VAT Newsletter. Important VAT, GST and sales tax news from around the world. Introduction. Issue No. 7, September 2015

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1 VAT Newsletter Important VAT, GST and sales tax news from around the world Issue No. 7, September 2015 Introduction Welcome to the seventh issue of Ernst & Young LLP s 2015 VAT Newsletter for the US and Canada. These newsletters cover a variety of topics, as valued added tax (VAT) can impact businesses in many ways. Approximately 160 countries now have a VAT, goods and services tax (GST), consumption tax, service tax or similar VAT, and the laws and regulations are constantly changing. We use this newsletter to inform you of significant changes taking place. At the end of this newsletter, you will find contact details for the senior members of our teams in the US and Canada who can help answer any questions you may have about the articles in this newsletter or any other VAT questions. We are interested in your feedback on the items covered and what topics you would like to see covered in the future. Please provide any feedback to Howard Lambert at howard.lambert@ey.com. If you would like to subscribe to EY s other Indirect Tax Updates, please click here.

2 Summary Global EY s 2015 Worldwide VAT, GST and Sales Tax Guide EY s Indirect Tax Briefing, 12th Edition Managing indirect tax controversy: dealing with audits and disputes Americas Puerto Rico Introduction of VAT new legislation Asia-Pacific Japan Latest on consumption tax on electronically supplied services South Korea VAT on electronic services provided by nonresident service providers Europe Poland European Court of Justice judgment: application of reduced rate of VAT to the supply of medical equipment and pharmaceutical products Middle East, India and Africa India Update on the introduction of a GST Turkey Proposal for VAT on electronic services supplied by nonresident businesses to Turkish customers Global EY s 2015 Worldwide VAT, GST and Sales Tax Guide You can access the latest guide here. EY s Indirect Tax Briefing, 12th edition You can access the latest briefing here. Managing indirect tax controversy: dealing with audits and disputes Managing indirect tax controversy is our new Global Indirect Tax thought leadership report, providing insights into how companies can anticipate and deal effectively with tax audits and resolve disagreements with tax administrations. You can access the report here. VAT Newsletter September 2015 Issue 7 2

3 Americas Puerto Rico Introduction of VAT new legislation On 29 May 2015, the Governor of Puerto Rico signed into law, Act (Act 72), which amends various provisions of the Puerto Rico Internal Revenue Code of 2011, as amended (Code). Although Act 72 s most notable provision is the introduction of a value added tax (VAT) as of 1 April 2016, it also includes amendments to the sales and use tax (SUT), income tax and excise tax under the Code, and introduces a mechanism to facilitate the exchange of taxpayer information between government agencies. This article focuses on the changes relating to the VAT and the SUT; a separate Tax Alert will be issued to address changes affecting other areas of the Code. Below are some general highlights of the indirect tax changes introduced by Act 72. Detailed discussion Value added tax Even though Act 72 provides an effective date of 1 April 2016 for the VAT, this date depends on a finding by the Consumption Tax Transformation Alternatives Commission (CATIC by its Spanish acronym), a group also created by this new law, that no other viable alternatives exist that meet the Government s tax revenue objectives while allowing a reduction in the tax burden shouldered by individuals. The CATIC must submit its report to the Governor and the legislative assembly by no later than 28 July At this time, the role of the CATIC in altering the course of the VAT is likely to be perfunctory. The Commonwealth s decision to move toward a VAT implementation resulted from an exhaustive study of the available tax system alternatives. The CATIC was a last-minute addition to this piece of legislation, aimed at harnessing the votes necessary for enactment in the legislative assembly. In addition, Act 72 grants the Puerto Rico Secretary of the Treasury authority to extend the effective date of the VAT by 60 days, until 1 June 2016, in the event the Puerto Rico Treasury Department s operations are not ready by the initial implementation date. Once the VAT comes into effect, it will be imposed at a maximum rate of 10.5% and will coexist with the 1% municipal SUT. Thus, the SUT provisions of the Code will remain in effect to the extent they relate to certain transactions subject to tax at the municipal level. Sales and use tax The more immediate effect of Act 72 will be the SUT rate increase from 6% to 10.5%, effective 1 July 2015, in addition to the retention of the 1% municipal SUT under the Code; thus, total combined SUT will be as high as 11.5%. Also, a 4% SUT is imposed on certain business-to-business (B2B) services and designated professional services rendered between 1 October 2015 and 31 March 2016; these services will not be subject to the municipal SUT during this period. Merchants rendering designated professional services will be allowed to use the cash method of accounting even if they use the accrual reporting basis after 30 September VAT Newsletter September 2015 Issue 7 3

