are issued, changes to the method of determining the VAT base and the need to track the costs associated with accommodation and travel services, for which the right to deduct VAT is now blocked. Another major change is a ban for the provider on deducting VAT incurred on the acquired goods and services linked to the accommodation and travel services rendered. Given that the provider must not show on the invoice the VAT paid on the margin, and cannot deduct the VAT incurred on the associated purchases, the margin scheme will cause a substantial increase in the cost of transactions. Compared to the previously applied rules, the cost will rise by the amount of non-deductible VAT and by the VAT paid on the margin. For completeness - the VAT payer s own services provided in connection with the event will not be subject to the margin scheme but will be governed by the standard VAT regime. For example, the cost of a provider s personnel or cost of own premises, if charged to the customer, is to be excluded from the margin scheme and the standard VAT regime should be applied instead. This is a fundamental change in the VAT treatment of accommodation and travel services under the Slovak VAT Act and many aspects of its practical application are currently not 4 EY Tax & Legal News Issue 1/2018

5 clear. If there are indications that extension of the scheme to business-to-business transactions affects you, we recommend consulting your tax advisor on the impacts and possible solutions. If you are interested in more detailed information or have any questions concerning the above, please contact your usual EY partner or manager. CJEU Judgment C 132/16 Iberdrola Deduction of input VAT in respect of services incurred for construction and improvement of a property belonging to a third party The Court of Justice of the European Union (CJEU) issued its decision in Case C 132/16 Iberdrola, concerning right of a taxable person to deduct the input VAT in respect of services incurred for construction or improvement of a property owned and used by a third party. Situation A Bulgarian municipality, acting as a developer, obtained a building permit in order to upgrade a waste-water pumping station serving a holiday village. Iberdrola had purchased several parcels of land in that holiday village as a private investor, in order to construct apartment buildings for seasonal use. The holiday village, once completed, was intended to generate rental income. Iberdrola entered into a contract with the Bulgarian municipality for refurbishment of the pumping station, for which Iberdrola had undertaken to carry out the required work at its own expense and had contracted those works to a third party. Reconstruction of the local municipal waste-water infrastructure was central to the project, enabling connection of the village to the communal sewerage system, since the existing independent system was inadequate. In other words, without upgrading the pumping station, Iberdrola would not have been able to carry out its economic activity. Iberdrola deducted input VAT in respect of the costs incurred in connection with construction of the sewerage system, which was subsequently refused by the local tax authority, on the basis that Iberdrola had supplied the Bulgarian municipality a service free of charge. On appeal, the Bulgarian administrative court held that the fact that supply of services was free of charge did not justify the rejection of the right to deduct the input VAT, given that those services were used in the context of Iberdrola s economic activity, namely the connection of the buildings for which a building permit had been granted for the pumping station project. Such costs form part of the general costs of the taxable person and constitute a component of the price of services to be supplied by Iberdrola (rental fees). It is irrelevant that the works carried out relate to a property belonging to the municipality. The tax authority appealed this decision and the Bulgarian Administrative Supreme Court referred the case to the CJEU. It asked whether Iberdrola was entitled to deduct the VAT incurred in respect of the supply of services relating to construction or improvement of a property, used both by the recipient of the supply (Iberdrola) and by the third party (municipality) which owns the property, for the sole reason that the third party enjoys the result of those services free of charge. Decision of the CJEU The CJEU stated that the taxable person has the right to deduct input VAT in respect of a supply of services, consisting of the construction or improvement of a property owned by a third party, when that third party enjoys the results of those services free of charge and when those services are used both by the taxable person and by the third party. This applies in the context of their economic activity, if the services do not exceed some Monika Fábryová monika.fabryova@sk.ey.com tel.: EY Tax & Legal News Issue 1/2018

