KPMG TaxWatch Webcast: VAT Implications of Cloud September 19, 2012 ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 2 1
Speakers Frank Sangster Principal International Indirect Taxes group KPMG LLP Sandy Nicolson Managing Director International Indirect Taxes group KPMG LLP Jeremy Gray Senior Manager International Indirect Taxes group KPMG LLP 3 Administrative CPE regulations require online participants take part in online questions You must respond to a minimum of four questions per 50 minutes in order to be eligible for CPE credit Polling questions will appear on your media player on top of the slides Results will be reviewed in aggregate and may be published as a pulse survey of the marketplace in the aggregate. Please note that no responses will be tracked back to any individual or organization To ask a question, use the Ask A Question icon on your media player or send an e-mail to us-taxwatch@kpmg.com Help Desk: 1-877-398-1471 or outside the US at 1-954-969-3342 4 2
Agenda Introduction Basics of VAT VAT and cloud computing Q&A 5 Basics of VAT 6 3
Basics of VAT What is Value-Added Tax? VAT is a tax on final consumption borne by the end consumer. Little relation to income tax and not intended to be a cost to business. VAT is a multi-stage, transaction-based tax that is applied to most business transactions levied at each stage of the supply chain VAT is a credit-method tax i.e.: VAT paid on purchases is netted against VAT collected on sales before remitting collections to the tax authority The concept of VAT is nearly universal, but the application of VAT can be very different from one country to the next 7 Basics of VAT (cont d) Currently, over 150 countries have a VAT regime The Arabian Peninsula countries are considering VAT regimes Many governments are shifting focus from taxing income to taxing consumption resulting in a reduction of corporate income tax rates and an increase in VAT rates The average VAT rate in the EU and LATAM is approximately 20% (and rising) 8 4
VAT Terminology Input Tax VAT incurred by businesses on qualifying business expenditure Output t Tax VAT charged by businesses on sales made to their customers Supply VAT terminology for a sale - Goods vs. Services Consideration Payment received in return for the supply of goods or provision of services According to the EU, everything received in return for the supply of goods and services, 9 VAT Terminology (cont d) Standard Rate EU VAT rates range from 15% to 25% Average EU and LATAM VAT rate is approaching 20% bit less in ASIAPAC Reduced Rate Any rate lower than the standard rate including 0%, e.g., basic food stuff, books usually political decision Zero Rate Generally applied to exports as well as certain select sectors Exempt Applied to certain sectors (e.g., charities, financial services, housing) 10 5
VAT Recovery Input VAT incurred on the acquisition of goods and services for the purposes making: Taxable supplies Zero-rated rated supplies Supplies made outside the jurisdiction (non-exempt) is recoverable No right to deduct input tax incurred on the acquisition of goods and services for the purposes of making exempt supplies Input tax incurred on goods and services acquired for making both taxable and exempt supplies must be apportioned 11 VAT Recovery (cont d) Non-residents not registered for VAT may claim refunds for VAT incurred through special schemes Must hold valid VAT invoice 12 6
VAT Liability Determination Is there a supply for consideration? Is the supply made by a taxable person? Is the supply made within a VAT jurisdiction? Is the supply exempt? Who is liable to account and when? Can the VAT be recovered? 13 Why is actively managing VAT important? VAT rates are trending higher Given VAT is becoming a more significant source of review for jurisdictions there is a greater focus on enforcing compliance and combating fraud Tax authorities are being more aggressive in how they treat VAT errors/shortfalls no longer just considered a wash VAT throughput for a company is significant and errors in a single repeatable transaction can result in huge errors A company with $5b worth of sales can have a VAT throughput of $1.6b 14 7
VAT and Cloud Computing 15 VAT and Cloud what do we have to think about? Characterization of services provided Classification (goods vs. services) Taxation of Cloud Services Definition and taxation of digital/electronic services Business status of customer - B2B vs. B2C Compliance and planning opportunities Location of Customer How to evidence 2015 Law change Best practices Common Issues 16 8
Characterization of Cloud Services Supply of goods or services Goods The transfer of the right to dispose of tangible property as owner The supply of real or personal property Services Anything other than goods Important to characterize whether a supply of goods or services as it will impact: Whether the supply is subject to VAT Who is liable to pay the VAT When the VAT is payable 17 Characterization of Cloud Services (cont d) SAAS, PAAS, and IAAS will all generally be considered a service for VAT purposes and will all have a similar treatment in a VAT jurisdiction IAAS can sometimes be related to land influences where and how the transaction is taxed Supply of hardware as part of cloud service Supply in its own right? VAT on goods VAT on importation Necessary and ancillary to the supply of the cloud service VAT on services VAT on importation 18 9