4 Furthermore, for periods commencing after 30 June 2015, the 75% SUT credit limitation is eliminated, and merchants will be able to claim SUT credits up to the full sales tax obligation. Unused SUT credits generated before 1 April 2016, will be available to reduce VAT obligation until fully exhausted, but with no refund option. Act 72 also provides for a phased payment mechanism for the SUT obligation related to transactions taking place during July 2015 (i.e., the month of the rate increase) to be remitted in the following manner: 55% will be paid on or before 20 August % will be paid in three equal installments due on or before the 20th day of the following three months (September, October and November) As part of its transition period provisions, Act 72 provides that the sale of taxable items covered by contracts or auctions that were executed, or awarded before 1 July 2015, will be subject to the tax rate in effect on 30 June The tax rate will be valid for the lesser of 12 months, or the duration of the contract. For taxable services, the lower SUT rate will apply only if the services are paid before 1 July Also, Act 72 introduces a requirement to register certain pre-existing construction contracts for commercial, industrial and housing projects in order to benefit from the lower rate in effect on 30 June The table below summarizes the major SUT rate changes introduced by Act 72. From 29 May 2015 until 30 June 2015 From 1 July 2015 until 30 September 2015 From 1 October 2015 until 31 March 2016 Central Government SUT rate 6% 10.50% 10.50% Municipal SUT rate 1% 1% 1% B2B and designated professional services Available SUT credit (only to resellers of tangible personal property) 0% 0% 75% of current SUT return liability 100% of current SUT return liability 4% (no Municipal SUT) 100% of current SUT return liability 4

5 Asia-Pacific Japan Latest on consumption tax on electronically supplied services As a result of the 2015 tax reform, new consumption tax rules (hereinafter, new rules ) will apply to cross-border digital services provided by overseas businesses to the Japanese market starting on 1 October The Consumption Tax Basic Circular (i.e. interpretation by the Japanese Tax Authorities) was partially updated on 26 May 2015 and the National Tax Agency issued a Consumption Tax on Cross-border Services Q&A on 3 June 2015 (a pamphlet outlining the new rules was also released). This alert focuses on the effects of the new consumption tax rules on overseas businesses that provide cross-border digital services to the Japanese market and introduces the main points of the Basic Circular revisions and the newly released Q&A. Scope of services subject to the new rules In the revised Basic Circular, the following services are presented as examples of digital services subject to the new rules. It should be noted that in addition to cloud services and the distribution of digital content or online advertisements, the downloading of software, the provision of consulting services and IT support services via the internet are also likely to be treated as digital services, subject to the new rules. Businesses involved in cross-border e-commerce should review the revised Basic Circular and Q&A to confirm whether their services are subject to the new rules as digital services. 1. Distribution of e-books via the internet 2. Services allowing users to listen to music or watch videos via the internet 3. Services allowing the use of software via the internet 4. Services that provide other businesses with an online space to sell products 5. Services that post online advertisements 6. Continuous consulting services via phone or The Q&A also provides other examples of potential digital services, such as services that allow customers to use cloud-based software or databases; services that provide a cloud-based space to store electronic data; and online English lessons. The Q&A also provides the following examples of services that are not expected to be treated as digital services subject to the new rules: Usage of telephone, fax, telegram, data transmission, or the internet to transmit information between parties (telecommunication services) Software development There can be cases where a request is made to an overseas business to develop a piece of copyrighted work; for example, software. The instructions are given via the internet and the deliverable is also received via the internet. If the use of the internet is incidental to the transaction (the VAT Newsletter September 2015 Issue 7 5