6 necessary extent which allows the taxable person to carry out the taxable output transactions and simultaneously their cost is included in the price of those taxable output transactions (rental fees in this case). In accordance with settled case-law, a taxable person has the right to deduct VAT even where there is no direct and immediate link between a particular input transaction and an output transaction, where the costs of the services in question are part of their general costs and are, as such, components of the price of the goods or services which they supply. Such costs should have a direct and immediate link with the taxable person s economic activity as a whole. In the case at hand, the CJEU concluded that reconstruction of the pumping station was essential for completion of the project and that, consequently, in the absence of such reconstruction, Iberdrola would not have been able to carry out its economic activity. This demonstrates the existence of a direct and immediate link between the reconstruction service, in respect of the pumping station belonging to the municipality, and the taxable output transaction performed by Iberdrola. The fact that the municipality also benefits from the service cannot justify denial of the right to deduct the input VAT. In the light of this, the input reconstruction service is considered to form a component of the cost of a taxed output transaction performed by Iberdrola. Practical considerations The CJEU judgment increases legal certainty of VAT-payers by means of strengthening the principle of a direct and immediate link between input and output transactions and its further interpretation. A direct and immediate link is a crucial criterion in respect of the right to deduct input VAT and cannot be jeopardized by other circumstances, such as side benefits gained by third parties. On the other hand, the judgment might open up the opportunity for further challenges as to whether the level of services is considered necessary. If you have any questions or would like to obtain more information regarding this topic, please contact the author of the article or your usual contacts within EY. Legal news New Act on Personal Data Protection effective as of May 2018 A new Act on Personal Data Protection ( the Act ) recently received presidential approval. Its aim is to harmonize Slovak legislation with EU Regulation 2016/679 of the European Parliament and of the Council of 27 April 2016, on the protection of natural persons with regard to the processing of personal data and on the free movement of such data ( the Regulation ). The Act also transposes into Slovak law EU Directive 2016/680 of the European Parliament and of the Council of 27 April 2016, on the protection of natural persons with regard to the processing of personal data by competent authorities for the purposes of the prevention, investigation, detection or prosecution of criminal offences or the execution of criminal penalties, and on the free movement of such data ( the Directive ). The new law reflects the current trend towards large-scale use of information-communication technologies and transfers of data within global undertakings. Adam Pichler adam.pichler@sk.ey.com tel.: Lucia Batlová lucia.batlova@sk.ey.com tel.: EY Tax & Legal News Issue 1/2018

7 The Act has six parts, the first and second of which copy the provisions of the Regulation, thus encompassing the processing of personal data by subjects not covered by the Regulation. The third part represents a transposition of the Directive and deals with processing of personal data for the purposes of prevention and detection of criminal activities. The fourth part supplements the rules of the Regulation with exceptions and deviations specific to Slovakia. For example, it stipulates conditions for processing personal data without the consent of a data subject, conditions for publication or disclosure of personal data with respect to employment, conditions of processing a birth number and processing of sensitive personal data. As data controllers, employers will be entitled to provide or publish the personal data of a data subject only to the following extent: Title, name, surname Employment, service or functional position Personal or employment number Organizational unit Place of work Phone and fax number, work address and identification data of the employer A birth number may be processed only if permitted by a special law for a particular purpose and its publication is forbidden. The Act also governs the processing of personal data of deceased persons. Personal data of deceased persons may be processed only with a close person s consent. If another close person expresses their objection, this renders the consent invalid. Additionally, the Act governs the data processing confidentiality obligations of controllers and processors. These obligations also apply to individuals accessing the data of the same subjects and continue after termination of their employment or other relationship with the controller or processor. The fifth part contains provisions, delegated by the Regulation for Member State adjustments. It governs the position, scope and powers of the Data Protection Office, including its sanction mechanism, plus the regulation of new institutes, codes of conduct and certification. Codes of conduct represent industry-specific rules, which subjects may access to, and agree to comply with. They will be approved by the Slovak Data Protection Office. Certification is issued or renewed by the Slovak Data Protection Office, or its accredited body, for a maximum period of three years. Either accessing an approved code of conduct or certification may serve as proof of compliance with personal data protection rules. The Act, similarly to the Regulation, will become effective as of 25 May If you would like to obtain more information or have any questions regarding this issue, please contact authors of this article or the appropriate EY partner or manager. 7 EY Tax & Legal News Issue 1/2018