Taxation of Cloud Services Certain jurisdictions have specific rules/regimes for taxing cloud services EU specific Electronically Supplied Services Regime Iceland, Norway, Switzerland similar to the EU Japan, Brazil and Canada considering rules similar to the EU Other jurisdictions treat cloud service as general services For those jurisdictions without a specific regime provided the supplier does not have a presence in the jurisdiction in which the customer is located that is linked to the supply, the supplier will not be liable for VAT on the supply liability may fall on the customer Focus on the EU as it is leading the field in the taxation of such services 19 Taxation of Cloud Services (cont d) Cloud services generally fall within the definition of Electronically Supplied Services (ESS) for EU VAT ESS EU definition includes: Website supply, web-hosting, distance maintenance of programs and equipment Supply of software and updating thereof Supply of images, text and information and making available of databases Supply of music, films and games Indicative list only nature of the underlying service not important key issue is whether it is delivered electronically Whether the customer is a business or individual is the key factor 20 10
Business status of customer B2B: Business to business General rule VAT generally payable where the buyer of the service is based usually reverse charge unless the supplier has a presence in the jurisdiction No specific ESS rule B2C: Business to consumer General Rule VAT generally payable in the country of the service provider, except in certain cases. ESS Rule ESS supply by a service provider outside the EU to an end user within the EU subject to VAT in the EU no reverse charge, liability on supplier. 21 Compliance and planning opportunities B2C Supplies Compliance more complex Non EU to EU Supplier obliged to charge VAT based on location of customer Single country registration possible Report all EU sales on a country by country basis in a single return EU to EU Supplier obliged to charge VAT based on its location Planning opportunities to reduce VAT rates in the EU 22 11
Location of Customer B2C Supplies Non EU to EU Determining of location of customer key issue Geo-location software IP addresses Credit card billing information Tax authority guidance Fraud prevention 23 2015 Law Change - EU Place of supply rules changing B2C EU to EU Taxed where customer is located Business considerations Potential compliance obligations in 27 Member States Processes and controls will need to be implemented Price points may change based on new VAT rates applying Customer location identification Review any previous planning 24 12
Common Issues - Establishment Where a non-resident cloud provider does not have a corporate presence in a VAT jurisdiction, it may still be considered to have an establishment for VAT purposes Servers Physical services provided e.g. maintenance Use of an agent This can result in a liability to register for VAT and charge VAT on a supply that might otherwise be self assessed by the customer 25 Common Issues Use and Enjoyment In certain jurisdictions, where the services are used and enjoyed may also have an impact on the VAT treatment. These use and enjoyment rules can override the contractual position where certain services are use and enjoyed in territory other that the place of business of the contracting counterparty. The application of the use of enjoyment provision in the EU is currently inconsistent across Member States and is generally regarded as an exceptional rule that is applied to avoid non-taxation in certain circumstances. Wider use point in relation to non-recoverable users of cloud services. 26 13
Common Issues Related Party Transactions Intercompany charges: Companies considering private cloud or community-cloud models need to consider documenting/ substantiating intercompany charges that are made across state or international borders. Dependant upon the nature of intercompany transactions, these can often be characterized as fully taxable and may give rise to VAT reporting obligations. 27 Common Issues Agency vs. Principal The VAT treatment of agents and intermediaries depends on the nature of the services they provide to their principals, and in many cases, also on the nature of the supplies made by those principals. In certain cases a buy/sell VAT transaction may be deemed to occur between the agent and principal where the agent does not actually take title to the goods or acquire and resell the service. 28 14
Common Issues - Bundling Cloud services can often be bundled together with other services or goods in a single contract. The issue is whether the different components should be treated separately or under the same rules for VAT purposes. Need to determine whether one component is necessary and ancillary to the principal component and merely a means of better enjoying that component single VAT treatment If each component constitutes t an aim in itself from the point of view of the purchaser VAT treatment may vary by component. 29 Pricing/Payment variations Cloud service models often have a number of innovative pricing options available including free, premium, and freemium. Revenue can be severely dented by the need to pay VAT if a pricing model is wrong. Payment variations Vouchers Online currency Buy-back/reselling services sale vs. credit Non-monetary flows 30 15
Leading Practices Indirect tax contract clauses Should be comprehensive Plus VAT/GST/transaction taxes Documentation requirements Invoices Credit/debit notes Preferably jurisdiction specific Invoicing requirements Need to include the elements required by indirect tax legislation Document retention requirements Compliance with data privacy rules 31 Key takeaways Characterization of cloud services is generally not an issue for VAT purposes goods vs. services The complexities of the commercial arrangements need to be understood to distill the VAT treatment principal vs. agent, pricing, intercompany supplies, bundling Compliance and reporting obligations can vary from country to country who needs to account for the tax 32 16
Polling Question Would you like a KPMG professional to contact you regarding the topics discussed today? Yes No 33 Q&A 17
Today s Presenters Frank Sangster 267-256-1680 fbsangster@kpmg.com Sandy Nicolson 408-367-2801 anicolson@kpmg.com Jeremy Gray 408-367-2876 jpgray@kpmg.com 35 Thank you for joining us. Please send any questions to us-taxwatch@kpmg.com Visit www.kpmgtaxwatch.com for a calendar of upcoming events. 2012 KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative (KPMG International). 18