6 development of copyrighted works), such services are not classified as the provision of digital services. Management or investment of assets located overseas (including internet banking) The internet is used to give instructions, status reports or results relating to the investment of assets or movement of funds. If the use of the internet is incidental to the transaction (the management or investment of assets), such services are not classified as the provision of digital services. However, for example, if the overall transaction generates separate usage fees for the use of cloudbased asset management software, this portion of the service would be classified as the provision of digital services. Data collection or analysis requested of a foreign business The internet is used to report the results of data collection, or analysis, at the request of the recipient. If the use of the internet is incidental to the transaction (the collection or analysis of data at the request of the recipient), the services are not classified as the provision of digital services. However, if a foreign business charges fees for browsing or for the use of data collected or analyzed by the foreign business itself (i.e., the data collection and analysis is not at the request of another company), such a transaction would be classified as the provision of digital services. Overseas litigation handled by overseas legal experts The internet is used to give instructions, or status reports, related to litigation. If the use of the internet is incidental to the transaction (the handling of overseas litigation), such services are not classified as the provision of digital services. Transfer/licensing of copyrights The owner of a copyright transfers, or licenses copyrights to a business that will duplicate, screen or broadcast such copyrighted material. If the transfer and receipt of such copyrighted works is done via the internet and the use of the internet is incidental to the transaction (the transfer or licensing of copyrights), such services are not classified as the provision of digital services. The new rules will apply if recipients of digital services have an address in Japan or if their head office or main office is in Japan. The new rules are therefore expected to apply when an overseas business provides digital services to the foreign branch of a Japanese corporation that has its address in Japan. It is also important that foreign corporations with a branch in Japan are also covered under the definition of an overseas business. When the Japanese branch of a foreign corporation provides digital services to a Japanese corporation, including its foreign branch, the new rules are expected to apply. Even with the release of the latest Basic Circular and Q&A, there are still many types of services that may be difficult to determine whether they are to be treated as digital services. In such cases, it is highly recommended that you consult with your local tax authority, or your tax advisor, in advance of the effective date. Main points of the new rules The following is an overview of the main points of the new rules, including the contents of the new Basic Circular. For a general introduction of the new rules, please refer to our newsletter dated 27 January 2015 with the title, 2015 Tax reform package, Revision of the Japan Consumption Tax treatment of cross-border services. 1. Place-of-supply criteria for the provision of digital services The place-of-supply will be determined based on whether the address of the recipient of digital services is inside, or outside, of Japan. For example, in the case of services that allow the downloading of e-books, music, games, and other media via the internet, it is necessary to make an objective and rational assessment for each transaction, such as by cross-checking the address that the customer stated at the time of purchase with the country of issue of the credit card used to make the purchase. 2. Introduction of the reverse charge mechanism With respect to provision of business-to-business (B2B) digital services, a reverse charge mechanism will be implemented which shifts the obligation of paying consumption tax to the business receiving the B2B digital service. It is necessary to determine whether the service is classified as a B2B digital service based on the nature of the service (e.g., distribution of advertisements, provision of an online space to sell games and software). When it is difficult to determine the classification based on the nature of the service, it is necessary to determine whether the contractual provisions (confirmed via contract, correspondence during the contract process, and at other points) could classify the service as a B2B digital service (e.g., cloud service). The overseas business that provides B2B digital services has an obligation to inform, in advance, the domestic business, which is the customer in the transaction, that the reverse charge mechanism is applied to the B2B digital services. When the reverse charge mechanism is applied, the amount billed by the overseas business will not include consumption tax. When a business receiving digital services has a taxable sales ratio of 95% or greater for the taxable period under regular consumption taxation, or when a business adopts the simplified consumption taxation for the taxable period, there is no requirement to report reverse charge consumption tax in the tax returns for the time being. The reverse charge will only apply for businesses that have a taxable sales ratio of less than 95% for the taxable period under regular consumption taxation. 3. Limitations on input tax credits for business-to-customer (B2C) digital services performed by overseas businesses As a provisional measure, input tax credits will not be available for businesses receiving B2C digital services for the time being. However, input tax credits may be available for businesses receiving B2C digital services that are provided by a registered overseas business (see 4. below). Digital services that are not classified as B2B digital services will be classified as B2C digital services. B2C digital services, for example, include the distribution of e-books, music and VAT Newsletter September 2015 Issue 7 6