8 Reversal of the European Court of Human Rights (ECHR) Chamber decision on employee monitoring In January 2016, the ECHR Chamber ruled in the case Bărbulescu vs. Romania, that under certain circumstances an employer has the right to monitor employees and thereby verify whether they are properly performing their tasks during working hours. In the case, Mr. Bărbulescu, a Romanian employee, argued before the ECHR that the employer s intervention into his private sphere was beyond permitted limits, in particular the monitoring of his internet network use during working time. Mr. Bărbulescu claimed that the employer s monitoring breached his right to respect for private and family life, recognized by Article 8 of the European Convention for the Protection of Human Rights and Fundamental Freedoms ( the Convention ). However, the Chamber decided that the rights guaranteed by the Convention were not infringed. Under its decision, the monitoring of employees can be considered as appropriate, provided that there are no other means to determine an employee s disciplinary misconduct. Mr. Bărbulescu further submitted his complaint to the ECHR Grand Chamber, which, as an ECHR second instance body, reached a decision on 5 September 2017 that the right to respect for private and family life had been infringed. The ECHR thus definitively concluded that the Romanian bodies had erred during the court proceedings, when they did not determine whether Mr. Bărbulescu had been fully informed of the possibility, nature and extent of the monitoring, as well as the access of the employer to correspondence content, prior to the its commencement. In essence, the ECHR did not consider monitoring to be illegal as such, but highlighted the fact that the employee had not been thoroughly informed about the methods and extent of the monitoring. According to the ECHR, each state has to ensure that monitoring is conducted by an employer, only to an extent which does not infringe employees rights. In this recent decision, the ECHR provides criteria which should be taken into account by national authorities when assessing the proportionality and justification of measures adopted by an employer for monitoring private employee correspondence. In particular, the following must be assessed: Whether the employee was informed about the possibility of correspondence monitoring The extent of the monitoring and the degree of intrusion into the employee s privacy Whether the reasons for monitoring correspondence and gaining access to its content are justified Whether a less intrusive method of monitoring exists How monitoring results are used Whether safeguards exist to prevent an employer from accessing an employee s correspondence content without prior notification The ECHR decision indirectly indicates the need for additional legislation on employee monitoring. Slovakia is one of the few European countries with this issue explicitly addressed in its legislation. This allows an employer to monitor employees only on serious grounds, relating to the specific nature of the employer s activities. Prior to the establishment of monitoring, it is essential to consult with employee representatives and inform employees in advance of the extent of the monitoring, methods of implementation and duration. At the same time, the principles of individual privacy protection and personal data protection have to be respected. Where employee monitoring becomes necessary, it is advisable to implement detailed internal procedures and directives Soňa Hanková sona.hankova@sk.ey.com tel.: EY Tax & Legal News Issue 1/2018

9 familiarizing employees with its methods and extent. Thus, the employer can maintain confidence among employees that information obligations are being properly observed. In the event of failure to meet the legal obligations, employee monitoring could be assessed as an unlawful breach of fundamental rights. In addition, information about the infringement of duties by employees, obtained by the employer through illegal monitoring, will be rendered inadmissible. If you would like to learn more, or if you have any questions regarding this topic, please contact the author or your EY partner or manager. Proposal for new rules on privacy protection in electronic communications At the end of October 2017 the European Parliament approved the Proposal for Regulation of the European Parliament and of the Council concerning the respect for private life and the protection of personal data in electronic communications ( the eprivacy Regulation ). The aim of eprivacy Regulation is to increase trust in digital services and to improve their security. The new regulation should apply also to services such as Messenger, Skype and WhatsApp, whereas protection should apply not only to the content of electronic communications, but also to protection of metadata (e.g., location data, call duration). If you would like to learn more, or if you have any questions regarding this topic, please contact authors or your EY partner or manager. Adam Pichler adam.pichler@sk.ey.com tel.: Lucia Batlová lucia.batlova@sk.ey.com tel.: Similarly, a new, simpler regulation of cookies should be introduced by the eprivacy Regulation. It should distinguish between the cookies of providers and third parties. The eprivacy Regulation also recognizes regimes of unsolicited communications, based on consent and in connection with the prior sale of products or services. However, individuals should be provided with the option to object to such communications. Penalties for the breach of particular obligations under the eprivacy Regulation may reach 20,000,000 or 4% of overall global turnover. The proposed effectiveness of the eprivacy Regulation is 25 May 2018, although considering subsequent legislative stages of the proposal, it is expected that this deadline will not be met. 9 EY Tax & Legal News Issue 1/2018

10 News in Brief The Register of Public Sector Partners Customers of state-owned utility companies (including electricity and gas suppliers) may be subject to obligatory registration with the Register of Public Sector Partners. Under the new Anti-Letterbox Companies Act, persons who receive assets (including electricity or gas) from companies where the majority of the managing or controlling body s members are appointed by the state, may be considered as Public Sector Partners. Although the law is rather ambiguous, the interpretation of the Ministry of Justice of the Slovak Republic applies a threshold of 100,000 to qualification. In other words, customers will not be considered Public Sector Partners, unless the value of electricity or gas they receive from a state-owned utility company exceeds 100,000 in a calendar year. The decision of the CJEU on the Uber transport service On 20 December 2017, the Court of Justice of the European Union (CJEU) issued its long-awaited decision on the Uber transport service. The CJEU had deliberated on a European legal interpretation, at the initiative of the Commercial Court in Barcelona, which acted in the matter of the action brought by the organization of Barcelona taxi drivers against the Uber company in Spain. The CJEU ruled that the Uber service does not solely represent a brokering service. Its brokering service is deemed to be an integral part of the service as a whole, which is essentially transport. In the court s opinion, it is obvious that Uber has a decisive influence on the conditions under which its drivers provide their services. In light of the decision, if Uber cannot be considered solely as a brokering service, it does not qualify as an information society service and is therefore subject to Member State-specific requirements for transport service providers. Consequently, Uber has to request licenses and permits under the appropriate legislation of individual EU states, thus fulfilling the same legal requirements as other transport service providers. Besides its direct impact on the transport service sector, the decision may have a wider influence on the operation and regulation of other shared economy platforms, which provide brokering services as part of their overall operations (e.g., Airbnb, BlaBlaCar, yuve, Rukie, Jaspravim, Žltý melón). EY Assurance Tax Transactions Advisory About EY 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. If you would like to add a member of your organization to the list of subscribers for Tax & Legal News, or would like your name to be removed from the list, please contact slavomira.popjakova@sk.ey.com.. For further information please contact either your usual partner/manager or: Corporate Taxation Marián Bíž, Richard Panek, Peter Feiler, Andrej Paulina, Tomáš Nagy, Monika Fábryová, Stanislava Kocková, Marta Onuščáková Transfer Pricing Marián Bíž, Shabab Khan, Stanislava Kocková VAT and Customs Marián Bíž, Juraj Ontko, Miroslav Marcinčin, Andrej Paulina, Monika Fábryová, Stanislava Kocková, Jana Ontkovičová Personal Taxation Marián Bíž, Miroslav Marcinčin, Vadim Bogomolov, Matej Oravec, Katarína Šnáblová Legal Services Róbert Kováčik, Soňa Hanková, Adam Pichler, Ján Broniš Assurance Dalimil Draganovský, Tomáš Přeček, Peter Uram-Hrišo Fraud Investigation & Dispute Services Pavla Hladká Business Advisory Services Peter Borák, Peter Málik Transaction Advisory Services Matej Bošňák, Peter Demský Tel.: ey@sk.ey.com 10 EY Tax & Legal News Issue 1/ EYGM Limited. All Rights Reserved. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/sk