7 movies to consumers. If, for example, digital services are shown on the website of the overseas business as targeted only for businesses, but the overseas business cannot restrict individual consumers from buying such services, such services are also treated as B2C services. At the request of the customer, registered overseas businesses have an obligation to issue invoices that state their overseas business registration number and to notify the customers that it has an obligation to pay consumption tax on taxable sales of B2C digital services. Input tax credits may only be applied when the business receiving B2C digital services keeps the invoices that include the registration number of the registered overseas business. 4. The establishment of the overseas business registration system Overseas businesses that fulfilll the following requirements may become registered overseas businesses by applying to the Commissioner of the National Tax Agency, via the District Director of the Tax Office with jurisdiction. Information regarding such businesses, such as names, addresses, head office locations, and registration number will be published on the National Tax Agency website. The requirements are as follows: a. The overseas business is subject to consumption tax b. The overseas business provides, or plans to provide, B2C digital services c. The overseas business has an office in Japan that provides B2C digital services d. If the overseas business has no office in Japan that provides B2C digital services described in c above, the overseas business has a designated tax agent for consumption tax e. If the overseas business has no office in Japan, the overseas business has designated a tax representative f. The overseas business is not delinquent in the payment of national taxes Applications for registration will be accepted beginning 1 July Actions and considerations The new rules will apply to transactions conducted on or after 1 October The new rules can have an impact on service provisions. Therefore, it is necessary to promptly assess the current situation and the potential future consequences and to consider the necessary steps to prepare for the change. 1. Confirming whether a transaction is affected by the new rules a. Is the transaction considered as the provision of digital services? b. Is the digital service being provided to Japanese customers? c. If a. and b. apply, is the transaction based on an agreement concluded on or before 31 March 2015, and will it be considered a continuous provision of digital services both before and on, or after, 1 October 2015? (A provisional measure [i.e., pre-revision] applies in this case, and the current consumption tax law will apply to such service provisions until the end of the service contract term. For example, agreements that are renewed each month will be treated as though a new agreement is concluded each month and will not be eligible for this provisional measure.) 2. Confirming the classification of a transaction a. Based on the nature of the service, can the recipients of the digital service normally be restricted to businesses? b. Based on the transaction terms, can the recipients of the digital service normally be restricted to businesses? (For example, if the contents of the digital service agreement are separately negotiated, and if they are part of an agreement concluded between the parties to such transaction and it is clear that the recipient of the digital service will use the provided service as a business, then the digital service will be considered B2B.) c. Can the online registration for digital services by nonbusiness entities (consumers) realistically be restricted? (If not, the digital service will be considered B2C.) d. Regarding b., if negotiations are necessary, identify potential issues and negotiate and conclude or revise the agreements. 3. Overseas businesses that provide B2B digital services a. Obligation to state that a transaction is subject to reverse charge (For example when introducing the details of a transaction online, or in documents presented at the time of negotiations, regarding the transaction details, it is necessary to notify the recipient that the transaction is subject to reverse charge in a manner that makes it easy for the recipient to understand that the reverse charge applies.) b. Revision of contents or forms of agreements (if necessary; refer to 2. b. and d.) 4. Overseas businesses that provide B2C digital services a. Confirmation about whether there is a filing obligation by verifying past taxable sales amount and whether tax exemption for small businesses applies (It should be noted that the provision of B2B digital services is excluded from taxable sales when considering the eligibility of the overseas business for the tax exemption for small businesses.) b. Registration as a registered overseas business (In order for the overseas businesses to provide B2C digital services that are eligible for input tax credits at the level of domestic businesses, they must be registered as overseas businesses.) c. Selection of a tax representative d. Preparation of tax returns and cash management of tax payments 5. Other points a. Impact analysis of the new rules on the business b. Consideration of a price setting policy for transactions subject to the new rules c. Consideration of IT system compatibility with new processes necessary under the new rules VAT Newsletter September 2015 Issue 7 7

8 South Korea VAT on electronic services provided by nonresident service providers Executive summary Effective as of 1 July 2015, the Republic of Korea s revised Value Added Tax Law (VATL) requires a nonresident service provider to register for and charge VAT on the supply of electronic services to customers in the Republic of Korea (Korea). This alert summarizes the key features and implications of this new law. Detailed discussion Definition of electronic service Electronic service means the supply of (1) game, audio, video files, electronic documents or software, or similar items that are processed by optical or electronic means and produced or modified in the form of codes, letters, audio, video and any similar items; and (2) the upgrade of such electronic service. Registration requirement The registration requirement applies to a nonresident service provider who provides electronic services directly to its Korean customers. The registration is made with the Korean National Tax Service (NTS) in a simplified way through the NTS website 1 within 20 days from the date of business commencement. 2 Compliance A registered nonresident service provider must file VAT returns and pay VAT on a quarterly basis. The due date of filing is on or before the 25th day, following a quarter-end month. The nonresident service provider is not required to issue a VAT invoice If the first day of business commencement is prior to 1 July 2015, the registration must be completed by 20 July However, if the electronic services to Korean customers are provided through an open market (e.g., open market app stores) or an intermediary agent for payment, the nonresident service provider is no longer treated as a supplier of the services, since the obligation to collect tax is shifted to the open market or intermediary. Accordingly, the nonresident service provider is not subject to the VAT requirements. Implications While this VAT regime seems to have been introduced for open market business operated for business-to-consumer services, it would exclude a case where a nonresident, or foreign corporation provides electronic services to businesses of a Korean entrepreneur. Since no detailed guideline on the scope of covered services is yet issued, the term software may be interpreted very broadly. As a result, most information technology (IT) services may be covered by the new VAT regime for electronic services, which may significantly affect foreign IT businesses that provide electronic services to Korean customers. Because the foreign service provider subject to the VAT regime is not required to issue a VAT invoice, it is unclear how Korean customers would be able to claim the input VAT charged by the service provider. Further clarification for the above issues is expected in the form of subordinate law by the Ministry of Strategy and Finance (MOSF). Foreign IT companies, or group IT service providers, may be significantly affected by this new VAT regime. Accordingly, they may consider either providing comments to the MOSF or seeking a tax ruling if subsequent provisions issued by the MOSF are still unclear. VAT Newsletter September 2015 Issue 7 8

9 Europe Poland European Court of Justice judgment: application of reduced rate of VAT to the supply of medical equipment and pharmaceutical products The European Court website shows Polish judgment C-678/13 European Commission v Poland, which held that the application by Poland of a reduced rate of VAT to the supply of a range of medical equipment and pharmaceutical products was, in the majority of cases, permitted by EU law. C-678/13 European Commission versus Poland On 4 June 2015, the Court of Justice of the European Union (CJEU) delivered its judgment in infringement proceedings brought by the European Commission against Poland for applying a reduced rate of VAT to the supply of a range (15) of medical equipment and pharmaceutical products. This case proceeded to judgment without a written Advocate General s opinion. Article 98(2) of the VAT Directive provides that Member States may only apply reduced VAT rates to the limited categories of goods and services set out in Annex III. Categories 3 and 4 of Annex III refer, respectively, to pharmaceutical products of a kind normally used for health care, prevention of illnesses and as treatment for medical and veterinary purposes, including products used for contraception and sanitary protection and medical equipment, aids and other appliances normally intended to alleviate or treat disability, for the exclusive personal use of the disabled. The Commission contended that the goods in question were not covered by either of these categories and, consequently, they were properly liable to the standard rate of VAT. The CJEU upheld the Commission s action insofar as it related to a small number (3) of the disputed items, but dismissed the Commission s action insofar as it related to the remaining (12) items. VAT Newsletter September 2015 Issue 7 9

10 Middle East, India and Africa India Update on the introduction of a GST The implementation of GST is arguably the largest realignment of the Indian federal structure since Independence. This article provides an update on the implementation status of the GST. Constitution Amendment Bill (CAB) Enactment of the GST legislation requires the Indian Constitution to be amended to realign taxation powers of the central and state governments. The Indian Constitution requires a greater than two-thirds majority of the ministers attending, or 50% of the total population of the Lok Sabha (i.e., the Lower House) and the Rajya Sabha (i.e., the Upper House) to vote in favor of the amendment. While almost all parties, barring a couple, are supporting the idea of a GST, the Congress Party has been opposing some elements in the present proposed draft of the GST. The Indian National Congress (INC) has a nominal presence in the Lower House. Passing of the bill in the Lower House is therefore not a challenge. However, the seat equation in the Upper House is very different. The INC still retains around 70 seats of the total 245 seats in the Upper House (this will materially change in mid-2016). The ruling coalition has only around 64 seats in the Upper House as of today. Given this, it appears that passing the CAB in the Upper House will require support from the INC. Reports suggest that the Government has made several attempts to gain (either explicit or tacit) support from the INC and, if the Government is able to get that support, a special session of the parliament is expected to be held in mid-september The holding of a special session should largely indicate that the GST bill (though slightly revised) should be passed in the Upper House. The revised bill will then get discussed again and passed in the Lower House (this should not be a challenge). After the CAB is passed by both houses, the same will need to be ratified by 50% of the states by a simple majority. This will take two to three months but is not expected to be a challenge. Other steps being taken The Government is still planning for the GST launch in April 2016 and with that deadline in mind is taking several steps. Reports suggest that the first drafts of the law will be finalized by mid-september. It is expected that the discussion with the industry on the draft laws will be initiated thereafter. Directorate General The present office of the Directorate General of Service tax has been renamed as the Directorate General of Goods and Service Tax (DGGST) with effect from 1 August 2015, and the said Directorate General s office has started functioning. State governments have initiated a collation of details for each industry for a smooth transition to GST regime. VAT Newsletter September 2015 Issue 7 10

11 Timely implementation of the GST Network a big challenge The unique feature of the Indian GST (apart from the dual taxation nature of the levy) is the integration of the GST Network (GSTN) in the administration of the levy. The GSTN is an IT platform that is mandated to handle all the day-to-day interactions with a taxpayer, such as registrations, filing of returns and performing other services. It is envisaged that the GSTN, will require sellers and suppliers to upload sales information on the GSTN, and the purchaser will get a set-off of the tax paid by the seller only upon the uploading of the relevant information on the GSTN. Given the integral role of the GSTN in the revenue administration, the implementation of GSTN, among other things, is also an extremely important factor in the launch of the GST regime. As of now, the contract for the implementation of the GSTN has not been awarded, and it is widely expected that GSTN may not be ready by April The delay in implementation of the GSTN might delay the launch date of the GST by a few months. Way forward We are seeing that both central and state governments are going ahead and taking several steps to be ready for a GST in We are advising clients to urgently initiate the business transformation activity (that the GST regime mandates). Turkey Proposal for VAT on electronic services supplied by nonresident businesses to Turkish customers Executive summary The Turkish Government is reported to be considering a range of proposals that would enable the Turkish Revenue Administration to collect both direct and indirect taxes on the sales and revenue generating online activities earned by nonresident businesses. On 20 February 2015, the Turkish Minister of Finance, Mr. Şimşek, announced the Government s intention to impose both corporate income tax and value added tax (VAT) on nonresident internet companies by introducing the concept of an electronic taxpayer to Turkey s Tax Procedure Law. A specific primary objective of the proposals which have not yet been released would be to collect taxes from social network platforms and from nonresident entities generating income from online advertisements targeted at Turkish consumers. Although no proposals on the implementation of the electronic taxpayer concept, or the imposition of VAT on sales derived from selling advertising space yet exist, Mr. Şimşek s statements indicate that the taxation of digital/internet activity occupy a significant place on the agenda of the Turkish Government. Detailed discussion Background A number of separate but related discussions in recent months have refocused the attention of the Turkish Government on potential ways in which digital activities may potentially be taxed. These discussions include the following: The decision of the Organisation for Economic Co-operation and Development (OECD) states that it is not feasible to ring-fence the digital economy from the rest of the economy for tax purposes. Here, the OECD noted in its 2014 report that certain business models and key features of the digital economy may exacerbate Base Erosion and Profit Shifting (BEPS) risks, and these risks will be addressed by the work on other actions in the BEPS project. There are reports that, despite the aforementioned decision, the OECD s Task Force on the Digital Economy (TFDE) has been discussing new proposals in advance of a July meeting of the same group. These proposals center upon two leading concepts being discussed by the digital task force. The first is an economic presence test based on data collection, while the second comprises an economic presence test based on sales. This reflects the fact that data and customers are seen as large value generators for digital businesses. A third option also under discussion is to combine the two proposals such that a digital nexus test would be based on a number of different factors. A recent Turkish tax case was decided against a multinational enterprise operating in the e-commerce area in Turkey. The Turkish Ministry of Finance expressed in a press release dated 20 February 2013 that the number of e-commerce activities delivered via the internet to Turkish citizens by nonresident companies showed a rapid increase in For this reason, the Ministry of Finance announced that it would take necessary precautions in order to prevent what it described as tax evasion through e-commerce. The Ministry of Finance further announced that a special directorate will be established within the Revenue Administration to enhance Turkish legislative developments in the area of e-commerce, as well as to monitor other countries unilateral moves in this area. Some two years after this press release, on 20 February 2015, the Ministry of Finance announced that due to the lack of Turkish and international e-commerce legislation, multinational enterprises that are not incorporated in Turkey do not pay taxes on income derived from their advertisement activity. VAT Newsletter September 2015 Issue 7 11

12 Therefore, by introducing the concepts of electronic taxpayer and electronic place of business through amendments to the Tax Procedural Law No. 213, multinational enterprises may, in the future, be liable for tax on their advertisement income, even though they are not incorporated in Turkey. The issue has been under discussion for two years and despite the abovementioned press releases, there has not been any formal legislative action on the amendment of Turkey Tax Procedure Law. However, Ministry of Finance statements indicate that the taxation of digital presence and the activities of such internet companies will occupy a significant place on the agenda of the Turkish Government after the recent formation of the new Turkish Government. Implications The potential for new Turkish tax proposals in the area of digital commerce represents a growing trend for countries to tax such activities in the absence of globally agreed recommendations. Many such proposals exist in both the direct and indirect tax areas and have the potential to create heightened uncertainty and compliance burden for companies operating in these jurisdictions. Companies should make efforts to continue to monitor new and existing developments and, where appropriate, engage with both national governments and the OECD to ensure effective policies are developed. UAE Official announcement regarding introduction of value added tax and corporate tax Executive summary On 18 August 2015, the UAE s Ministry of Finance (MoF) released an official statement addressing the progress it has made in respect of the Gulf Cooperation Council (GCC) value added tax (VAT) proposal and the potential UAE corporate tax (CT) introduction. This announcement comes after months of increasing press speculation and an International Monetary Fund (IMF) report released at the beginning of August 2015 advising the UAE that Expenditure-containing measures and revenue-raising options need to be considered to reduce fiscal vulnerabilities and ensure intergenerational equity. Detailed discussion GCC VAT The announcement provides official confirmation that the UAE MoF has been conducting studies in relation to the implementation of VAT in the GCC along with its fellow GCC member states (Bahrain, Kuwait, Oman, Saudi Arabia and Qatar) and also confirms the following: The UAE has made an agreement to implement VAT simultaneously along with the other GCC member states. The draft UAE VAT law remains under negotiation due to the absence of a final agreement between the respective GCC member states over elements of the GCC VAT framework, including the VAT rate and exemptions. The UAE will make an immediate announcement once a final agreement on the content of the UAE VAT law has been reached. Businesses will be given approximately 18 months from the date of this announcement to prepare for the implementation, and before being required to fulfill their UAE VAT obligations. This announcement appears consistent with the initial expectation that the UAE will not implement VAT alone, and that the eventual UAE VAT regime will fall under a common GCC VAT framework agreement. Given the reported lack of agreement among the GCC member states over fundamental elements of the VAT framework, such as the VAT rates and exemptions, an official announcement as to the actual implementation date may be some way off, and is unlikely to come before In addition, the announcement of the 18-month period from the finalization of the VAT law to actual implementation appears to reinforce the UAE s commitment to ensure that businesses have adequate time to prepare for the VAT implementation, and to follow international best practices in relation to the implementation of VAT. VAT Newsletter September 2015 Issue 7 12

13 UAE CT In addition to the information in relation to the GCC VAT implementation, the announcement provides a brief update on the UAE s progress in respect of CT confirming that a draft UAE CT law is being studied in relation to the eventual CT, regime to be implemented. The MoF confirms that it will make an announcement once the law has been finalized, and that businesses will be given no less than 12 months from the date of this announcement to prepare for the implementation, and before being required to fulfill their UAE CT obligations. There is no further information in relation to when taxpayers can expect an announcement in respect of the CT law. However, this update clearly indicates that a federal UAE CT introduction is firmly on the MoF s agenda. Implications The introduction of the GCC VAT and federal UAE CT regimes has been discussed and speculated upon for a number of years. Many commentators maintain a sense of skepticism around whether actual implementation will eventually materialize, particularly in the short to medium term. However, the UAE MoF s announcement, along with the obvious concerns over oil prices and the recent recommendations by the IMF, provide more support than ever before that tax changes in the UAE are imminent. Businesses should remain mindful of the potential introduction of both direct and indirect taxes, particularly in the case of mediumto long-term investments in the UAE and the negotiation of the legal and economic impact of the provisions of long-term contracts, and that they keep up to date with developments. VAT Newsletter September 2015 Issue 7 13

14 EY newsletters and alerts If you would like a copy of a green paper, newsletter or alert covering some of the topics mentioned below, please click on the link, or contact Howard Lambert at howard.lambert@ey.com. Hungary: EY Tax Express June 2015: Tax changes for next year: Ernst & Young Tanacsado Korlatolt Felelossegu Tarasag s June client newsletter, Tax Express, provides information on the tax law changes (including indirect taxes) for next year. Slovakia: EY Tax & Legal News May 2015: Ernst & Young k.s. has issued the latest edition of its client tax newsletter, EY Tax and Legal news, that includes an item on the CJEU judgment in case C-42/14 Wojskowa, concerning the VAT treatment of utility costs, recharged by a landlord to tenants in connection with the letting of immovable property. VAT Newsletter September 2015 Issue 7 14

15 EY Assurance Tax Transactions Advisory Ernst & Young LLP (US) US VAT practice leaders Robert Smith Irvine, CA Karen Christie New York, NY Anne Freden San Francisco, CA Regional resources Alex Cotopoulis New York, NY Deirdre Hogan San Francisco, CA Corin Hobbs San Jose, CA 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. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. EYG no. YY3661 BSC no W ED None Ela Choina Chicago, IL ela.choina@ey.com Howard Lambert Irvine, CA howard.lambert@ey.com 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 Maria Hevia Alvarez New York, NY maria.heviaalvarez@ey.com Edel Flynn New York, NY edel.flynn@ey.com Gino Dossche New York, NY gino.dossche@ey.com Steve Patton New York, NY steve.patton1@ey.com Peter Molnar Atlanta, GA peter.molnar@ey.com Enrique Agresott Garcia New York, NY enrique.agresottgracia@ey.com Ernst & Young LLP (Canada) Canada GST practice leader Jean-Hugues Chabot Montreal, Quebec jean-hugues.chabot@ca.ey.com Regional resource Ally Murphy Toronto, Ontario ally.murphy@ca.ey.com